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ECB’s Lagarde: we need to be cautious in cutting rates

WASHINGTON (Reuters) – The European Central Bank will need to be cautious when deciding on further interest rate reductions and take its cue from incoming data, ECB President Christine Lagarde said on Wednesday.

Traders have ramped up bets on faster and potentially bigger rate cuts from the ECB after a host of policymakers warned about the risk of undershooting the central bank’s 2% inflation target – a remarkable change in tone after a two-year campaign to rein in prices.

Lagarde did not directly comment on the path for rates but she appeared to pour some cold water on market speculation.

“We need to be cautious because data will come up and will indicate to us what is the state of the economy, what is the state of inflation, of underlying inflation,” she told an event in Washington. “And there will be a judgmental aspect to our decisions, but we will indeed have to be cautious in doing so.”

Speaking at a separate event in Washington, where policymakers are gathered for the IMF/World Bank annual meetings, the ECB’s chief economist Philip Lane said he still expected a recovery in the euro zone’s economy even though “recent data raised some questions” about it.

The ECB cut its key interest rate by 25 basis points to 3.25% last week – its third cut this year. Policymakers are now debating how far interest rates may need to fall and how to signal their plans to investors.

Portuguese central banker Mario Centeno suggested rates could be cut by a larger 50 basis points at the bank’s next meeting on Dec 12.

“We need to look at the incoming data, the trend in the data that we have been observing and certainly 50 basis points can be on the table because we continue to be data dependent and the data we are getting points in that direction,” he told CNBC.

Even Dutch central bank governor Klaas Knot, in the past an outspoken hawk, said the ECB could “continue to cut rates until (they) reached neutral territory,” which economists put at around 2.0-2.5%.

Markets have fully priced in a 25 basis point cut on Dec 12 and some chance of a 50 bp move. The rate is seen falling to 2.0% by June.

This post appeared first on investing.com

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