“Not too worried about exporting inflation to Europe”

European Central Bank President Christine Lagarde told CNBC on Wednesday that the European Central Bank is “not too worried” about the impact of foreign inflation on the euro zone.

Asked about the potential impact on Europe if U.S. inflation picks up again, Lagarde said: “If U.S. inflation picks up again, it will definitely become a problem in the United States, and that's the first consequence.”

“We're not too worried about inflation exporting to Europe.”

“We will observe some interesting phenomena. For example, the exchange rate will be of interest and … there may be consequences, but we are certainly interested in seeing growth in the United States because growth in the United States has been That’s a plus for the rest of the world,” she added.

The ECB president stressed that policymakers are confident that inflation will reach the central bank's 2% target by 2025 and that the deflationary process will continue. Annual inflation in the euro zone was 2.4% in December, rising for the third consecutive month after hitting a low of 1.7% in September.

Lagarde also said that “markets are expecting very different monetary policy moves” in the United States and the euro zone in the coming months because the European Central Bank and the Federal Reserve “are not cutting interest rates at the same pace.”

“We do have this disagreement, and it has to do with the different economic environments in the United States and Europe right now,” she noted.

The European Central Bank cut interest rates four times last year, taking the deposit rate, its key rate, to 3%. The market currently expects a further rate cut to 2% by September 2025. By comparison, the Fed cut interest rates by less than half a percentage point during the same period.

In their latest macroeconomic forecasts in December, ECB staff said they expected annual inflation in the euro zone to average 2.1% this year, adding that progress on deflation was “well advanced”.

It comes as the European Union grapples with sluggish growth, which has also slumped in its largest economy, Germany.
GDP will contract in 2024 for the second consecutive year.

“In terms of growth, the risks are to the downside and we have to pay very close attention to the data that we are receiving, collecting and analyzing to understand what needs to be done,” she said of the outlook for the euro zone.

“We're on this regular, gradual path. Deflation is happening.”

The central bank will pay close attention to so-called “latecomer” factors such as services, energy, wages and insurance to see whether service prices can achieve its expected gradual decline in early 2025.

Although overall price growth in the euro area has fallen from a peak of 10.6%, service sector inflation is particularly troublesome, hovering near 4% since November 2023.

This is a breaking news story and will be updated soon.