The chances of an ECB interest rate cut are limited, until the end of the year at least, as Christine Lagarde, the head of the ECB, said today “we are in a good place in terms of growth” considering at the same time that the risks on this front have decreased.

Speaking after the meeting of the Board of Directors, during which it was decided to keep interest rates unchanged, she described the growth of the eurozone’s GDP by 0.2% in the third quarter of the year as a positive surprise.

Regarding the risks that could lead to a slowdown in the growth rate of the eurozone, Kr. Lagarde listed three developments which have resulted in their limitation.

Specifically:

The EU-US trade deal reached over the summer, the recently announced truce in the Middle East and today’s announcement of progress in US-China trade negotiations have mitigated some of the risks of a slowdown in economic growth.

But at the same time – as the ECB points out – the volatile global trade environment could disrupt supply chains, further impair exports and weigh on consumption and investment. Deteriorating sentiment in financial markets could lead to tighter funding conditions. Geopolitical tensions, in particular Russia’s unjustified war against Ukraine, remain a major source of uncertainty. Conversely, higher-than-expected defense and infrastructure spending, combined with productivity-boosting reforms, will help growth. An improvement in the business climate could stimulate private investment. Sentiment could also improve and activity pick up if remaining geopolitical tensions ease or if remaining trade disputes are resolved faster than expected.

Turning to developments on the inflation front, where the eurozone’s consumer price index (HICP) rose at an annual rate of 2.4% in September, compared with 2.3% the previous month, the ECB chief stressed that the outlook remained more uncertain than usual due to the volatile global trade policy environment.

Also, a stronger euro could lead to a larger-than-expected decline in inflation. In addition, inflation could turn out to be lower if higher tariffs lead to a reduction in demand for euro area exports and prompt countries with excess capacity to further increase their exports to the euro area. Increased volatility and risk aversion in financial markets could weigh on inflation.

Conversely, inflation could turn out to be higher if the fragmentation of global supply chains drives up import prices, restricts the supply of critical raw materials and exacerbates capacity constraints in the domestic economy. Rising defense and infrastructure spending could also lead to higher inflation in the medium term.

However, today’s ECB Governing Council decision to keep the key interest rate at 2% was taken as inflation remains close to the medium-term target of 2% and the Governing Council’s assessment of the outlook for inflation remains broadly unchanged. The economy continued to grow despite the adverse global environment. A strong labor market, robust private sector balance sheets and previous rate cuts by the Governing Council continue to be important sources of resilience. However, the outlook remains uncertain, mainly due to ongoing global trade conflicts and geopolitical tensions.