The ECB risks making a huge mistake

Is Christine Lagarde’s ECB at risk of making a big blunder on interest rates, putting the entire eurozone economy in trouble?

The question, in fact, is not only not new, but has arisen repeatedly in recent years of monetary policy decisions adopted by the European Central Bank under Christine Lagarde’s direction, starting with the flurry of rate hikes announced by Frankfurt between July 2022 and September 2023, to lower the feverish rise in inflation. "Too much monetary tightening that risks stifling economic growth": was the alarm raised from many quarters in the Eurozone, not only from the world of economists but also (or rather, above all) from politicians.

From June 6, 2024, to June 5, 2025, Lagarde then heeded that cry, cutting interest rates eight times, thus halving the ECB deposit facility rate from 4% to the current 2%. But is this rate now the last stop for the ECB President? An affirmative answer to this question is supported by some statements Christine Lagarde reiterated at the last meeting of the ECB’s Governing Council. These statements could herald a major blunder by the ECB on interest rates, with some warnings also being raised by the institutional world.

The ECB Grapples with Inflation, the OECD’s Outlook

Yesterday, Tuesday, September 23, 2025, in publishing the report "OECD Economic Outlook, Interim Report, September 2025," titled "Finding the Right Balance in Uncertain Times," the OECD warned that, "Most G20 economies are projected to experience a decline in inflation, driven by slower growth and easing labor market pressures," adding that it estimates that "headline inflation will decline from 3.4% in 2025 to 2.9% in 2026, while core inflation in G20 advanced economies will remain broadly stable at 2.6% in 2025 and 2.5% in 2026."

The OECD examined inflation trends across economies, indicating that while the United States faces fears of a resurgence of upward pressures, the euro area risks the opposite.

In the US, the Paris-based association explained, "there are already some signs that the effects of the tariff hike have begun to be passed on to consumer prices, particularly on import-intensive durable goods. Recent business surveys also suggest that the continued price increases for manufacturing inputs in the United States are being passed on to the prices of finished goods."

That said, while in America "the increase in effective tariffs will further stimulate inflation, assuming that the pass-through rate to final goods prices strengthens as firms become less willing to absorb the increase in the costs of imported goods," in the euro area things will be different, so much so that the OECD has revised downward its estimates for euro area inflation forecast by 0.1 percentage points compared to the last report released in June, now forecasting inflation in 2025 at 2.1%, therefore slightly above the ECB’s target, but at 1.9% in 2026, therefore below the European Central Bank’s objective.

Inflation, what does the ECB expect for 2025 and the coming years

Nothing shocking, nor even a real alert, given that, if you look again at the macroeconomic projections formulated by the European Central Bank staff and released during the last monetary policy meeting on September 11, when Eurozone interest rates were left unchanged for the second consecutive time after the first adjournment at the previous meeting last year July 24, you’ll see that the forecasts are quite similar.

Frankfurt has announced that it now expects the HICP for 2025 of 2.1%, compared to the previously expected +2%; a 1.7% increase in 2026, compared to the +1.6% estimated in June; and a 1.9% increase, compared to the 2% increase in the latest staff outlook, in 2027.

Regarding core inflation estimates, the outlook is as follows: inflation excluding energy and food is expected to rise by 2.4% in 2025, 1.9% in 2026, and 1.8% in 2027.

Lagarde is therefore well aware that the growth in inflationary pressures will be lower than the target she is aiming for.

At the same time, euro area GDP growth is estimated to remain resilient, at 1.2% in 2025, an upward revision from the 0.9% expected in June; equal to +1% in 2026 and +1.3% in 2027, and the package of expansionary fiscal policy measures rolled out by both Germany and the entire EU have convinced her that they can afford the luxury of no longer intervening on interest rates, at least in the short term.

The scenario announced by European Central Bank economists, however, does not convince several analysts. They fear that, after having underestimated the risk of runaway inflation at the end of 2021, and even before the war in Ukraine that began on February 24, 2022, the ECB president is now ignoring the opposite risk, namely that of excessively pronounced disinflation, which could ultimately lead to deflation. This is all despite recent warnings being raised by the central bank’s own head, Christine Lagarde.

Is Lagarde ignoring the risk of euro disinflation? The obsession is called inflation.

Already during the press conference following the interest rate announcement—which was left unchanged in July—Lagarde effectively emphasized, commenting on the possible presence of disinflationary threats, that "there will always be those two or three governors who are very worried about inflation falling below target." But this doesn’t worry her too much, given that "the disinflationary or inflationary pressures cannot yet be determined."

Rather, there will be "tariff-related frictions," added the head of the European Central Bank, which could translate into a reduction in supply, pushing prices up again. Lagarde’s view, which appears to focus more on inflationary pressures than disinflationary ones, is not ruled out a priori by the crowded audience of economists. However, they also consider the likelihood of the opposite occurring, primarily due to the euro’s appreciation, which, as a note from Scope Ratings highlighted.

The euro’s rise, expected to rise 14% against the dollar in 2025, "is (in fact) leading to disinflationary dynamics," to the point that "an appreciation above the 1.20 threshold against the dollar could raise concerns about competitiveness and deflation risks."

Already in mid-April of this year, Marcus Ashworth had published an editorial on Bloomberg titled "The ECB Should Wheel Out Its Monetary Bazooka," urging Lagarde to cut rates by as much as 50 basis points, warning that something could still be done to seize the opportunity "for the euro area to escape the ongoing disaster."

Lagarde has continued to cut rates since then (until July of this year), but has turned a deaf ear to the calls from dovish policymakers, continuing to cut rates by just 25 basis points.

Economists warn of services inflation and wages.

Following the ECB’s latest rate announcement, albeit in a less emphatic tone, another warning was issued by economists at MUFG Mitsubishi UFJ Financial Group. Commenting on Lagarde’s so-called "good position," they emphasized that, "although the obstacles to further monetary easing are certainly more numerous than in the past, and the burden falls significantly on the doves, we expect this situation (of interest rate reductions) to be gradually supported by various factors over the coming months." Their view is for a further rate cut at the December 18 meeting.

Economists at the Japanese financial giant’s research division justified their forecasts by noting that service price inflation is trending downward. “After hovering around 4%, the rate has now weakened from that threshold, falling to 3.1% in August.”

Furthermore, “Forward-looking wage indicators suggest that pressures will continue to ease.”

Not surprisingly, it has been noted, “the ECB has rightly revised down its wage growth forecast to 2.7%, for both 2026 and 2027 .” Economists remain bullish on EUR-USD, predicting a further 6.8% appreciation of the single currency against the greenback by mid-2026, " even if the ECB were to cut rates again "

Is Lagarde Getting It All Wrong? The Super Euro Ignored by the ECB

The doves’ strong suspicion is that Lagarde is getting it all wrong again and that, by underestimating the Super Euro, as well as by continuing to obsess over inflation, she is ultimately downplaying the disinflationary risks that forced the ECB to drive eurozone interest rates down to below zero, back when the Eurotower was in the hands of former Prime Minister Mario Draghi.

A warning not to ignore the threat of disinflation turning into deflation has been issued, especially by Italian officials, such as Bank of Italy Governor Fabio Panetta (who, after all, might have a lot to say to his hawkish Austrian colleague), who, in July, noted that "the key question now is whether the current level of interest rates is adequate to ensure that inflation remains close to its target, preventing persistent deviations in either direction ."

And yesterday, a report from S&P Global, dedicated to the outlook for the Eurozone economy in the fourth quarter of 2025, noted that, while "persistent inflation in services reflects the strength of the labor market, suggesting that the European Central Bank (ECB) has concluded its rate-cutting cycle," it also noted that "in this context, the rapid appreciation of the euro is an important factor to monitor."

The hope, in short, is that Lagarde will not underestimate the threat of disinflation, thereby making a monetary policy mistake that could be egregious, in refusing to lower ECB policy rates again.

But "downside risks to inflation are increasingly evident"

A clear warning to the ECB about the risk that Lagarde might make a monetary policy mistake by continuing to maintain rates at their current levels or, worse, as some already predict, raising them again, was issued by Sandra Rhouma, European Economist at AllianceBernstein, who explained, on the same day the ECB Governing Council met, the economists’ decision to cut the 2026 GDP growth outlook and, simultaneously, to confirm inflation below its target for both 2026 and 2027.

The economist drew on these elements to emphasize that "downside risks to inflation are increasingly evident" and that the ECB cannot ignore certain factors for long:

• The slight but persistent deviation of inflation from targets.
• The euro set to strengthen.
• Growth that risks disappointing.
• Overall disinflationary trade flows.

All this, in a context in which "potential bullish factors (for inflation), such as German infrastructure spending or potential climate shocks, remain too uncertain to balance the picture."

Consequently, according to the expert from AllianceBernstein’s European division, "Lagarde’s statement that ’the disinflation process is over’ is a conclusion that could prove premature and not surprisingly disprovable in the coming months."

Assuming Lagarde decides to heed these signals and not continue to act her own way. As she has always done, Rouhma, for her part, did not mince words, emphasizing that "the ECB itself seems to ignore the risks associated with below-target inflation."

Original article published on Money.it Italy 2025-09-24 14:19:00. Original title: La BCE rischia di commettere un errore madornale