WHEN: Today, Tuesday, April 16, 2024
WHERE: CNBC’s “Squawk on the Street” and “Money Movers”
Following are excerpts from the unofficial transcript of a CNBC exclusive interview with ECB President Christine Lagarde on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) and “Money Movers” (M-F, 11AM-12PM ET) today, Tuesday, April 16. Following is a link to video on CNBC.com:
More of the interview will air on “CNBC Leaders: Christine Lagarde” tonight at 8pm ET.
All references must be sourced to CNBC.
LAGARDE ON GEOPOLITICS, INFLATIONARY OUTLOOK & MORE
SARA EISEN: Joining me exclusively here in Washington, D.C. is the president of the European Central Bank, Christine Lagarde. Welcome.
CHRISTINE LAGARDE: Thank you so much, Sara.
EISEN: You’re–
LAGARDE: Happy to be here.
EISEN: It’s great to see you. You’re in town for the IMF World Bank meetings, as always. Interesting timing because geopolitics are front and center again. These meetings come after the Iranian attack on Israel. And I and I do wonder if some of these events change the economic outlook for you at all or impact them.
LAGARDE: You know, geopolitical developments have been with us for a long time. And certainly from our perspective in, in Europe the developments started in a harsh and difficult way with the unacceptable invasion by Russia of Ukraine. That was a major geopolitical development that had significant economic impacts, particularly on the energy front. But then, of course, we had more and more. And some, and not really often commented upon, like Sudan, like Yemen. But obviously since October 7th, it has been a succession of geopolitical developments which have a bearing on economic activity. I think it has a bearing on number one, consumer confidence and confidence of investors. You know, where are we heading? What will be the developments? What impact will it have? And it also has an impact on– commodity prices. It’s not been very significant in, in the late in you know, in the last few weeks. But obviously those geopolitical developments matter a lot. We factor them into our focus, our modeling as much as we can. And, and we have to constantly monitor and see how it develops and what impact it has on, on all these fronts that I have mentioned.
EISEN: On commodities, oil has been affected. And we watch oil, of course, with, with Iran. Brent’s trading around 90. If it spikes higher, if there’s an escalation, does that become a factor that changes your inflationary outlook for Europe and potentially your policy?
LAGARDE: We will, we will obviously, as you say, we are monitoring very closely. The most recent reaction in the last few days has been relatively moderate. Went up, it went down. But it’s, it’s a moderate movement. We have gone through the period of significant hike of oil prices. And of course we will be informed by that episode. I think that, you know, since the particularly the latest development in, in Ukraine and the energy crisis that Europe suffered in particular on oil and gas have changed the landscape as well in terms of sources of supply, in terms of dependence, independence, level of inventories, relationship with other countries. And I think that the situation will be different from what it was then. But it, it does impact. And it does impact across the world, not just, not just the Euro area.
EISEN: It’s, it’s not just oil that’s been rising. We’ve seen prices–
LAGARDE: True.
EISEN: From aluminum to cocoa to copper, which is happening in a time where overall Eurozone inflation rates have been coming down.
LAGARDE: Yep.
EISEN: And I wonder how confident you feel about that level continuing to fall in the wake of some of these rises in commodities.
LAGARDE: You, you know, the, I think on, on commodities we cannot be brought, you know, it cannot be a general assessment. We have to go sort of sector by sector by sector. Because when we look at food, for instance, whether it’s processed or unprocessed, you have the first difference. And then cocoa has been a very, has had a significant impact. But you also have to, you know, drill down, taking out cocoa, what is actually the, the inflation on food. Now you, you can’t leave on cocoa and all the other elements have to, be really measured in that in that basket of food elements. But all commodity prices have an impact. And we have to be extremely attentive to those movements. Clearly on energy and on food it has a direct and rapid impact.
EISEN: So the market is thinking that you’re going to cut rates in June. You’ve signaled June. Is that still the plan?
LAGARDE: You know, we are, we are observing a disinflationary process that is moving according to our expectations. And as I said in our latest, press conference after the monetary policy decision that we made to keep rates on hold, we just need to build a bit more confidence in this disinflationary process. But if it moves according to our expectations, if we don’t have, you know, a major shock in developments we are heading towards, you know, a moment where we have to moderate, the restrictive monetary policy that we have applied certainly since September, when we decided to hold rate and to keep that restrictive monetary policy. It will be time, as I said, subject to the new development of additional shock. It will be time to moderate the restrictive monetary policy in reasonably short order.
EISEN: And, sounds like June. That’s your next meeting. How do you think about the policy path from there? Is it every meeting gets a cut? Every other meeting–
LAGARDE: We’ve been, I’ve been extremely clear on that. And I have said deliberately we are not pre-committing to any rate path. Why is that? Because number one, we are data-dependent. Because there’s huge uncertainty out there. I mean, we just spoke about geopolitical development. We, we have to be attentive to those developments. We have to look at the data. We have to draw conclusions from those datas, data. And, and we will continue to apply the three key criterias that we have signaled now, and which have served us well. You know, it’s the inflation outlook, it’s the underlying inflation and is the, the strength of monetary policy transmission. So we will at each and every meeting, particularly when we have projections, but not necessarily only when we have projections, we will look at the evolution and whether or not those data under these three criteria headline, if you will, confirm our perspective or not. That’s what we will do. So–
EISEN: Market expects three this year. Is that reasonable?
LAGARDE: You know, I wouldn’t comment on that because if you had asked me, two or three months ago, we were expecting more than three. And I think that we are better off from our, you know, central bank perspective, of course looking at what they anticipate because they are big boys and they, too many boys. But, big boys. And they–
EISEN: Always.
LAGARDE: They run their models. They observe things. They take risk. They, assess, you know, term premium. But we have to be data-dependent. We have to look at our own work. And we are very, very steady and focused on what we are seeing. And we’ll apply judgment at the end of the day. What is produced by these numbers and data and model projections have to be taken into account with judgment on the part of the governance.
EISEN: Alright, I’ll try it one other way, which is how, how restrictive do you see rates right now being for the economy?
LAGARDE: I think we have said that we, we believe that they are restrictive enough and that they are producing an impact. And we’re saying by the same token that as data come in in the next couple of months, because we will in, well, in April, May will be key moments for data. Our confidence will grow that this has been strong enough, and we can begin to dial down and moderate the restriction imposed by monetary policy.
EISEN: On the inflation front in particular, it’s 2.4% inflation. You’ve come a long way down. What does the path to 2% look like?
LAGARDE: Bumpy. It, it will be and, you know, I think it’s important to actually understand that. Because we have had this very regular, steady decline in the last few months. You know, 2.8%, 2.6%, 2.4%. I have no idea what the next one will be. But it might not be 2.2%. It’s not, it’s not linear. And given the base effects that will be produced by very low prices of energy a year ago, we will have a bumpy road. So rates, inflation rates might go down, might go up a little bit. But they will fluctuate around this line that, for the moment, is going downwards. And as I said, unless we have major shocks that would disrupt that expectations, we should continue to be directionally down to our 2% target, which we believe we will reach sustainably in mid ’25. So that’s the, the expected path of inflation.
EISEN: Why do you think that inflation has come down farther at this point in Eurozone versus in the U.S., where we’re still in the threes?
LAGARDE: I think we’re talking about two different, two different economies, two different series of shocks, and a different kind of inflation. But what is most different between Europe and the United States of America is the behavior of the consumer. And then we can go into why that is. But I think what we observe is European consumers that are very cautious, that continue to save significantly, when you look at the, at the saving rates in Europe, it is still high and higher than pre-COVID. When you look at the American consumer, the American consumer consumes. And the level of savings overall is less than what it was pre-COVID. That, that’s a major difference. Now if you go to the root of why is that–
EISEN: Fiscal?
LAGARDE: It’s fiscal. It’s energy. And it’s the natural tendency of the American consumers to have confidence to spend, not to save so much. But fiscal has played, has played a role. It was significantly higher in this country. And it was targeted to households, to consumers. So when people got a check in the mail, they really had money in their hands that they could spend. And, and as a result of that, consumed.
EISEN: You said at the last meeting that you are not Fed-dependent, you’re data-dependent. Because the view on the Fed and what we’re hearing from policy makers is it’s going to be a little bit longer before they think about cutting interest rates. Do you not worry, though, about a gap, a divergence in policy between these two major central banks?
LAGARDE: Well, let me explain what I meant by we are not Fed-dependent, which I think is, is absolutely correct. There was a debate about the CPI numbers, which came, came out I think just very briefly before we had our monetary policy decision. And suddenly everybody fretted about that number. And the assumption was, oh, well, the Fed is going to be delayed, which nobody knows. And I would certainly not, like pass a judgment on that. And of course it’s going to impact the ECB. The ECB will be delayed. Yeah. We are data-dependent. So our data came down in March. We have had a little bit of data in April. But it’s on that basis that we have to make our decisions. And not on the basis of any central bank in the world, be it the Fed, which is the largest and with the largest economy measured by GDP, we cannot make decision on that basis. Hence, we are not Fed-dependent. But what I will say is that the evolution of inflation, the evolution of monetary policy in any of the large economies that actually have a bearing on the global activity in the world, of course we take into account. And we take that into account in our own measurements and in our own models. So it does find its way in how we forecast. And as I said, one of the three key criterias are inflation outlook and the other two. But inflation outlook. And that, of course, receives and is informed by multiple datas, including what happens in other countries.
EISEN: And also currencies. I wonder how closely you’re, you’re following–
LAGARDE: Ah. You know, central bankers don’t talk about currencies as a matter of principle because we don’t target currencies.
EISEN: But it’s a transmission mechanism–
LAGARDE: But it is, yes. Yes. And it, it does have an impact on inflation. So we have to be very attentive to exchange rates, to the value of currencies, to the value of the euro, and, and how much it impacts inflation in terms of imported inflation, for instance.
EISEN: If–
LAGARDE: Trade is affected also.
EISEN: If euro goes back to parity, which we’re not too far against the U.S. dollar, is that a good thing or a bad thing for Europe?
LAGARDE: As I said, I don’t want to comment on, on exchange rates in any particular number.
EISEN: Okay, but we, you’re seeing what’s happening with the Japanese yen, for instance, which has been plummeting because of the huge interest rate differential between Japan and the U.S. And I do wonder if that factors in, and would be a concern if you do go ahead of the Fed in cutting rates.
LAGARDE: We will be driven by our data. We will be driven by our analysis of the situation. And we will be targeting this sustainable 2% target that we have, which will determine price stability. This is, this is our mandate. We have, we are single- mindedly focused on that 3% target and price stability. We’re looking at lots of other things, including, you know, imported inflation, including the volume of trade. Including the productivity numbers. The there are multiple data that find our way into the work that will determine.
LAGARDE ON CHINA’S ECONOMY
LAGARDE: China is no longer the single and well, the, the largest supply partner and trade partner for the for the U.S., for instance. But it is still a significant trade partner for many countries. But that export engine is slowing down. Massive infrastructure projects. That engine is probably slowing down as well. And it remains to be seen how much focus and push there is on consumption, question mark. I don’t have the answer.
LAGARDE ON GROWTH IN EUROPE
LAGARDE: It’s been a bit of a roller coaster. If you look at the 2022 numbers, Europe was recovering strongly, more strongly than the U.S., actually, for that matter which had a recession. ’23, very sluggish growth. 0.5%, if I recall. Our forecast for ’24 was 0.6%. And then it, it gradually ramps up to a more, more regular growth rate, 1.5%, 1.6%. I think the real focus, and that will probably result from this report issued by former Prime Minister Letta, the Italian prime minister who has been tasked to really review the single market of Europe, is it working, how many barriers do we have, how much can we leverage having a real single market. And I think that his conclusions are that it’s not working properly. And we do not have a single market. And it’s about time that we have an economy that works as a single market. But we have to focus on the upside that we can have from that real single market, including capital, including banking. And it’s also time that we really focus on productivity, because that’s another area where we lag behind the United States in a significant way.
EISEN: I was gonna ask where, where the growth in Europe comes from, where it’s going to come from.
LAGARDE: Two, two sources for of additional growth coming up. Number one, additional demand addressed to Europe. And that’s where, you know, the exchange rate can factor in. And second, the so almost mechanical impact of wages increasing, which is the case in Europe. And it was lagging behind the United States but is now really catching up. So additional wages while inflation comes down. You have real disposable income, addition as a result of that. And therefore, consumption should lead the way.
EISEN: Part of the issue has been Germany, the biggest economy, has been weaker. It’s been hit, its exports. It’s been hit by the energy situation. Is Germany in recession?
LAGARDE: You know what I say from the latest numbers is the industrial production number for Germany, which is now on the way up. After months and months of decline, which had to do with energy prices and the very strong destination of exports for Germany towards China, industrial production number have ramped up. And, and much higher than what we had expected. So I think we need to see how that consolidates. Whether it’s a trend or whether it’s a one-off number. But it looks as if Germany might have turned the corner of this significant massive shocks that it suffered on energy, highly dependent on Russia supply, China, main destination of exports, and, and what we know about the Chinese economy. And, and a strong focus that that country has had historically on, on industry.
EISEN: Yeah, what are you thinking about the Chinese economy right now? And–
LAGARDE: Well, China’s economy has surprised us–
EISEN: A week ago?
LAGARDE: This morning.
EISEN: Weaker?
LAGARDE: Hm? No–
EISEN: Weaker?
LAGARDE: 5.3%. That’s higher than what we had expected.
EISEN: But retail sales have been sort of sluggish compared to what we expected.
LAGARDE: I think what will be interesting to watch is what are the sources for growth going forward. And how is that sort of changing from massive exports, and that engine is probably significantly slowing. China is no longer the single and well, the, the largest supply partner and trade partner for the for the U.S., for instance. But it is still a significant trade partner for many countries. But that export engine is slowing down. Massive infrastructure projects. That engine is probably slowing down as well. And it remains to be seen how much focus and push there is on consumption, question mark. I don’t have the answer. And how much there is on manufacturing of strategy, you know, products that, that China wants to rely on. But I’m saying all that because China is by, you know, many accounts the second, sometimes the first, largest economy in the world. And, and its development matters in all, in all respects.
EISEN: Do you think we’ve seen peak China growth?
LAGARDE: Well, if you look at the evolution of that economy, compare it with other, you know, they like to call themselves a developing economy. But, I mean, if you, if you observed the path that developing economies have taken, you observe the demographics and all that, it’s likely that in terms of GDP growth, that the high numbers in the high 8s, 9s, are probably behind.
