On December 23, Financial Associated Press reported (Editor: Shi Zhengcheng) that European Central Bank President Christine Lagarde stated in a podcast released on Monday that she believes the European Central Bank is nearing its final inflation target while remaining vigilant about certain industries.

Lagarde's clear policy outlook stands in stark contrast to Powell of the Federal Reserve, who tried to confuse the market last week. The European Central Bank has cut rates a total of four times this year, with economists predicting another four cuts next year, where the deposit facility rate may drop from the current 3% to 2% by the middle of next year.

(Source: FRED, European Central Bank)

Approaching the inflation target

When asked if there is still a need to worry about inflation, Lagarde confidently stated that it is now "close to that stage"—the point at which it can be announced that inflation is sustainably controlled at the 2% target. She also noted that this statement comes with some reservations due to the hidden risks of inflation in the service sector. While the overall inflation rate in the Eurozone has dropped to 2.2%, the inflation rate in the service sector remains at 3.9%, hovering around 4%.

Lagarde also mentioned that attention should be paid to the situation of inflation "laggards," such as the prices of insurance contracts that are renewed annually, hoping that they won't see a repeat of the price increases seen this January.

Lagarde emphasized that the European Central Bank is aiming for a 2% inflation target and that monetary policy will be formulated to maintain this level. She strongly hopes to achieve this rather than return to a "negative interest rate" state, as such a policy could lead to a "somewhat irreversible change" in the psychology of market participants.

Moreover, a situation has arisen in Europe: when you ask those who have restored their income through salary increases whether their purchasing power has recovered, about 34% of them will tell you it has not. This could explain why the savings rate of Eurozone residents is significantly higher than the historical average: not because of inflation expectations, but due to the awareness of diminished income levels. Lagarde commented that this situation may be related to the fact that prices are constantly adjusting, but consumers' wages typically only increase annually.

Europe and the USA are very different.

As the two major currencies in the world, as their economies diverge and monetary policies split, the outside world is anticipating that the exchange rate of the Euro against the Dollar may fall back to parity at some point next year, that is, 1 Euro to 1 Dollar. In October of this year, 100 Euros could still be exchanged for 110 Dollars, but now it can only be exchanged for 104 Dollars.

(EUR/USD daily chart, source: TradingView)

As regions that have also experienced high inflation, the two currently are 'in very different states.' Lagarde believes there are two major factors.

The first is Energy. Europe is a net importer of Energy, so rising energy prices equate to a 'tax' paid to foreign countries. The USA also encounters rising energy prices, but that money is redistributed domestically and does not flow out of the USA.

The second factor relates to industry policy and the associated 'Dollar privilege.' Lagarde stated that Europe has many programs to support businesses that are 'on the brink of life or death' or might go bankrupt, while the USA stimulates demand through fiscal support, many American households view this as extra income and spend it. Meanwhile, the fiscal support available in the USA is far larger than in Europe, but this is also a privilege of the world's largest economy and the issuer of the Dollar.

At the same time, Europe is not a unified large market. Lagarde cited that there could be tariffs of up to 45% on goods between different markets, and even 110% on services, while the number of various Exchanges could be as high as 293.

Discussing Trump.

As for the outlook for 2025, a pressing question is how to engage with Trump's new government, which will take office on January 20 of next year.

Lagarde believes that trade restrictions coupled with retaliatory trade wars and this confrontational approach to trade are detrimental to the Global economy and may also adversely affect the USA economy.

Regarding Trump's fondness for 'talking trade', Lagarde recalls her past days of personally participating in negotiations. Similar to Powell, Lagarde transitioned into the business and political realm after many years in the USA legal field, serving successively as France's Minister of Foreign Trade, Minister of Agriculture, and Minister of Finance, before returning to the USA to take over the IMF.

Lagarde stated that one must continuously adjust oneself, especially when facing a very powerful player on the other side of the table. It is essential to adjust strategies, identify one's strengths and reinforce them, while also recognizing the opponent's weaknesses before entering negotiations. Considering the situations Trump encountered during his first term, if Europe could establish a joint procurement platform, it might be more credible, for instance, joint procurement of Energy and arms.