Published : 4 days ago, on 04/12/2024

FRANKFURT (Reuters) -Euro zone economic growth could be weaker in the months ahead and downside risks dominate the medium term outlook, European Central Bank President Christine Lagarde said in a parliamentary hearing on Wednesday.

The euro zone economy has been virtually stagnant for the past 18 months, and a long-delayed recovery is now also at risk from political turmoil in France.

When asked if the ECB would step in to help France should market turbulence intensify, Lagarde avoided a direct reply but said financial stability was a relevant factor in price stability, the ECB’s primary mandate.

Price and financial stability interlinked. Without one, you don’t have the other,” Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs in Brussels.

Lagarde said the ECB was “fixated” on its inflation mandate and had multiple tools at its disposal including the Transmission Protection Instrument, which allows the bank to buy unlimited amounts of bonds from euro zone countries experiencing an unwarranted and disorderly rise in borrowing costs.

French borrowing costs have increased in recent weeks and the collapse of the government could push them up further, raising some questions among investors about the ECB’s potential role.

But France is unlikely to qualify for aid because market moves are neither disorderly, nor unjustified, plus France is under an Excessive Deficit Procedure.

On the broader economy, Lagarde said there would be weak growth in the near term and the outlook further out was uncertain.

Survey-based data suggest that growth will be weaker in the short term, on the back of slowing growth in the services sector and a continued contraction in manufacturing,” she said.

The medium-term economic outlook is uncertain, however, and dominated by downside risks,” Lagarde added. Geopolitical risks are elevated, with growing threats to international trade.

Given the open nature of the bloc, trade barriers pose a threat to manufacturing and investment, Lagarde added.

Still, Lagarde said there could be some recovery ahead, driven by increased investment and consumer spending on the back of rising real incomes.

Inflation, hovering just above the ECB’s 2% target, could rise in the final quarter of 2024 but will then fall back to target next year, Lagarde said, repeating her guidance on prices.

The ECB will next meet on Dec. 12 and economists overwhelmingly expect another 25 basis point rate cut, the fourth such move this year.

Lagarde did little to influence those expectations, saying merely that the bank would follow a data-dependent and meeting-by-meeting approach.

(Reporting by Balazs Koranyi;Editing by Alison Williams and Christina Fincher)