Monetary policy statement (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2024-03-07

INTRODUCTORY STATEMENT

Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to keep the three key ECB interest rates unchanged. Since our last meeting in January, inflation has declined further.In the latest ECB staff projections, inflation has been revised down, in particular for 2024 which mainly reflects a lower contribution from energy prices. Staff now project inflation to average 2.3 per cent in 2024, 2.0 per cent in 2025 and 1.9 per cent in 2026. The projections for inflation excluding energy and food have also been revised down and average 2.6 per cent for 2024, 2.1 per cent for 2025 and 2.0 per cent for 2026. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages. Financing conditions are restrictive and our past interest rate increases continue to weigh on demand, which is helping push down inflation. Staff have revised down their growth projection for 2024 to 0.6 per cent, with economic activity expected to remain subdued in the near term. Thereafter, staff expect the economy to pick up and to grow at 1.5 per cent in 2025 and 1.6 per cent in 2026, supported initially by consumption and later also by investment.
We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary.
We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
The decisions taken today are set out in apress releaseavailable on our website.
I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.
The economy remains weak.Consumers continued to hold back on their spending, investment moderated and companies exported less, reflecting a slowdown in external demand and some losses in competitiveness. However, surveys point to a gradual recovery over the course of this year. As inflation falls and wages continue to grow, real incomes will rebound, supporting growth. In addition, the dampening impact of past interest rate increases will gradually fade and demand for euro area exports should pick up.
The unemployment rate is at its lowest since the start of the euro. Employment grew by 0.3 per cent in the final quarter of 2023, again outpacing economic activity. As a result, output per person declined further. Meanwhile, employers are posting fewer job vacancies, while fewer firms are reporting that their production is being limited by labour shortages.
Governments should continue to roll back energy-related support measures to allow the disinflation process to proceed sustainably. Fiscal and structural policies should be strengthened to make our economy more productive and competitive, expand supply capacity and gradually bring down high public debt ratios. A speedier implementation of the Next Generation EU programme and more determined efforts to remove national barriers to deeper and more integrated banking and capital markets can help increase investment in the green and digital transitions and reduce price pressures in the medium term. The EU’s revised economic governance framework should be implemented without delay.
Inflation edged down to 2.8 per cent in January and, according to Eurostat’s flash estimate, declined further to 2.6 per cent in February. Food price inflation fell again, to 5.6 per cent in January and 4.0 per cent in February, while energy prices in both months continued to decline compared with a year ago but at a lower rate than in December. Goods price inflation also fell further, to 2.0 per cent in January and 1.6 per cent in February. Services inflation, after remaining at 4.0 per cent for three months in a row, edged lower to 3.9 per cent in February.
Most measures of underlying inflation declined further in January as the impact of past supply shocks continued to fade and tight monetary policy weighed on demand. However, domestic price pressures are still elevated, in part owing to robust wage growth and falling labour productivity. At the same time, there are signs that growth in wages is starting to moderate. In addition, profits are absorbing part of the rising labour costs, which reduces the inflationary effects.
Inflation is expected to continue this downward trend in the coming months. Further ahead, it is expected to decline to our target as labour costs moderate and the effects of past energy shocks, supply bottlenecks and the reopening of the economy after the pandemic fade. Measures of longer-term inflation expectations remain broadly stable, with most standing around 2 per cent.
The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy or a further slowdown in global trade would also weigh on euro area growth.Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are major sources of geopolitical risk. This may result in firms and households becoming less confident about the future and global trade being disrupted.Growth could be higher if inflation comes down more quickly than expected and rising real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected.
Upside risks to inflation include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and disrupt global trade. Inflation could also turn out higher than anticipated if wages increase by more than expected or profit margins prove more resilient. By contrast, inflation may surprise on the downside if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly.
Market interest rates have risen since our January meeting and our monetary policy has kept broader financing conditions restrictive. Lending rates on business loans have broadly stabilised, while mortgage rates declined in December and January. Nevertheless, lending rates remain elevated, at 5.2 per cent for business loans and 3.9 per cent for mortgages.
Bank lending to firms had turned positive in December, growing at an annual rate of 0.5 per cent. But, in January, it edged lower, to 0.2 per cent, owing to a negative flow in the month. The growth in loans to households continued to weaken, falling to 0.3 per cent on an annual basis in January. Broad money – as measured by M3 – grew at a subdued rate of 0.1 per cent.
The Governing Council today decided to keep the three key ECB interest rates unchanged. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation returns to our medium-term targetand to preserve the smooth functioning of monetary policy transmission.
The first question would be on the more abrupt revision of inflation than expected. How does that translate on the rate outlook?And my second question would be more on the discussions you’ve been having inside the Governing Council. Have you also discussed perhaps doing too much, and by that, risk that inflation is going to undershoot the target at some point in time?
Thank you very much for your question and allow me to preface my response to your question with something that we discussed this morning, which is a little bit unrelated to monetary policy, which has to do with the topic of concern to many European institutions, which is the capital markets union. As some of you will remember, the Governing Council had taken a view on the capital markets union back in 2020, when the Commission had published its action plan at the time. And given the momentum and the special efforts deployed by the euro area, deployed by the Commission, to progress the capital market union, we have decided to update significantly that statement and we have unanimously agreed on a new statement which is more specific, which sets out the imperative of moving fast and making progress. That statement will be available before close of business today. It will come after all the monetary policy documents are made available, so that we don’t mix the two of them. It was a decision that we made after a good discussion on the matter yesterday and a little bit this morning.
On inflation, first of all, I would observe that we are on this disinflationary process, and we are making progress. We came from 2.9% in December, 2.8% in January, 2.6% in February. There is a definite decline which is under way, and we are making good progress towards our inflation target. And we are more confident as a result. But we are not sufficiently confident, and we clearly need more evidence, more data. We know that this data will come in the next few months. We will know a little more in April, but we will know a lot more in June. So, this is what we have determined during our discussion this morning. And as usual, we have proceeded with a review of the three criteria, which you know is the inflation outlook which, as you will have noted in the monetary policy statement, has been slightly revised, a bit more for 2024 for headline [inflation], but slightly, both for headline and core [inflation] in the next two years, 2025 and 2026. But we feel more confident about those projections. The second element that we look at, as you know, is the underlying inflation and on that front as well we are seeing a narrowing of the range between the various measures that we use. We are also seeing a general moderation, with one exception. I'll come back to that if you want. We have looked carefully at the strength of monetary policy transmission. Those are the three components that we are very keen to check carefully and to monitor meeting-by-meeting to see what information it delivers. And it’s clearly a positive signal, but certainly not enough of a series of signals to make us confident enough yet at this point in time.
Just to follow up since you said you will know a lot more in June. Was this the majority view in the Governing Council that you will not have enough information in April to be ready for an interest rate cut? Secondly,you're clearly very focused on wage growth. Can you be a bit specific how much further it needs to slow down for you to be comfortable with an interest rate cut?
There was general broad agreement about the fact that we will get a lot more data and a lot more information in June. That's a certainty. There was also a very broad agreement around the fact that we will not change our views on one single data [point]. And what we are seeing in the data at the moment is indicating certain movements that are directionally good, but it is not strong enough and durable enough, for the moment, to give us sufficient confidence. So that was a generally accepted sentiment around the room and the decision that we made was a unanimous decision, by the way. You are correct that while we continue to look at the three components of the reaction function; the inflation outlook, the underlying inflation and the strength of monetary policy, there are two components that we are particularly vigilant about. And those two components are the wages evolution as well as the profits evolution. Unit labour costs, unit profits are two items that we will be particularly attentive to and will continue to be attentive to. I mentioned that in the underlying inflation measurements there is one which is not moving in the same direction as the others. The others are generally declining and the range between the various instruments is narrowing as well. But there is one that is not declining and that is domestic inflation. Domestic inflation is largely informed by services, which itself is for most services labour-intensive, and therefore very sensitive to wage evolution. So those are the two components that we will particularly zero in and try to be laser focused on to see whether there is confirmation or not of this beginning of moderation that we are seeing on the wage front, and confirmation of what has been observed on the profits, as to whether or not profits absorb and act as a buffer for the wage increases. We will have the Q4 numbers for CPE, for compensation per employee, tomorrow. Our assessment for the moment is: [the CPE was] declining, relative to the third quarter. I think it's a conservative assessment given the various other elements that we try to look at. We look at some backward-looking elements, but we also try to be as forward-looking as we can by really following very carefully all the new agreements that are signed and how terms and conditions will apply going forward.
Underlying inflation is one of the three criteria you look at and the only one that remains above 2% at least at the current time. It's forecasted at 2.6% for this year. Is it a level at which you are comfortable to cut rates? And the second question; a few days ago, Mario Draghi told in a speech in Washington that the euro zone needs low capital costs to finance huge investments. Do you agree with that and what do you think about the fact that these investments in transitions may be delayed because of high rates?
I wouldn't say that underlying inflation is the only figure that is above 2%. We tried to look at the inflation outlook, which includes of course the headline inflation, which is the one that under our strategy review we have agreed is the compass that we're using. We’re also looking at the inflation without energy and food, otherwise called core inflation. But we don't only look at core. We look at other measurements of underlying inflation to try to remove the noise from the signals and try to really measure each and every time what is going to be the best indicator to give us the measurements of what is to come. I wish everything was closer to our target. We're not there yet. We are not there. Even on headline inflation, we are still projecting 2.3%, which is a revision from what we had before. But we're still at 2.3% in 2024 and we are at 2% in 2025. Core inflation is at 2.6% in 2024 and then moving to 2.1% in 2025 and finally reaching 2% in 2026. I am not saying here that we will wait until we are at 2% and that we see 2% to take a decision. This is not what I'm saying here. But in terms of projections, both headline and core, this is what we are seeing. We are all looking forward to the two Italian reports, if I may say, because there will be a report by Enrico Letta on the single market which, if fully implemented, would certainly deliver more growth than we have at the moment. And we're very much looking forward to the report of President Draghi on the competitiveness of Europe, which is obviously a major topic going forward. I'm sure he will be making recommendations and I will wait until we have the report to react to his proposals. But we have a mandate, we have a mission, we are determined to reaching our 2% inflation target in the medium term and we will be riveted to that.
Since our last meeting here, market expectations have gone through a serious revision. There's been a big repricing. How is the current market pricing aligning with your own views? Are you happy with what's been happening in the market? Is this a better reflection of where you think policy might be going? The other question is about the framework review. Could you tell us where that is standing now? Where is it going? What's the next step in terms of timeline? And is the minimum reserve ratio part of that discussion?
I've tried in the past to refrain from passing judgement and commenting specifically on market expectations. I just note that it seems to be converging better, but everyone has to do their job. They do their job. We do our job. We look at the three elements, we look at our projections, we try to anticipate the impact of our monetary policy and that’s how we make decisions. Not by being determined by what markets consider. In terms of the operational framework, we have had a discussion, short of course because the main agenda yesterday and today was monetary policy. But we had a discussion yesterday morning on the operational framework to narrow areas of discussions and arrive at a platform that hopefully will be a consensus between the governors. My strong expectation is that it will be completed on the occasion of our meeting on March 13, and it will then be released, published, explained. Our communications department has some ideas as to how to best do it because it is a highly technical matter. Some of you are fully versed in the sophistication and the delicacies of the operational framework, but it warrants a good review, a good explanation. So I hope that March 13 will be the date when we will go out with the operational framework.

QUESTION AND ANSWER SESSION

And my second question would be more on the discussions you’ve been having inside the Governing Council. Have you also discussed perhaps doing too much, and by that, risk that inflation is going to undershoot the target at some point in time?