Monetary policy statement (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2024-12-12

INTRODUCTORY STATEMENT

Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to lower the three key ECB interest rates by 25 basis points.In particular, the decision to lower the deposit facility rate – the rate through which we steer the monetary policy stance – is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.
The disinflation process is well on track. Staff see headline inflation averaging 2.4 per cent in 2024, 2.1 per cent in 2025, 1.9 per cent in 2026 and 2.1 per cent in 2027 when the expanded EU Emissions Trading System becomes operational. For inflation excluding energy and food, staff project an average of 2.9 per cent in 2024, 2.3 per cent in 2025 and 1.9 per cent in both 2026 and 2027.
Most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis. Domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay.
Financing conditions are easing, as our recent interest rate cuts gradually make new borrowing less expensive for firms and households.But they continue to be tight because our monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit.
Staff now expect a slower economic recovery than in the September projections. Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter. Staff see the economy growing by 0.7 per cent in 2024, 1.1 per cent in 2025, 1.4 per cent in 2026 and 1.3 per cent in 2027. The projected recovery rests mainly on rising real incomes – which should allow households to consume more – and firms increasing investment. Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand.
We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. 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. We are not pre-committing to a particular rate path.
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 grew by 0.4 per cent in the third quarter, exceeding expectations. Growth was driven mainly by an increase in consumption, partly reflecting one-off factors that boosted tourism over the summer, and by firms building up inventories. But the latest information suggests it is losing momentum. Surveys indicate that manufacturing is still contracting and growth in services is slowing. Firms are holding back their investment spending in the face of weak demand and a highly uncertain outlook. Exports are also weak, with some European industries finding it challenging to remain competitive.
The labour market remains resilient. Employment grew by 0.2 per cent in the third quarter, again by more than expected. The unemployment rate remained at its historical low of 6.3 per cent in October. Meanwhile, demand for labour continues to weaken. The job vacancy rate declined to 2.5% in the third quarter, 0.8 percentage points below its peak, and surveys also point to fewer jobs being created in the current quarter.
The economy should strengthen over time, although more slowly than previously expected. The rise in real wages should strengthen household spending. More affordable credit should boost consumption and investment. Provided trade tensions do not escalate, exports should support the recovery as global demand rises.
Fiscal and structural policies should make the economy more productive, competitive and resilient. It is crucial to swiftly follow up, with concrete and ambitious structural policies, on Mario Draghi’s proposals for enhancing European competitiveness and Enrico Letta’s proposals for empowering the Single Market. We welcome the European Commission’s assessment of governments’ medium-term plans for fiscal and structural policies, as part of the EU’s revised economic governance framework.Governments should now focus on implementing their commitments under this framework fully and without delay. This will help bring down budget deficits and debt ratios on a sustained basis, while prioritising growth-enhancing reforms and investment.
Annual inflation increased to 2.3 per cent in November according to Eurostat’s flash estimate, from 2.0 per cent in October. The increase was expected and primarily reflected an energy-related upward base effect. Food price inflation edged down to 2.8 per cent and services inflation to 3.9 per cent. Goods inflation went up to 0.7 per cent.
Domestic inflation, which closely tracks services inflation, again eased somewhat in October. But at 4.2%, it remains high. This reflects strong wage pressures and the fact that some services prices are still adjusting with a delay to the past inflation surge. That said, underlying inflation is overall developing in line with a sustained return of inflation to target.
The increase in compensation per employee moderated to 4.4 per cent in the third quarter from 4.7 per cent in the second. Amid stable productivity, this contributed to slower growth in unit labour costs. Staff expect labour costs to increase more slowly over the projection horizon as a result of lower wage growth and higher productivity growth. Moreover, profits should continue to partially offset the effects of higher labour costs on prices, especially in the near term.
We expect inflation to fluctuate around its current level in the near term, as previous sharp falls in energy prices continue to drop out of the annual rates. It should then settle sustainably at around the two per cent medium-term target. Easing labour cost pressures and the continuing impact of our past monetary policy tightening on consumer prices should help this process. Most measures of longer-term inflation expectations stand at around 2 per cent, and market-based indicators of medium to longer-term inflation compensation have decreased measurably since the Governing Council’s October meeting.
The risks to economic growth remain tilted to the downside. The risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by geopolitical risks, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, which could disrupt energy supplies and global trade. Growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. It could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster.
Inflation could turn out higher if wages or profits increase by more than expected. Upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade.Moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected. By contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Greater friction in global trade would make the euro area inflation outlook more uncertain.
Market interest rates in the euro area have declined further since our October meeting, reflecting the perceived worsening of the economic outlook. Although financing conditions remain restrictive, our interest rate cuts are gradually makingit less expensive for firms and households to borrow.
The average interest rate on new loans to firms was 4.7 per cent in October, more than half a percentage point below its peak a year earlier. The cost of issuing market-based debt has fallen by more than a percentage point since its peak. The average rate on new mortgages, at 3.6 per cent in October, is about half a percentage point lower than at its highest point in 2023, even though the average rate on the outstanding stock of mortgages is still set to rise.
Bank lending to firms has gradually picked up from low levels, and increased by 1.2 per cent in October compared with a year earlier. Debt securities issued by firms were up 3.1% in annual terms, which was similar to the increase in the previous few months. Mortgage lending continued to rise gradually in October, with an annual growth rate of 0.8 per cent.
In line with our monetary policy strategy, the Governing Council thoroughly assessed the links between monetary policy and financial stability. Euro area banks remain resilient and there are few signs of financial market stress. Financial stability risks nonetheless remain elevated. Macroprudential policy remains the first line of defence against the build-up of financial vulnerabilities, enhancing resilience and preserving macroprudential space.
The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which we steer the monetary policy stance – is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. 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. We are not pre-committing to a particular rate path.
In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.
I have two questions. The first is on a general flavour of the arguments which have been exchanged in order to reach the decision today. What were the key arguments in favour of that 25 basis points rate cut? Second question, you dropped the reference to keep interest rates restrictive or sufficiently restrictive for the foreseeable future. Does that also mean that you consider perhaps a larger rate cut at your next policy meeting, or is that something you have been discussing, at least?
We had a Governing Council meeting that was the last of 2024 and which really led us to acknowledge, not yet the victory against inflation, not yet “mission accomplished”, but certainly it led us to acknowledge that inflation was really on track, in terms of reaching our 2% target in the medium-term. And that gave us a level of confidence to actually decide to cut and to decide the appropriate cut, which is, in our view, 25 basis points. That proposal was agreed by all members of the Governing Council. There were some discussions, with some proposals to consider possibly 50 basis points. But the overall agreement to which everybody rallied was that 25 basis points was actually the right decision. And I think it was predicated on three key elements. The first element is that inflation in our projections has converged towards 2% for six projection exercises in a row. So, you probably have forgotten, as I wish I had, the days when everybody was considering that maybe we would slip into 2026 and we would not reach 2% in 2025. Well, as I said, six times in a row, our projections are telling us that we will be at 2% target in the course of 2025 and if anything, it has moved a little bit forward in the course of 2025, but suffices to say that in 2025 we shall be at 2%. And that is, you know, clearly reflected in the projections that we have. I think the second element is that the fading of past shocks has pushed underlying inflation down. If I look, for instance, at wages, if I look at profits, and you remember the discussion that we had many times about the buffer that profits could exercise to absorb additional labour costs. We are actually seeing that reality unfolding and the projection for compensation, whether we look at the wage tracker, whether we look at compensation per employee, whether we look at the vacancy ratio, all of that is pointing in the direction of wages gradually, in the course of 2025 reaching a percentage increase that is compatible with our 2% target. And in terms of profits, we are also observing the same movement, of growth in profits having declined and being in a position to absorb some of this labour costs. Productivity: we are beginning to see also some a little bit more promising numbers. So those three components: wages, profit, productivity, also heading in the right direction. And I think the third element that we took into consideration, and that led us to this decision, is that risk to inflation is now two sided, clearly, and that led us to making the decision that we've made, but also removing the reference to restrictiveness that you have mentioned. And by that, I'm also addressing your second question by the same token. But having said all that, we still have service inflation, which is running high. And if we look in particular at domestic inflation, we are still at 4.2% and service inflation has hedged down a little bit from 4 to 3.9, but it is still resistant, and we would really want to see a change in the composition of inflation to feel totally confident that we are really almost at target.