Monetary policy statement (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2024-09-12

INTRODUCTORY STATEMENT

Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to lower the deposit facility rate – the rate through which we steer the monetary policy stance – by 25 basis points. Based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to take another step in moderating the degree of monetary policy restriction.
Recent inflation data have come in broadly as expected, and the latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026, as in the June projections.Inflation is expected to rise again in the latter part of this year, partly because previous sharp falls in energy prices will drop out of the annual rates. Inflation should then decline towards our target over the second half of next year. For core inflation, the projections for 2024 and 2025 have been revised up slightly, as services inflation has been higher than expected. At the same time, staff continue to expect a rapid decline in core inflation, from 2.9 per cent this year to 2.3 per cent in 2025 and 2.0 per cent in 2026.
Domestic inflation remains high as wages are still rising at an elevated pace. However, labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation. Financing conditions remain restrictive, and economic activity is still subdued, reflecting weak private consumption and investment. Staff project that the economy will grow by 0.8 per cent in 2024, rising to 1.3 per cent in 2025 and 1.5 per cent in 2026. This is a slight downward revision compared with the June projections, mainly owing to a weaker contribution from domestic demand over the next few quarters.
We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. We will continue to follow a data-dependent and meeting-by-meeting 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. We are not pre-committing to a particular rate path.
The decisions taken today are set out in apress releaseavailable on our website. As announced on 13 March 2024, some changes to the operational framework for implementing monetary policy will take effect from 18 September. In particular, the spread between the interest rate on the main refinancing operations and the deposit facility rate will be set at 15 basis points. The spread between the rate on the marginal lending facility and the rate on the main refinancing operations will remain unchanged at 25 basis points.
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 0.2 per cent in the second quarter, after 0.3 per cent in the first quarter, falling short of the latest staff projections. Growth stemmed mainly from net exports and government spending. Private domestic demand weakened, as households consumed less, firms cut down business investment and housing investment dropped. While services supported growth, industry and construction contributed negatively. According to survey indicators, the recovery is continuing to face some headwinds.
We expect the recovery to strengthen over time, as rising real incomes allow households to consume more. The gradually fading effects of restrictive monetary policy should support consumption and investment. Exports should also continue contributing to the recovery as global demand rises.
The labour market remains resilient. The unemployment rate was broadly unchanged in July, at 6.4 per cent. At the same time, employment growth slowed to 0.2 per cent in the second quarter, from 0.3 per cent in the first. Recent survey indicators point to a further moderation in demand for labour, and the job vacancy rate has fallen closer to pre-pandemic levels.
Fiscal and structural policies should be aimed at making the economy more productive and competitive, which would help to raise potential growth and reduce price pressures in the medium term. Mario Draghi's report on the future of European competitiveness and Enrico Letta’s report on empowering the Single Market stress the urgent need for reform and provide concrete proposals to make this happen. Implementing the EU’s revised economic governance framework fully, transparently and without delay will help governments bring down budget deficits and debt ratios on a sustained basis. Governments should now make a strong start in this direction in their medium-term plans for fiscal and structural policies.
According to Eurostat’s flash estimate, annual inflation dropped to 2.2 per cent in August, from 2.6 per cent in July. Energy prices fell at an annual rate of 3.0 per cent, after an increase of 1.2 per cent in the previous month. Food price inflation went up slightly, to 2.4 per cent in August. Goods inflation and services inflation moved in opposite directions. Goods inflation declined to 0.4 per cent, from 0.7 per cent in July, while services inflation rose, to 4.2 per cent from 4.0 per cent.
Most measures of underlying inflation were broadly unchanged in July. Domestic inflation edged down only slightly, to 4.4 per cent from 4.5 per cent in June, with strong price pressures coming especially from wages. Negotiated wage growth will remain high and volatile over the remainder of the year, given the significant role of one-off payments in some countries and the staggered nature of wage adjustments. At the same time, the overall growth in labour costs is moderating. The growth in compensation per employee fell further to 4.3 per cent in the second quarter, the fourth consecutive decline, and ECB staff project it to slow markedly again next year. Despite weak productivity, unit labour costs grew less strongly in the second quarter, by 4.6 per cent, after 5.2 per cent in the first quarter. Staff expect unit labour cost growth to continue declining over the projection horizon owing to lower wage growth and a recovery in productivity. Finally, profits are continuing to partially offset the inflationary effects of higher labour costs.
The disinflation process should be supported by receding labour cost pressures and the past monetary policy tightening gradually feeding through to consumer prices. Most measures of longer-term inflation expectations stand at around 2 per cent, and the market-based measures have fallen closer to that level since our July meeting.
The risks to economic growth remain tilted to the downside. Lower demand for euro area exports, owing for instance to a weaker world economy or an escalation in trade tensions between major economies, would 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 also be lower if the lagged effects of monetary policy tightening turn out stronger than expected. Growth could be higher if inflation comes down more quickly than expected and rising confidence and real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected.
Inflation could turn out higher than anticipated 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 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 declined markedly since our July meeting, mostly owing to a weaker outlook for global growth and reduced concerns about inflation pressures. Tensions in global markets over the summer led to a temporary tightening of financial conditions in the riskier market segments.
Overall, financing costs remain restrictive as our past policy rate increases continue to work their way through the transmission chain. The average interest rates on new loans to firms and on new mortgages stayed high in July, at 5.1 and 3.8 per cent respectively.
Credit growth remains sluggish amid weak demand. Bank lending to firms grew at an annual rate of 0.6 per cent in July, down slightly from June, and growth in loans to households edged up to 0.5 per cent. Broad money – as measured by M3 – grew by 2.3 per cent in July, the same rate as in June.
The Governing Council today decided to lower the deposit facility rate by 25 basis points. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. We will continue to follow a data-dependent and meeting-by-meeting 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. 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 returns to our medium-term target and to preserve the smooth functioning of monetary policy transmission.
I have a question on the decision to cut by 25 basis points versus 50 basis points. Why did you go for 25? And my second question is: looking into the future, given that the Fed also is going to start to cut, the macroeconomic picture is gloomier than before. Inflation is coming back. Is the market right to anticipate that you cut by another 50 by the end of the year?
On your question about our decision, we decided to cut the deposit facility rate by 25 basis points. And that was a unanimous decision. We proceeded as we normally do and have very clearly indicated by obviously looking at data and looking in particular at data through the prism of our three key criteria. So when you look at the incoming information, it confirms our previous projections and it comforts us in our confidence that we are heading towards our target in a timely manner. During the course of 2025 in particular, inflation will decline towards our 2% target. And we thought that given the gradual disinflationary process, it was perfectly appropriate to moderate the degree of monetary policy restriction by cutting our deposit facility rate, which I will call the DFR if you don’t mind from now on, by 25 basis points. When I said that we looked at all the information that we get on the occasion of a projection exercise through our three prisms, I’m referring obviously to the inflation outlook, I’m referring to the underlying inflation and I’m referring to the transmission of monetary policy. On the inflation outlook, when we receive the projections of our staff for September, it’s virtually unchanged relative to June for the inflation outlook. And it continues to see a return to 2% at the end of 2025. And this is, by the way, the fifth consecutive projection exercise pointing to that 2% at the end of 2025. Why do I say that? Because it certainly reinforces our confidence in the solidity and robustness of those projections. That’s for the first prism: the inflation outlook. For the underlying inflation on the other hand, we look at the various indicators that we have from domestic inflation to PCCI [Permanent and Common Component of Inflation]. And here we see one particular indicator, the domestic indicator, which is abating a little bit because it moved from 4.5% to 4.4% between June and July, and it is not satisfactory. It is resistant. It is persistent. This is the reason why we have to be resilient in our approach and very attentive to the various components of core inflation as measured by those various indicators. The third prism is the policy transmission. And on that front, we all observe that the financing conditions continue to be restrictive and the footprint of our monetary policy in the real economy has been visible. On the basis of that review of incoming data, staff analysis, consistency of the projections for the fifth exercise in a row, that decision to cut by 25 basis points was perfectly legitimate and, as I said, unanimously decided. I am tempted to quote the Spanish Que sera sera because we have consistently said, and we repeat again, that we shall remain data-dependent. And that is particularly justified in view of the uncertainty that abounds. We shall be data-dependent. We shall decide meeting by meeting. And our path, of which the direction is pretty obviously a declining path, is not predetermined neither in terms of sequence nor in terms of volume. And I would like to add one thing which I have already said before, which is still true, which is that data dependency does not mean data point dependency. We’re not going to be fixated on one single number. We are looking at a whole battery of indicators. And I’m saying that in particular because September will certainly deliver a low reading of inflation. Very likely. We expect, because of the base effect, particularly on energy, our inflation numbers to be up in the fourth quarter, so the last three months of 2024. But September is going to deliver a low reading. But we’re not just looking at one indicator. We’re looking at a whole range of data that we receive.
The October meeting is a short five weeks away. To use your own words from March, do you think you will know a lot more or just a little more come 17 October? My second question is about something else. It’s about something that the ECB has been championing for years, and that is cross-border consolidation between banks. It seems it’s finally happening, with UniCredit building up a stake in Commerzbank. Does the ECB welcome this development?
On your first question, we can all count: it is five weeks before 17 October, which is a relatively short period of time compared with other intervals that we’ve had in the past. I would simply repeat what I have said. We are going to be data-dependent. We are going to decide meeting by meeting. I’m not giving you any commitment of any kind as far as that particular date is concerned. And our path is not predetermined at all. On the other matter that you referred to, typically we do not comment on individual institutions. And as you know well, we have a clear procedure which involves our supervision authority, the SSM [Single Supervisory Mechanism], which at certain thresholds of equity ownership or transfer of shares, if you will, has to be consulted and has to authorise. And of course I’m confident that the authorities of these institutions concerned, namely UniCredit and Commerzbank, will be perfectly aware of their regulatory requirements and will comply with such requirements. The SSM will do what it has to do in full independence. Clearly, cross-border mergers have been hoped for by many authorities, and it will be very interesting to see that process unfold in the weeks to come.