Monetary policy statement (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2023-09-14

INTRODUCTORY STATEMENT

Good afternoon, the Vice-President and I welcome you to our press conference.
Inflation continues to decline but is still expected to remain too high for too long. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. In order to reinforce progress towards our target, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points.
The rate increase today reflects 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 September ECB staff macroeconomic projections for the euro area see average inflation at 5.6 per cent in 2023, 3.2 per cent in 2024 and 2.1 per cent in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices. Underlying price pressures remain high, even though most indicators have started to ease. ECB staff have slightly revised down the projected path for inflation excluding energy and food, to an average of 5.1 per cent in 2023, 2.9 per cent in 2024 and 2.2 per cent in 2025. Our past interest rate increases continue to be transmitted forcefully. Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target. With the increasing impact of our tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7 per cent in 2023, 1.0 per cent in 2024 and 1.5 per cent in 2025.
Based on our current assessment, we consider thatthe key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest 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 is likely to remain subdued in the coming months. It broadly stagnated over the first half of the year, and recent indicators suggest it has also been weak in the third quarter. Lower demand for the euro area’s exports and the impact of tight financing conditions are dampening growth, including through lower residential and business investment. The services sector, which had so far been resilient, is now also weakening. Over time, economic momentum should pick up, as real incomes are expected to rise, supported by falling inflation, rising wages and a strong labour market, and this will underpin consumer spending.
The labour market has so far remained resilient despite the slowing economy. The unemployment rate stayed at its historical low of 6.4 per cent in July. While employment grew by 0.2 per cent in the second quarter, momentum is slowing. The services sector, which has been a major driver of employment growth since mid-2022, is now also creating fewer jobs.
As the energy crisis fades, governments should continue to roll back the related support measures. This is essential to avoid driving up medium-term inflationary pressures, which would otherwise call for an even stronger monetary policy response. Fiscal policies should be designed to make our economy more productive and to gradually bring down high public debt. Policies to enhance the euro area’s supply capacity – which would be supported by the full implementation of the Next Generation EU programme – can help reduce price pressures in the medium term, while supporting the green transition. The reform of the EU’s economic governance framework should be concluded before the end of this year and progress towards Capital Markets Union should be accelerated.
Inflation declined to 5.3 per cent in July but remained at that level in August, according to Eurostat’s flash estimate. Its decline was interrupted because energy prices rose compared with July. Food price inflation has come down from its peak in March but was still almost 10 per cent in August. In the coming months, the sharp price increases recorded in the autumn of 2022 will drop out of the yearly rates, thus pulling inflation down.
Inflation excluding energy and food fell to 5.3 per cent in August, from 5.5 per cent in July. Goods inflation declined to 4.8 per cent in August, from 5.0 per cent in July and 5.5 per cent in June, owing to better supply conditions, previous drops in energy prices, easing price pressures in the earlier stages of the production chain and weaker demand. Services inflation edged down to 5.5 per cent but was still kept up by strong spending on holidays and travel and by the high growth of wages.The annual growth rate of compensation per employee remained constant at 5.5 per cent in the second quarter of the year. The contribution of labour costs to annual domestic inflation increased in the second quarter, in part owing to weaker productivity, while the contribution of profits fell for the first time since early 2022.
Most measures of underlying inflation are starting to fall as demand and supply have become more aligned and the contribution of past energy price increases is fading out. At the same time, domestic price pressures remain strong.
Most measures of longer-term inflation expectations currently stand at around 2 per cent. But some indicators have increased and need to be monitored closely.
The risks to economic growth are tilted to the downside. Growth could be slower if the effects of monetary policy are more forceful than expected, or if the world economy weakens, for instance owing to a further slowdown in China. Conversely, growth could be higher than projected if the strong labour market, rising real incomes and receding uncertainty mean that people and businesses become more confident and spend more.
Upside risks to inflation include potential renewed upward pressures on the costs of energy and food.Adverse weather conditions, and the unfolding climate crisis more broadly, could push food prices up by more than expected. A lasting rise in inflation expectations above our target, or higher than anticipated increases in wages or profit margins, could also drive inflation higher, including over the medium term. By contrast, weaker demand – for example due to a stronger transmission of monetary policy or a worsening of the economic environment outside the euro area – would lead to lower price pressures, especially over the medium term.
Our monetary policy tightening continues to be transmitted strongly to broader financing conditions. Funding has again become more expensive for banks, as savers are replacing overnight deposits with time deposits that pay more interest and the ECB’s targeted longer-term refinancing operations are being phased out. Average lending rates for business loans and mortgages continued to increase in July, to 4.9 per cent and 3.8 per cent respectively.
Credit dynamics have weakened further. Loans to firms grew at an annual rate of 2.2 per cent in July, down from 3.0 per cent in June. Loans to households also grew less strongly, by 1.3 per cent, after 1.7 per cent in June. In annualised terms based on the last three months of data, household loans declined by 0.8 per cent, which is the strongest contraction since the start of the euro. Amid weak lending and the reduction in the Eurosystem balance sheet, the annual growth rate of M3 fell from 0.6 per cent in June to an all-time low of -0.4 per cent in July. In annualised terms over the past three months, M3 contracted by 1.5 per cent.
Inflation continues to decline but is still expected to remain too high for too long. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. In order to reinforce progress towards our target, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points. Based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest 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.
My first question is a general one. How did the discussion go? Because clearly before going into the meeting, there was much room for the so-called doves but also the hawks. So how did you come to a compromise? And the second question. Is that a dovish hike, meaning that’s it the end of the rate hiking cycle now or do you leave the door open?
So how did the discussion go? We had a lot of data, a lot of analysis done by staff and obviously this was a projection meeting and the projections were prepared by ECB staff. So we looked very closely at all those data. And to give you an example, we spent hours and hours yesterday, morning and afternoon, with the usual presentation by staff in the morning and by the Chief Economist and the member of the Executive Board responsible for markets to have as much intelligence, numbers and analysis as possible. And I'm pleased to say that at the end of this morning session, we came to the conclusion that we shared the analysis that was conducted, on GDP, on inflation, on anticipation. And obviously some members did not draw the same conclusion and some governors would have preferred to pause and reserve future decisions once more certainty, more intelligence would have resulted from the passing of time and the impact of our many previous decisions. But I can tell you that there was a solid majority of the governors to agree with the decision that we have made and that I have just read to you. So yes, there are a few members in the Governing Council who would have preferred a pause and we had to rely, as I told you, on a solid majority. It is not the practice to give numbers of who did what and when, but suffice to say that the majority was solid. I don't want you to believe that we had an antagonistic adversarial discussion. We really went deep into the numbers and the analysis, and tried to really take into account the sensitivity analysis, the scenarios that were provided by staff and we really discussed the baseline and the impact of our measures in the past. And I am happy to go through the process that we followed in terms of reasoning.
On your second question, is the door open or is the door closed? You know, there was a beautiful theatre play by De Marivaux, who said that a door has to be either opened or closed. But this is theatre. What we have decided is actually reflected in that key paragraph, which I have read twice because it is in the body of the text which was released to you earlier and also in the conclusion of the text. And it has caveats: “based on our current assessment”. So, it is based on all the data, the numbers, the analysis, the assessment, the projections and any other information that we have available. We considered that “the key ECB interest rates have reached levels” – note, levels – “that, maintained for a sufficiently long duration” – so there is the time element that comes up – “will make a substantial contribution” – substantial contribution, those are heavy words – “to the timely return of inflation to the target”. And we don't stop here. The whole paragraph is important and needs to be read in symbiosis. So the next sentence says that “our future decisions will ensure that the key ECB interest rates will be set at – one – “sufficiently restrictive levels” – two – “as long as necessary”. Those are really two parameters that are going to guide us very much. Not that we are forgetting about the three components that have guided our reasoning so far. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restrictions. In particular, our interest rate decisions will be based on our assessment – and I repeat there, it's in the in the text – of number 1, inflation outlook in the light of the incoming economic and financial data, number 2, the dynamics of underlying inflation, number 3, the strength of monetary policy transmission. So, that addresses your question and I think that the exercises that no doubt some of you will conduct in relation to “substantial contribution” and how that substantial contribution contributes from “significant level maintained for as long as necessary, based on current assessment”, gives you the answer to your question.
The first question is about asset purchases. Is 2024 carved in stone for PEPP reinvestments? And if not, do you expect any discussion on the APP? Do you expect the discussion about outright sales of bonds? And the second question is about the growth outlook. The question is whether a recession is becoming your base case for the Eurozone. Do you expect a recession perhaps in the third and fourth quarters, or do you still believe that the quarterly numbers continue to remain positive?
On your first question, we regard interest rates as the key tool in the work that we are doing in order to reach our 2% medium term target. So we have not discussed the PEPP programme, the reinvestment and the forward guidance. PEPP is our flexibility instrument, as you know, and is the first line of defence if we want to defend a proper transmission of our monetary policy. We have not discussed any kind of APP outright sales. On your second question. You are correct that the GDP has been revised significantly. We moved from 0.9% to 0.7% in 2023 and more importantly we moved from 1.5% to 1.0% in 2024. But let me just take a moment to explain to you what seems like the biggest revision, which is 2024. Most of it, actually three quarters of that revision of 0.5, is attributable to carry over from 2023. So we are going through a period of about five quarters of very, very sluggish growth and, based on our projection, we are coming to the end of it. The pickup according to the same calendar, the same quarter calendar that we have had in the June projections, picks up again in 2024. The downgrade from 1.5% to 1%, as I said, is a carry-over from 2023. In 2025, we have a small revision and we move from 1.6% to 1.5%, which is really a minimal revision. In essence, the recovery we had projected for the second half of 2023 is actually pushed out into time for various reasons that I'm happy to expand upon. That is what we are seeing.
You say that the current level of interest rates will make a substantial contribution to fighting inflation, if maintained for a sufficiently long period of time. Did you have a discussion in the Governing Council what sufficiently long means in practice, or for how long rates will have to stay at the peak at the very least? And then as recently as when you gave a speech in Sintra, you said the ECB is unlikely to be able to call the peak in interest rates in the near future. I am just wondering what exactly made you decide that now is the time to at least allude to the fact more strongly.
I am not going to annoy you with the rereading but you obviously all picked up the “level”. Our two key determinations are “levels sufficiently restrictive” for long enough, so that we are confident that we are reaching the 2% medium term target. And, as indicated in that paragraph that I have read, under current assessment, we believe that the interest rates that we decide will provide a substantial contribution to that target, but with the two elements: sufficiently restrictive and for long enough. Now your real question is, did you discuss the “long enough”? The answer to that is no, because we are also saying in the same breath that we will be data dependent. So what we want to do is continue to be data dependent and test our assessment that I have just described for you against future projections and subsequent assessment. That is what we are tasked to do with the determination to reach the 2% medium term target in a timely manner.
Now you had a second question. I am not changing anything from Sintra. I stand by what I said and I wrote in Sintra. We are not saying either that we are now at peak. I think the sentence that I read is really the critical one. With today's decision, we have made sufficient contributions, under current assessment, to returning inflation to target in a timely manner. And as I said, both elements matter, the level sufficiently restrictive and the duration. But it's obvious that the focus is probably going to move a bit more to the duration. But we can't say that now we are at that peak. I know it is complicated, because the “as long as necessary” cannot be actually pinned down and the “substantial contribution” cannot be pinned down either, because we have to conduct an assessment every time against the data, against the analysis, against the various information that we derive from experts, and against the projections and what our staff offers.