Monetary policy statement (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2024-06-06

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. 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 moderate the degree of monetary policy restriction after nine months of holding rates steady. Since our meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons. Monetary policy has kept financing conditions restrictive. By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down.
At the same time, despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year. The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections.Staff now see headline inflation averaging 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026. For inflation excluding energy and food, staff project an average of 2.8 per cent in 2024, 2.2 per cent in 2025 and 2.0 per cent in 2026. Economic growth is expected to pick up to 0.9 per cent in 2024, 1.4 per cent in 2025 and 1.6 per cent in 2026.
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 Governing Council today also confirmed that it will reduce the Eurosystem’s holdings of securities under the pandemic emergency purchase programme (PEPP) by €7.5 billion per month on average over the second half of the year. The modalities for reducing the PEPP holdings will be broadly in line with those followed under the asset purchase programme (APP).
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.
After five quarters of stagnation, the euro area economy grew by 0.3 per cent over the first quarter of 2024. The services sector is expanding, and manufacturing is showing signs of stabilisation at low levels. We expect the economy to continue to recover as higher wages and improved terms of trade push up real incomes. Stronger exports should also support growth over the coming quarters, as global demand for goods and services rises. Finally, monetary policy should exert less of a drag on demand over time.
Employment rose by 0.3 per cent in the first quarter of this year, with around 500,000 new jobs created, and surveys point to continued job growth in the near term. The unemployment rate edged down to 6.4 per cent in April, its lowest level since the start of the euro. Companies are still posting many job vacancies, though slightly fewer than before.
National fiscal and structural policies should aim at making the economy more productive and competitive, which would help to raise potential growth and reduce price pressures in the medium term. An effective, speedy and full implementation of the Next Generation EU programme, progress towards capital markets union and the completion of banking union, and a strengthening of the Single Market would help foster innovation and increase investment in the green and digital transitions. Implementing the EU’s revised economic governance framework fully and without delay will help governments bring down budget deficits and debt ratios on a sustained basis.
Annual inflation rose to 2.6 per cent in May, from 2.4 per cent in April, according to Eurostat’s flash estimate. Food price inflation declined to 2.6 per cent. Energy price inflation increased to 0.3 per cent, after recording negative annual rates for a year. Goods price inflation continued to decrease in May, to 0.8 per cent. By contrast, services price inflation rose markedly, to 4.1 per cent from 3.7 per cent in April.
Most measures of underlying inflation declined further in April, the last month for which data are available, confirming the picture of gradually diminishing price pressures.However, domestic inflation remains high. Wages are still rising at an elevated pace, making up for the past inflation surge. Owing to the staggered nature of the wage adjustment process and the important role of one-off payments, labour costs will likely fluctuate over the near term, as seen in the pick-up in negotiated wages in the first quarter. At the same time, forward-looking indicators signal that wage growth will moderate over the course of the year. Profits are absorbing part of the pronounced rise in unit labour costs, which reduces its inflationary effects.
Inflation is expected to fluctuate around current levels for the rest of the year, including due to energy-related base effects. It is then expected to decline towards our target over the second half of next year, owing to weaker growth in labour costs, the unfolding effects of our restrictive monetary policy, and the fading impact of the energy crisis and the pandemic. Measures of longer-term inflation expectations have remained broadly stable, with most standing at around 2 per cent.
The risks to economic growth are balanced in the near term but remain tilted to the downside over the medium term. 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 effects of monetary policy 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 risen since our April meeting. Financing costs have plateaued at restrictive levels as our past policy rate increases have worked their way through the financial system. The average interest rates on new loans to firms and on new mortgages were unchanged in April, at 5.2 per cent and 3.8 per cent respectively.
Credit dynamics remain weak. Bank lending to firms grew at an annual rate of 0.3 per cent in April, down slightly from the previous month. Loans to households continued to grow at 0.2 per cent on an annual basis. The annual growth in broad money – as measured by M3 – rose to 1.3 per cent in April, from 0.9 per cent in March.
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. The improving economic outlook has fostered financial stability, but heightened geopolitical risks cloud the horizon. An unexpected tightening of global financing conditions could prompt a repricing of financial and non-financial assets, with negative effects on the wider economy.Macroprudential policy remains the first line of defence against the build-up of financial vulnerabilities. The measures that are currently in place or will soon take effect are helping to keep the financial system resilient.
The Governing Council today decided to lower the three key ECB interest rates 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.
Cutting rates at the same time as hiking the inflation forecast needs perhaps a little bit more explanation and raises also the question whether you perhaps pre-committed yourself too early to that cut. The second one is that the market currently is expecting some 65 basis points in cuts during the course of this year. Is the market right or about right?
Let me take this opportunity to give you bit of an opening answer and tell you what we did this morning and what happened as a preamble to this morning’s decision. But let me first tell you that we started our meeting this morning by paying tribute to the many men and women who sacrificed their lives on the beach of Normandy today, which is the 80th anniversary of D-Day. And we paid tribute to those sacrifices and those of many others because it enabled us to build what we have built, to disagree in a very civilised way and to have very harmonious and congenial decisions amongst 20 different nationals representing their respective national central banks amongst our Governing Council[1]. And it was perfectly appropriate and fitting to do so. Then we decided to cut, and we did so because overall our confidence in the path ahead, because we have to be forward-looking, has been increasing over the last months. So let me explain to you why our confidence has increased in the path ahead. And I will take you back a little bit because this is, after all, the first time in many years that we make that kind of decision. And these things do not happen in a vacuum. So I’ll take you back a little bit to our monetary policy cycle, to remind you that we have had two successive phases and we have made that decision. So the first phase, as you will remember, was a phase of very robust and rapid tightening. We tightened by 450 basis points between July 2022 and September 2023. Then we moved into a phase of holding from September 2023 up until today. And if we look back at those phases, during each of those phases we divided inflation by half. So if you look at the peak of inflation, in October 2022, we were at 10.6% – double-digit inflation on average. Now fast forward to September 2023, we were at 5.2%. Fast forward to today, we are at 2.6%. So at each and every step of the way, when we reassess and decided to move in a different direction, we had halved inflation. I think the second element that we took very much into account was the reliability and the strength of our projections. And there is one particular line of projections which to many of us was relevant. If you look at Q4 2025 projections – you look at September, you look at December, you look at March, you look at June – there’s a variation between those projections of 0.10 percentage points. So it’s either 2 or 1.9 or 2 or 1.9 or 2. And it’s on the basis of this reliability and solidity and robustness of those projections that we have made that decision to actually cut. I’m sure that you will be asking “What about next time?” and I will invariably tell you the same thing, which is what is included in the monetary policy statement. We shall be data-dependent and we shall decide meeting by meeting. But to say that is probably not enough. And how we collect data matters, but what is also more important is how we analyse the data. And I’m not only specifically pointing at one set of data, but all the data that we get. We’re looking at it under the prism of our three criteria. You will have noticed that I have repeated three times, I think, in this monetary policy statement the three criteria, which are the inflation outlook on the basis of the financial and economic data that we collect. It’s the underlying inflation, and it’s the transmission of monetary policy. So it’s under the prism of these three criteria that we analyse all the data that we have available. And we need to have those data. We need to have enough of those data to make a relevant and appropriate analysis that took us this time around to this decision. On your second question, markets do what markets have to do, and we do what we have to do.
You just mentioned that you need enough data to take your decisions, and back in March you said that you will know a little more by April and a lot more by June. Are we in a similar situation where only a little more will be known by the next meeting and a lot more by the one after that? And more broadly on this topic, some argue that some of your meetings coincide with the release of key indicators and therefore that those policy meetings are more important. What do you think of this view? Do you share it?
You are correct that there is no perfect synchronization between our meetings and our decisions and the publication of particular data. I’m thinking of one particular data that will come for publication tomorrow, which is the compensation per employee (CPE) for Q1, which obviously is relevant because we look very carefully at wages from all possible angles of analysis and CPE is a relevant point. It’s not the only one. Wages are an important field of data that we need to analyse, but CPE is one of them and it’s only being published tomorrow. So what we try to do, just to take you a little bit behind the scenes, is we collect as much data as are available. And at the moment we have about 15 countries or so and a very large portion of the euro area economy. And we calculate what is the likelihood of that number to better assess and test our resolve. That’s what we have to do, and there is no perfect synchronization between the dates of publication, which are set, and the dates of our monetary policy meetings, which are also set. And they don’t coincide necessarily all the time. You also asked what kind of data we are talking about. First of all, it is data. Second, it is enough data so that the analysis that we conduct under the three criteria that I have mentioned can actually be relevant. So I’m not going to tell you today, nor at any point in time until much later on in the summer, whether we do this now or we do something else at another point in time. The only thing I’m telling you is that we need sufficient data, and data comes in gradually over the course of time. We need sufficient data to actually corroborate the view that we have that the disinflationary path is being confirmed and warrants further decisions.