Monetary policy statement (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2024-01-25

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. The incoming information has broadly confirmed our previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and our past interest rate increases keep being transmitted forcefully into financing conditions. Tight financing conditions are dampening demand, and this is helping to push down inflation.
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 thatthe 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 euro area economy is likely to have stagnated in the final quarter of 2023. The incoming data continue to signal weakness in the near term. However, some forward-looking survey indicators point to a pick-up in growth further ahead.
The labour market has remained robust. The unemployment rate, at 6.4 per cent in November, has fallen back to its lowest level since the start of the euro and more workers have entered the labour force. At the same time, demand for labour is slowing, with fewer vacancies being advertised.
Governments should continue to roll back energy-related support measures to avoid driving up medium-term inflationary pressures. Fiscal and structural policies should be designed to make our economy more productive and competitive, as well as to gradually bring down high public debt ratios. Structural reforms and investments 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 and digital transitions. Following the recent ECOFIN Council agreement on the reform of the EU’s economic governance framework, the legislative process should be concluded swiftly so that the new rules can be implemented without delay. Moreover, it is imperative that progress towards Capital Markets Union and the completion of Banking Union be accelerated.
Inflation rose to 2.9 per cent in December as some of the past fiscal measures to cushion the impact of high energy prices dropped out of the annual inflation rate, although the rebound was weaker than expected. Aside from this base effect, the overall trend of declining inflation continued. Food price inflation dropped to 6.1 per cent in December. Inflation excluding energy and food also declined again, to 3.4 per cent, due to a fall in goods inflation to 2.5 per cent. Services inflation was stable at 4.0 per cent.
Inflation is expected to ease further over the course of this year as the effects of past energy shocks, supply bottlenecks and the post-pandemic reopening of the economy fade, and tighter monetary policy continues to weigh on demand.
Almost all measures of underlying inflation declined further in December. The elevated rate of wage increases and falling labour productivity are keeping domestic price pressures high, although these too have started to ease. At the same time, lower unit profits have started to moderate the inflationary effect of rising unit labour costs. Measures of shorter-term inflation expectations have come down markedly, while those of longer-term inflation expectations mostly stand 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 key 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 rising real incomes mean 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 hamper 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 by more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Moreover, inflation could decline more quickly in the near term if energy prices evolve in line with the recent downward shift in market expectations of the future path for oil and gas prices.
Market interest rates have moved broadly sideways since our last meeting. Our restrictive monetary policy continues to transmit strongly into broader financing conditions. Lending rates on business loans declined slightly, to 5.2 per cent in November, while mortgage rates increased further to 4.0 per cent.
High borrowing rates, with the associated cutbacks in investment plans and house purchases, led to a further drop in credit demand in the fourth quarter, as reported in our latest bank lending survey. While the tightening of credit standards for loans to firms and households moderated, they remained tight, with banks concerned about the risks faced by their customers.
Against this background, credit dynamics have improved somewhat but overall remain weak. Loans to firms stagnated in November compared with a year earlier – after contracting in October – as the monthly flow of short-term loans rebounded. Loans to households grew at a subdued annual rate of 0.5 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.
Last week in Davos, you said that you consider it likely that interest rates will be cut in the summer, after some of your colleagues already had given similar guidance. Did you discuss the possible timing of an interest rate cut at today’s meeting, also in light of the weak economic data we got from Germany this morning? And if not, if you didn’t discuss it, would you stand by your remark from Davos? Is it likely that we will get a cut in summer? And does that mean that, at least from your point of view, March and April are off the table? And the second question is on geopolitical risks and in particular the Red Sea shipping turmoil. You recently mentioned a possible comeback of supply bottlenecks as a key risk factor for inflation. You also mentioned it today, and your colleague Robert Holzmann even warned that rate cuts in 2024 can’t be taken for granted because of these risks. Given the most recent developments and the ongoing tensions in the region, has the Governing Council become even more concerned about it? And how would you react if risks materialise, for example if inflation picks up again due to higher shipping costs or new supply chain disruptions?
First of all, the consensus around the table of the Governing Council was that it was premature to discuss rate cuts. In addition to that, I typically stand by my comments. So the comments I made to your television channel, Bloomberg, I certainly stand by them. I’m not sure that I would exactly characterise them as you have, but I stand by what I have said, not what others have commented that I have said. One other thing which was very much the consensus around the table was that we had to continue to be data-dependent. So rather than being fixated on any kind of particular calendar, which would be being date-dependent, we reaffirmed our data dependency. And I have flagged in the course of the monetary policy statement some of the areas that we will be particularly attentive to in the course of the next few months.
You specifically addressed the issue of the supply bottlenecks. I would be maybe a bit cautious about the use of supply bottlenecks because it was very much associated with the consequences of COVID and the multifaceted bottlenecks that we observed both in shipping, in port handling, in dispatching of containers, which was really a very sizeable disruption in the whole logistics chain. But we are observing very carefully because we are seeing what you are all observing, which is that shipping costs are increasing, delivery delays are increasing and, while we all know that there is more shipping capacity than there was in 2020 and 2021, we also know that costs and fees are increasing. Now, I think most observers agree to say that it has a moderate impact. The percentage of the water transport costs is a little north of 1.5% of total input costs. But we are being very careful and looking attentively to the developments, and it’s pretty clear. I think whether you look at the IMF, the OECD, or other commentators, if the conflict in that region was to develop further, clearly that would be an additional risk, whether it’s a question of the disruption of shipping that we alluded to or the price of energy and commodities at large.
I have a question because you are always referring to wage data. There’s loads of wage data around. What are you actually really looking at, and is there a cut-off point in the coming year? Because clearly, we can look at wage data throughout the year. And then I would like to again bring you back to that “before summer” decision. June is a good time, isn’t it? Because you have a new round of staff projections. So in case the inflation outlook would materialise to be lower than we have it now, would that give you more ground to actually cut rates?
Thank you for your question on wages because, as you have noted, it is an item that we’re going to look at and that we have looked at very carefully, as we are also looking very carefully at profit unit and the link between labour unit and profit unit, which was one of the key assumptions we had under our baseline. I’ll remind you that the baseline we had was that wage increases would gradually over the course of time be absorbed by a gradual reduction of profit unit, and that’s exactly what we are seeing. It’s often said that wage indicators are backward-looking, and yes there is a whole battery of backward-looking indicators. For instance, the latest – I think it’s the compensation per employee data – that is available dates back to October. So what we have in addition to that is indices that we have built over the course of time, one of which actually originates from Ireland. Our chief economist, Philip Lane, was at the origin of that one, which is the wage tracker. This receives almost live any change to negotiated agreements in particular, and we receive that on a constant basis.
The other indicator, which also is important not so much in relation to wages but in relation to the tightness of the labour market, is Indeed, which gathers all the vacancies advertised, particularly on the internet. That informs about the tension of the labour market and of course is telling us a little bit where we are heading in terms of that tightness, which itself results in a position of strength in the negotiation for one party or the other. We are seeing those indicators at a high level. What we are also seeing on the wage tracker is stabilisation, which explains the comments included in the monetary policy statement. And in Indeed we are seeing also a slight reduction of the volume of vacancies that are advertised. Now, we take all these data at face value, and we try to constantly corroborate them. We do that with the national central banks, observers, and economists to make sure that we really canvas the 20 Member States as accurately as possible. It’s not elusive because really, we’re trying to pin it down, but it requires that we look at it from multiple angles to make sure that we are as accurate and as up to date as we can be. Being forward-looking is not an easy one for wages. But just to give you an idea, I think it’s 40% of the employees covered by our wage tracker which have had their employment contract renewed without new terms of salary levels in December. So the 40% include those whose terms and conditions have expired and must be renewed at the end of December and those for which the same will happen in the first three months of 2024. So you have 40% of the workforce of whom salaries, wages, one-off payments are yet to be determined and will be tracked by our wage tracker. This information will come in the course of the next few months, which will be of course really rich in information to help us better understand exactly where we are on wages.
As I said, we are data-dependent, and we make decisions one meeting at a time. What we have done in the course of this meeting today is that we have confirmed our inflation outlook and we consider that the information that we have received in the last few weeks since our December meeting showed that the medium-term inflation outlook is broadly following the path that we had projected in December. That’s point number one. Point number two, we look also very carefully at data concerning underlying inflation and here we are seeing a decline across the board of pretty much all our indicators. We also look carefully at inflation expectations. Those were a few weeks which were rich in information, where we have seen that both the market-based and the survey-based inflation expectations are also, both in the short term and for some of them also for the medium term, really coming in at around our 2% target. And of course, we look at the latest inflation numbers, and you will have seen all of you that the December number was 0.5pp north of the November number, which was this 2.4. But we had expected that upside, which was caused by base effects largely attributable to German measures. It was weaker than we had anticipated but it was totally predicted, and it does not detract from the view that we have that the disinflation process is at work. And – I should have mentioned that because I mentioned the inflation outlook and the underlying inflation – of course we look very carefully at the strength of monetary policy transmission. And here again we had some good data and information, notably from the bank lending survey.
You’re data-dependent to this data on wages that won’t be published before late spring. Don’t you think this could lead to cut too late, if not before June? Could you explain more about the word “premature” when you speak about rate cuts? Does that mean that the Council has spoken about cuts?