Monetary policy statement (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2024-07-18

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 broadly supports our previous assessment of the medium-term inflation outlook. While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June. In line with expectations, the inflationary impact of high wage growth has been buffered by profits. Monetary policy is keeping financing conditions restrictive. At the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above our target well into next year.
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.
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 incoming information indicates that the euro area economy grew in the second quarter, but likely at a slower pace than in the first quarter. Services continue to lead the recovery, while industrial production and goods exports have been weak. Investment indicators point to muted growth in 2024, amid heightened uncertainty. Looking ahead, we expect the recovery to be supported by consumption, driven by the strengthening of real incomes resulting from lower inflation and higher nominal wages. Moreover, exports should pick up alongside a rise in global demand. Finally, monetary policy should exert less of a drag on demand over time.
The labour market remains resilient. The unemployment rate was unchanged, at 6.4 per cent in May, remaining at its lowest level since the start of the euro. Employment, which grew by 0.3 per cent in the first quarter, was supported by a further increase in the labour force, which expanded at the same rate. More jobs are likely to have been created in the second quarter, mainly in the services sector. Firms are gradually reducing their job postings, but from high levels.
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 are key factors that would help foster innovation and increase investment in the green and digital transitions.We welcome the European Commission’s recent guidance calling for EU Member States to strengthen fiscal sustainability and the Eurogroup’s statement on the fiscal stance for the euro area in 2025. 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 eased to 2.5 per cent in June, from 2.6 per cent in May. Food prices went up by 2.4 per cent in June – which is 0.2 percentage points less than in May – while energy prices remained essentially flat. Both goods price inflation and services price inflation were unchanged in June, at 0.7% and 4.1% respectively. While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June.
Domestic inflation remains high. Wages are still rising at an elevated rate, making up for the past period of high inflation. Higher nominal wages, alongside weak productivity, have added to unit labour cost growth, although it decelerated somewhat in the first quarter of this year. Owing to the staggered nature of wage adjustments and the large contribution of one-off payments, growth in labour costs will likely remain elevated over the near term. At the same time, recent data on compensation per employee have been in line with expectations and the latest survey indicators signal that wage growth will moderate over the course of next year. Moreover, profits contracted in the first quarter, helping to offset the inflationary effects of higher unit labour costs, and survey evidence suggests that profits should continue to be dampened in the near term.
Inflation is expected to fluctuate around current levels for the rest of the year, partly owing 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 effects of our restrictive monetary policy and the fading impact of the past inflation surge. Measures of longer-term inflation expectations have remained broadly stable, with most standing at around 2 per cent.
The risks to economic growth are tilted to the downside. 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.
The policy rate cut in June has been transmitted smoothly to money market interest rates, while broader financial conditions have been somewhat volatile. Financing costs remain restrictive as our previous policy rate increases continue to work their way through the transmission chain. The average interest rate on new loans to firms edged down to 5.1 per cent in May, while mortgage rates remained unchanged at 3.8 per cent.
Credit standards for loans remain tight. According to our latest bank lending survey, standards for lending to firms tightened slightly in the second quarter, while standards for mortgages eased moderately. Firms’ demand for loans fell slightly, while households’ demand for mortgages rose for the first time since early 2022.
Overall, credit dynamics remain weak. Bank lending to firms and households grew at an annual rate of 0.3 per cent in May, only marginally up from the previous month. The annual growth in broad money – as measured by M3 – rose to 1.6 per cent in May, from 1.3 per cent in April.
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. 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.
You said that domestic price pressures are still high. Could you elaborate a bit what the biggest lingering concerns were during your meeting around the issue of wages, profits and productivity, and what you would need to see in the data on those points that you're going to get over the summer in order to be comfortable with another rate cut in September? A second question is on fiscal policy. Are you worried that large deficits and slow consolidation in some countries in the eurozone could make it harder to bring inflation back to 2% and possibly even create financial stability problems?
Thank you very much for your two questions. Let me start with the second one and I'm going to repeat for you a paragraph that we discussed and that we slightly modified, but which essentially remains intact with a bit more force probably, which is that “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 pressure. An effective, speedy and full implementation of the Next Generation EU programme, progress towards the Capital Markets Union and the completion of the Banking Union, as well as the strengthening of the Single Markets, are key factors that would help foster innovation and increase investment in the green and digital transitions.” That could probably echo some of the things that you heard probably this morning, when President von der Leyen presented her proposals. What is really important about the fiscal aspect is the following sentence. “We welcome the European Commission's recent guidance calling for EU member states to strengthen fiscal sustainability and the Eurogroup’s statement on the fiscal stance for the euro area in 2025. 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.” This was discussed and we believe that it's a very strong endorsement of the principle of discipline, so that all Member States who have adhered and agreed to a set of rules under the fiscal governance framework will actually apply those rules and principles. There's a process that is underway that will take them to submit the multi-annual proposals that will be then reviewed. But this is certainly the set of rules that have to be implemented and respected. On your first question, and you give me an opening because you said what was actively discussed in the Governing Council over the course of the last two days and specifically this morning. I see very much the discussions we had this morning as a story of on the one hand, on the other hand. And you're only asking me a question on the other hand, which has to do with the services inflation, which is obviously well exemplified by the domestic prices that you referred to. And the domestic prices are clearly high, have slightly increased compared even with the May reading. But we believe they are largely determined by what I call the WPP, which for me is the wage, the profit and the productivity. And we spent a lot of time actually looking under the hood of wages, profit and productivity on the basis of rather limited information because we don't have a lot of specificity at this juncture, and we will have a lot more of that in the coming weeks and months. But suffice to say that the wages, whether you are measuring them with reference to compensation per employee, compensation per employee on an hourly basis, the wage trackers that we use and various other instruments, including Indeed for instance, point us in the direction of rather elevated wages, which were embedded and totally taken into account in our June projections. So this does not come as a surprise to us. There is a very large component of catching up with inflation. So nominal wages increase significantly this year in order to compensate the loss of purchasing power that has been experienced by workers over the last couple of years. What is very interesting, because we debated that, including with representatives of the national central banks, is that while it [wage increases] will remain elevated this year, many surveys and the corporate telephone survey, in particular, the SAFE survey that is published, indicate that this trend of elevated wages will decline significantly in the course of 2025 and even more so 2026. So directionally, that’s the direction that it is heading for. On productivity, there is a limited element of recovery at very low levels. Productivity [growth] was at -1% [Q4 2023]. It’s now -0.6% [Q1 2024]. So there is a little bit of progress, but certainly not what we would like to see. Our expectation is that with consumption picking up with more demand, the recovery will strengthen and that will raise productivity as hoarded employees will be asked to respond to the demand that is addressed to the goods production and service supplying sectors. So on that front, a slight improvement in the month of June and we hope to see more of that as demand picks up. On the third component – profits, it has reversed compared to what we observed in the last quarter of 2023, meaning that unit profits are now down to negative territory when they were actually in positive territory in the last quarter of 2023. So there has been absorption of the additional labour costs that resulted from the catch up and from the drift in labour costs. So that’s our analysis of domestic prices. But clearly they are high and are a component of prices that we try to observe very carefully. And that leads me to one word that you used. You used the word “point.” And for those of you who care to listen or to read the speech that I gave in Sintra, I specifically referred to data dependency, which is something that was unanimously endorsed by the Governing Council today. But I also made very clear that data dependency did not mean data point dependency. So we applied that to wages, to other elements that we measured very carefully in the last weeks and that we looked at together in the last two days.
I have a question on the September rate/potential rate move. Provided everything stays like it is right now, so the indicators coming in in line with what you’re expecting, are we going to see a rate cut in September? The second question would be on what we are currently hearing from the United States, a possibility of higher tariffs and more trade tension. Is that something you are discussing in the Governing Council and also in terms of reinflationary effects?
Thank you so much for your two questions. The decision that was taken this morning was a unanimous decision, but what was equally unanimously determined was the fact that we were determined to be data dependent to decide meeting by meeting and not to have any predetermined rate path. So the question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving. Obviously, our projection from June will be a point of reference, but the projection of September plus all the other elements that we will be receiving will be taken into account to decide what we do in September. But there is no predetermined path and that was very strongly endorsed by the Governing Council. The issue of tariffs that you mentioned, that’s an important aspect. And we will have internal discussions within the Governing Council about the risk resulting from segmentation, fragmentation. And obviously the tariff increases that are flagged, either as to be maintained or to be increased, come into the picture. And that is particularly important given that export is one of the engines of the recovery as we flagged it. It’s consumption first and foremost, driven by the increased purchasing power resulting from nominal salary increases and reduced inflation. But it’s also an increase in trade as a result of which exports out of Europe to the rest of the world would matter. And this is an area where we will be attentive to whatever political decisions are made by whoever in the future.
My first question is: you said that the decision was unanimous. Did you discuss or did anyone even want to discuss the prospect and the merits of a rate cut today? And the second question is whether you feel more or less confident about inflation hitting target in the second half of 2025 than you were six weeks ago?
On your first question, you all know how the Governing Council works. We do a lot of debate and discussion and we present views in the course of Wednesday. And on Thursday morning, a proposal is put forward by our chief economist Philip Lane. Then each and every Governing Council member says whether he supports or doesn’t support the proposal by our chief economist, Philip Lane. And on this occasion, everyone was supportive of the decision proposed by Philip Lane. And as I said, it encompasses the three key rates unchanged and the meeting-by-meeting data dependency and no predetermined rate path going forward. You pointed to the issue of confidence and we were not the only central bank in the world to have referred to the need to be sufficiently confident about the inflation path and the disinflationary process. I think we are at the stage where with additional data – data, not data points – additional data that will take multiple avenues and forms, and that we will dissect in great detail in the weeks and months to come; so with additional data, if that data actually confirms the disinflationary process that is at work at the moment, it will reinforce our confidence and we shall see. But it will encompass a whole range of data and indications. And on each and every review of those components, we will still continue to apply our threefold approach, which will focus on inflation outlook. Therefore, it gives us a way in which we can look forward. We will also look at underlying inflation, into all its decomposition, and we will look at the transmission. We will continue to review those three components in the same way.
Ursula von der Leyen was today elected for a new mandate of five years. So there is clarity in Brussels, but still a big fog in Paris, politically, where we are far from seeing an exercise of synchronised swimming, if I can use a metaphor that you may appreciate. So in light of this, can you maybe share with us a comment on this new election of Ursula von der Leyen for the next years? And the second question is, do you think monetary policy in this whole process, not just the meeting in the last two days, but what came prior to this, can be hampered by the fact that allegedly about 40% of the staff here in this house declared to suffer from burnout according to a recent survey that you may have news about?
Firstly, how much do you think the ECB will need to slow the economy and slow demand if wage growth does not moderate as you've forecast that it will? And secondly, given that Donald Trump is now leading in the polls ahead of November's presidential election in the US, what do you think that, if he wins, that could mean for both inflation but also growth in Europe?