MONETARY POLICY STATEMENT
PRESS CONFERENCE
Christine Lagarde, President of the ECB,
Luis de Guindos, Vice-President of the ECB
Frankfurt am Main, 8 September 2022
Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to raise the three key ECB interest rates by 75 basis points.
This major step frontloads the transition from the prevailing highly accommodative level of policy rates
towards levels that will ensure the timely return of inflation to our two per cent medium-term target.
Based on our current assessment, over the next several meetings we expect to raise interest rates
further to dampen demand and guard against the risk of a persistent upward shift in inflation
expectations. We will regularly re-evaluate our policy path in light of incoming information and the
evolving inflation outlook. Our future policy rate decisions will continue to be data-dependent and
follow a meeting-by-meeting approach.
We took today's decision, and expect to raise interest rates further, because inflation remains far too
high and is likely to stay above our target for an extended period. According to Eurostat's flash
estimate, inflation reached 9.1 per cent in August. Soaring energy and food prices, demand pressures
in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up
inflation. Price pressures have continued to strengthen and broaden across the economy and inflation
may rise further in the near term. As the current drivers of inflation fade over time and the
normalisation of our monetary policy works its way through to the economy and price-setting, inflation
will come down. Looking ahead, ECB staff have significantly revised up their inflation projections and
inflation is now expected to average 8.1 per cent in 2022, 5.5 per cent in 2023 and 2.3 per cent in
2024.
After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area
economic growth, with the economy expected to stagnate later in the year and in the first quarter of
2023. Very high energy prices are reducing the purchasing power of people's incomes and, although
supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse
geopolitical situation, especially Russia's unjustified aggression towards Ukraine, is weighing on the
confidence of businesses and consumers. This outlook is reflected in the latest staff projections for
economic growth, which have been revised down markedly for the remainder of the current year and
throughout 2023. Staff now expect the economy to grow by 3.1 per cent in 2022, 0.9 per cent in 2023
and 1.9 per cent in 2024.
The lasting vulnerabilities caused by the pandemic still pose a risk to the smooth transmission of our
monetary policy. The Governing Council will therefore continue applying flexibility in reinvesting
redemptions coming due in the pandemic emergency purchase programme portfolio, with a view to
countering risks to the transmission mechanism related to the pandemic.
The decisions taken today are set out in a press release available on our website. A separate
technical press release on the remuneration of government deposits will be published at 15:45 CET.
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.
Economic activity
The euro area economy grew by 0.8 per cent in the second quarter of 2022, mainly owing to strong
consumer spending on contact-intensive services, as a result of the lifting of pandemic-related
restrictions. Over the summer, as people travelled more, countries with large tourism sectors benefited
especially. At the same time, businesses suffered from high energy costs and continued supply
bottlenecks, although the latter have been gradually easing.
While buoyant tourism has been supporting economic growth during the third quarter, we expect the
economy to slow down substantially over the remainder of this year. There are four main reasons
behind this. First, high inflation is dampening spending and production throughout the economy, and
these headwinds are reinforced by gas supply disruptions. Second, the strong rebound in demand for
services that came with the reopening of the economy will lose steam in the coming months. Third, the
weakening in global demand, also in the context of tighter monetary policy in many major economies,
and the worsening terms of trade will mean less support for the euro area economy. Fourth,
uncertainty remains high and confidence is falling sharply.
At the same time, the labour market has remained robust, supporting economic activity. Employment
increased by more than 600,000 people in the second quarter of 2022 and the unemployment rate
stood at a historical low of 6.6 per cent in July. Total hours worked increased further, by 0.6 per cent, in
the second quarter of 2022 and have surpassed their pre-pandemic levels. Looking ahead, the slowing
economy is likely to lead to some increase in the unemployment rate.
Fiscal support measures to cushion the impact of higher energy prices should be temporary and
targeted at the most vulnerable households and firms to limit the risk of fuelling inflationary pressures,
to enhance the efficiency of public spending and to preserve debt sustainability. Structural policies
should aim at raising the euro area's growth potential and supporting its resilience.
Inflation
Inflation rose further to 9.1 per cent in August. Energy price inflation remained extremely elevated, at
38.3 per cent, and it was again the dominant component of overall inflation. Market-based indicators
suggest that, in the near term, oil prices will moderate, while wholesale gas prices will stay
extraordinarily high. Food price inflation also rose in August, to 10.6 per cent, partly reflecting higher
input costs related to energy, disruptions of trade in food commodities and adverse weather
conditions.
While supply bottlenecks have been easing, these continue to gradually feed through to consumer
prices and are putting upward pressure on inflation, as is recovering demand in the services sector.
The depreciation of the euro has also added to the build-up of inflationary pressures.
Price pressures are spreading across more and more sectors, in part owing to the impact of high
energy costs across the whole economy. Accordingly, measures of underlying inflation remain at
elevated levels and the latest staff projections see inflation excluding food and energy reaching 3.9 per
cent in 2022, 3.4 per cent in 2023 and 2.3 per cent in 2024.
Resilient labour markets and some catch-up to compensate for higher inflation are likely to support
growth in wages. At the same time, incoming data and recent wage agreements indicate that wage
dynamics remain contained overall. Most measures of longer-term inflation expectations currently
stand at around two per cent, although recent above-target revisions to some indicators warrant
continued monitoring.
Risk assessment
In the context of the slowing global economy, risks to growth are primarily on the downside, in
particular in the near term. As reflected in the downside scenario in the staff projections, a long-lasting
war in Ukraine remains a significant risk to growth, especially if firms and households faced rationing
of energy supplies. In such a situation, confidence could deteriorate further and supply-side
constraints could worsen again. Energy and food costs could also remain persistently higher than
expected. A further deterioration in the global economic outlook could be an additional drag on euro
area external demand.
The risks to the inflation outlook are primarily on the upside. In the same way as for growth, the major
risk in the short term is a further disruption of energy supplies. Over the medium term, inflation may
turn out to be higher than expected because of a persistent worsening of the production capacity of
the euro area economy, further increases in energy and food prices, a rise in inflation expectations
above our target, or higher than anticipated wage rises. However, if energy costs were to decline or
demand were to weaken over the medium term, it would lower pressures on prices.
Financial and monetary conditions
Market interest rates have increased in anticipation of further monetary policy normalisation in
response to the inflation outlook. Credit to firms has become more expensive over recent months, and
bank lending rates for households now stand at their highest levels in more than five years. In terms of
volumes, bank lending to firms has so far remained strong, in part reflecting the need to finance high
production costs and inventory building. Mortgage lending to households is moderating because of
tightening credit standards, rising borrowing costs and weak consumer confidence.
Conclusion
Summing up, we raised the three key ECB interest rates by 75 basis points today, and expect to raise
interest rates further, because inflation remains far too high and is likely to stay above our target for an
extended period. This major step frontloads the transition from the prevailing highly accommodative
level of policy rates towards levels that will support a timely return of inflation to our two per cent
medium-term target.
Our future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting
approach. We stand ready to adjust all of our instruments within our mandate to ensure that inflation
returns to our medium-term inflation target.
We are now ready to take your questions.