Christine Lagarde: International Monetary and Financial Committee
statement
Statement by Ms Christine Lagarde, President of the European Central Bank, at the
fiftieth meeting of the International Monetary and Financial Committee, IMF Annual
Meetings, Washington DC, 25 October 2024.
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Introduction
Since our last meeting in April, the global growth outlook has remained broadly
unchanged. While global growth is projected to expand at a moderate pace, risks to the
outlook have shifted to the downside, reflecting rising economic policy uncertainty
against a backdrop of heightened geopolitical tensions. Global headline inflation
continues to recede amid falling energy prices, the normalisation of supply conditions
and still tight monetary policy.
In October the Governing Council lowered the three key ECB interest rates by 25 basis
points. The decision to lower the deposit facility rate - the rate through which it steers
the monetary policy stance - reflects the Governing Council's updated assessment of
the inflation outlook, the dynamics of underlying inflation and the strength of monetary
policy transmission. The incoming information on inflation shows that the disinflation
process is well on track. Recent indicators of economic activity have surprised
somewhat to the downside and financing conditions remain restrictive.
The Governing Council will keep policy rates sufficiently restrictive for as long as
necessary to achieve its two per cent medium-term inflation target in a timely manner.
The appropriate level and duration of restriction will continue to be determined by
following a data-dependent and meeting-by-meeting approach. In particular, the
Governing Council's interest rate decisions will be based on its assessment of the
inflation outlook, the dynamics of underlying inflation and the strength of monetary
policy transmission. The Governing Council is not pre-committing to a particular interest
rate path.
The Governing Council recently initiated an assessment of its monetary policy strategy,
which will focus on the changed inflation environment and its implications for the
monetary policy strategy, with conclusions expected in the second half of 2025.
Economic activity
After the broad stagnation in activity in 2023, euro area real GDP expanded moderately
in the first half of this year, helped by the recovery in foreign demand and public
spending. Private domestic demand remained weak, with households and firms still
hesitant to consume and invest. Incoming data suggest economic activity may have
softened again in the second half of the year amid rising geopolitical uncertainty.
Looking ahead, we expect growth to strengthen over time, as rising real incomes
support household consumption and the gradually fading effects of restrictive monetary
policy should support consumption and investment. Exports should contribute to the
recovery as global demand rises.
The labour market remains resilient, but indicators point towards cooling labour demand
on the back of weaker economic activity. Employment continued to grow in the second
quarter of 2024, albeit at a slower rate than in the first quarter of the year. In August the
unemployment rate remained at 6.4%, its lowest level since the introduction of the euro.
Labour productivity is expected to recover in the future as labour hoarding unwinds and
profit margins moderate.
Fiscal and structural policies should be aimed at making the economy more productive,
competitive and resilient. That would help to raise potential growth and reduce price
pressures in the medium term. To this end, it is crucial to swiftly follow up, with concrete
and ambitious structural policies, on Mario Draghi's proposals for enhancing European
competitiveness and Enrico Letta's proposals for empowering the Single Market.
Implementing the EU's revised economic governance framework fully, transparently
and without delay will help governments bring down budget deficits and debt ratios on a
sustained basis. Governments should now make a strong start in this direction in their
medium-term plans for fiscal and structural policies.
Risks to growth remain tilted to the downside. Lower confidence could prevent
consumption and investment from recovering as quickly as expected. This could be
amplified by sources of geopolitical risk, such as Russia's unjustified war against
Ukraine and the conflict in the Middle East, which could disrupt energy supplies and
global trade. Lower demand for euro area exports due, for instance, to a weaker world
economy or an escalation in trade tensions between major economies would further
weigh on euro area growth. Growth could be lower if the lagged impact of our monetary
policy tightening turns out stronger than expected. However, growth could also be
higher if the world economy grows more strongly than expected or if easier financing
conditions and declining inflation lead to a faster rebound in consumption and
investment.
Inflation
Headline inflation fell to 1.7% in September 2024 due mainly to a sharp drop in energy
inflation, following a broadly declining path since the last IMFC meeting. Core inflation -
HICP inflation excluding energy and food - began to moderate in recent months after
an overall sideways trend, reflecting mainly declining goods inflation. Services inflation
edged down in September, but has been more persistent, hovering around 4%.
Most measures of underlying inflation have been gradually moderating in recent
months. However, domestic inflation remains elevated, with strong price pressures
coming from wages in particular. Wage growth has continued to be strong, but overall
growth in labour costs has been moderating in recent quarters and profits have been
buffering the impact of higher wages on inflation.
Looking ahead, we expect inflation to temporarily increase again in the fourth quarter of
this year as the previous sharp falls in energy prices drop out of the annual rates.
Thereafter, inflation should resume its decline, reaching our target next year and
averaging 1.9% in 2026 according to the September staff projections.
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 disrupt global trade and push energy prices and freight costs higher in the
near term. 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 low confidence and concerns about geopolitical events prevent consumption and
investment from recovering as fast as expected, if monetary policy dampens demand
more than expected, or if the economic environment in the rest of the world worsens
unexpectedly.
Financial stability, euro area banking sector and non-bank financial
intermediation
The financial stability of the euro area continues to be affected by geopolitical risks and
uncertainties surrounding the macroeconomic outlook. The financial stability outlook
remains fragile, with elevated vulnerabilities. Geopolitical risks from intra- and
intercountry conflicts coupled with election uncertainties could trigger a sharp reversal of risk
sentiment and weaken macro-financial conditions, leading to negative feedback loops
between governments and both the non-financial and financial sectors. While the sharp
corrections we saw in financial markets over the summer were short-lived, benign risk
pricing underscores the potential for more disruptive developments. Additionally,
although commercial real estate markets have shown signs of stabilising, the full scale
of the correction may not yet have been reflected in valuations, which are slow to adjust.
Euro area banks have been a source of resilience thanks to their sizeable liquidity and
capital buffers, and their profitability has been robust thanks to improved net interest
margins. However, these profits will likely begin to moderate alongside declining rates.
Asset quality is starting to weaken from a historically high level, particularly in
commercial property lending. Bank valuations remain subdued and are vulnerable to
geopolitical uncertainty, although recent political events have had a limited impact on
the financial sector more broadly. From a macroprudential policy perspective and
against a background of headwinds and uncertainty, it is crucial that the existing
requirements for releasable capital buffers are maintained, or in some countries
increased, and that adequate borrower-based measures are implemented as required.
It is important that key jurisdictions are making progress in implementing Basel III. A
full, faithful and timely implementation of Basel III is crucial, as strong regulation and
supervision ensure that banks remain safe and sound.
Risks in the non-bank financial intermediation (NBFI) sector remain elevated, despite
some rebalancing towards higher-quality assets. Asset price corrections and market
volatility, as well as macroeconomic and geopolitical uncertainty, could trigger outflows
from open-ended investment funds or margin calls for investment funds, insurance
companies and pension funds. These dynamics would increase the likelihood of forced
sales, which could negatively affect the markets in which non-bank financial
intermediaries invest. Additionally, parts of the NBFI sector are highly leveraged, which
could amplify liquidity shocks to the wider financial system. This underlines the need to
strengthen the NBFI policy framework, including from a macroprudential perspective, in
an internationally coordinated manner.
International cooperation
Geopolitical tensions are increasingly giving rise to economic and financial
fragmentation and pose a significant risk to global prosperity, with trade flows already
visibly decoupling along lines of geopolitical influence. So far, this decoupling has been
limited to specific sectors, such as energy and key advanced technologies. ECB
analysis suggests that trade fragmentation could result in global GDP losses ranging
from nearly 6% in a scenario of higher trade barriers only being erected for strategic
products, to 9% in a more severe scenario of full decoupling. Trade fragmentation could
lead to renewed inflationary pressures globally, not only because of increased
production input costs but also on account of reduced diversification opportunities.
Overall, this would make it more challenging for central banks to ensure price stability. It
is therefore crucial that legitimate concerns about security and supply chain resilience
do not lead to a spiral of protectionism. Multilateral cooperation is more important than
ever if we are to preserve the unparalleled achievements in global growth and poverty
reduction of recent decades, and securing global peace is a precondition for economic
prosperity.
With the IMF marking its 80th anniversary this year, its role and work remain absolutely
critical in the current complex global environment. The Fund's multilateral and bilateral
surveillance function remains as important as ever in protecting member countries from
crises, and the upcoming Comprehensive Surveillance Review will help establish the
most relevant priorities for years to come. We welcome the recent decisions to
strengthen the IMF's lending toolkit as part of the Review of Charges and the
Surcharges Policy and the Review of the Poverty Reduction and Growth Trust Facilities
and Financing. We support the IMF's position at the centre of the global financial safety
net, with a strong core mandate, and we highly value its unique role in bridge-building
and facilitating global cooperation to tackle common challenges. We welcome the fact
that Sub-Saharan Africa will shortly occupy the newly created seat on the IMF's
Executive Board, which will significantly contribute to improving the overall balance of
regional representation.
We continue to witness an increase in economic losses and financial risks stemming
from extreme physical climate hazards, including record-breaking heatwaves in Asia,
devastating floods and wildfires in the Americas and central and eastern Europe, and
more frequent tropical storms in the Caribbean and South Asia. Adaptation measures to
shield our lives and economies from the impact of climate change, alongside ambitious
policies to put the climate transition on track, are more relevant than ever. We support
international progress on transition planning, enabling corporations, financial institutions
and governments to set up credible net-zero roadmaps in a systematic way.
Furthermore, it is essential to further develop more systematic and comprehensive
approaches to assess the impact of escalating nature-related economic and financial
risks on price and financial stability, including integrated climate and nature risk
analyses.