Christine Lagarde: ECB press conference - introductory statement
Introductory statement by Ms Christine Lagarde, President of the European Central
Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt
am Main, 2 February 2023.
* * *
Good afternoon, the Vice-President and I welcome you to our press conference.
We would like to begin by congratulating Croatia on joining the euro area on 1 January
2023. We also warmly welcome Boris Vuji, the Governor of Hrvatska narodna banka, to
the Governing Council. We will now report on the outcome of today's meeting.
The Governing Council will stay the course in raising interest rates significantly at a
steady pace and in keeping them at levels that are sufficiently restrictive to ensure a
timely return of inflation to our two per cent medium-term target. Accordingly, the
Governing Council today decided to raise the three key ECB interest rates by 50 basis
points and we expect to raise them further. In view of the underlying inflation pressures,
we intend to raise interest rates by another 50 basis points at our next monetary policy
meeting in March and we will then evaluate the subsequent path of our monetary policy.
Keeping interest rates at restrictive levels will over time reduce inflation by dampening
demand and will also guard against the risk of a persistent upward shift in inflation
expectations. In any event, our future policy rate decisions will continue to be data
dependent and follow a meeting-by-meeting approach.
The Governing Council today also decided on the modalities for reducing the
Eurosystem's holdings of securities under the asset purchase programme (APP). As
communicated in December, the APP portfolio will decline by €15 billion per month on
average from the beginning of March until the end of June 2023, and the subsequent
pace of portfolio reduction will be determined over time. Partial reinvestments will be
conducted broadly in line with current practice. In particular, the remaining reinvestment
amounts will be allocated proportionally to the share of redemptions across each
constituent programme of the APP and, under the public sector purchase programme
(PSPP), to the share of redemptions of each jurisdiction and across national and
supranational issuers. For our corporate bond purchases, the remaining reinvestments
will be tilted more strongly towards issuers with a better climate performance. Without
prejudice to our price stability objective, this approach will support the gradual
decarbonisation of the Eurosystem's corporate bond holdings, in line with the goals of
the Paris Agreement.
The decisions taken today are set out in a press release available on our website. The
detailed modalities for reducing the APP holdings are described in a separate press
release to 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
According to Eurostat's preliminary flash estimate, the euro area economy grew by 0.1
per cent in the fourth quarter of 2022. While above the December Eurosystem staff
projections, this outcome means that economic activity has slowed markedly since
mid2022 and we expect it to stay weak in the near term. Subdued global activity and high
geopolitical uncertainty, especially owing to Russia's unjustified war against Ukraine
and its people, continue to act as headwinds to euro area growth. Together with high
inflation and tighter financing conditions, these headwinds dampen spending and
production, especially in the manufacturing sector.
However, supply bottlenecks are gradually easing, the supply of gas has become more
secure, firms are still working off large order backlogs and confidence is improving.
Moreover, output in the services sector has been holding up, supported by continuing
reopening effects and stronger demand for leisure activities. Rising wages and the
recent decline in energy price inflation are also set to ease the loss of purchasing power
that many people have experienced owing to high inflation. This, in turn, will support
consumption. Overall, the economy has proved more resilient than expected and
should recover over the coming quarters.
The unemployment rate remained at its historical low of 6.6 per cent in December 2022.
However, the rate at which jobs are being created may slow and unemployment could
rise over the coming quarters.
Government support measures to shield the economy from the impact of high energy
prices should be temporary, targeted and tailored to preserving incentives to consume
less energy. In particular, as the energy crisis becomes less acute, it is important to
now start rolling these measures back promptly in line with the fall in energy prices and
in a concerted manner. Any such measures falling short of these principles are likely to
drive up medium-term inflationary pressures, which would call for a stronger monetary
policy response. Moreover, in line with the EU's economic governance framework, fiscal
policies should be oriented towards making our economy more productive and
gradually bringing down high public debt. Policies to enhance the euro area's supply
capacity, especially in the energy sector, can help reduce price pressures in the
medium term. To that end, governments should swiftly implement their investment and
structural reform plans under the Next Generation EU programme. The reform of the
EU's economic governance framework should be concluded rapidly.
Inflation
According to Eurostat's flash estimate, which has been calculated using Eurostat
estimates for Germany, inflation was 8.5 per cent in January. This would be 0.7
percentage points lower than the December figure, with the decline owing mainly to a
renewed sharp drop in energy prices. Market-based indicators suggest that energy
prices over the coming years will be significantly lower than expected at the time of our
last meeting. Food price inflation edged higher to 14.1 per cent, as the past surge in the
cost of energy and of other inputs for food production is still feeding through to
consumer prices.
Price pressures remain strong, partly because high energy costs are spreading
throughout the economy. Inflation excluding energy and food remained at 5.2 per cent
in January, with inflation for non-energy industrial goods rising to 6.9 per cent and
services inflation declining to 4.2 per cent. Other indicators of underlying inflation are
also still high. Government measures to compensate households for high energy prices
will dampen inflation in 2023 but are expected to raise inflation once they expire. At the
same time, the scale of some of these measures depends on the evolution of energy
prices and their expected contribution to inflation is particularly uncertain.
Although supply bottlenecks are gradually easing, their delayed effects are still pushing
up goods price inflation. The same holds true for the lifting of pandemic-related
restrictions: while weakening, the effect of pent-up demand is still driving up prices,
especially in the services sector.
Wages are growing faster, supported by robust labour markets, with some catch-up to
high inflation becoming the main theme in wage negotiations. At the same time, recent
data on wage dynamics have been in line with the December Eurosystem staff
projections. Most measures of longer-term inflation expectations currently stand at
around two per cent, but these warrant continued monitoring.
Risk assessment
The risks to the outlook for economic growth have become more balanced. Russia's
unjustified war against Ukraine and its people continues to be a significant downside
risk to the economy and could again push up the costs of energy and food. There could
also be an additional drag on euro area growth if the world economy weakened more
sharply than we expect. Moreover, the recovery would face obstacles if the pandemic
were to re-intensify and cause renewed supply disruptions. However, the energy shock
could fade away faster than anticipated and euro area companies could adapt more
quickly to the challenging international environment. This would support higher growth
than currently expected.
The risks to the inflation outlook have also become more balanced, especially in the
near term. On the upside, existing pipeline pressures could still send retail prices higher
in the near term. Moreover, a stronger than expected economic rebound in China could
give a fresh boost to commodity prices and foreign demand. Domestic factors such as a
persistent rise in inflation expectations above our target or higher than anticipated wage
rises could drive inflation higher, also over the medium term. On the downside, the
recent fall in energy prices, if it persists, may slow inflation more rapidly than expected.
This downward pressure in the energy component could then also translate into weaker
dynamics for underlying inflation. A further weakening of demand would also contribute
to lower price pressures than currently anticipated, especially over the medium term.
Financial and monetary conditions
As we tighten monetary policy, market interest rates are rising further and credit to the
private sector is becoming more expensive. Bank lending to firms has decelerated
sharply over recent months. This partly stems from lower financing needs for
inventories. But it also reflects weakening demand for loans to finance business
investment, in the context of a steep upward move in bank lending rates and a
considerable tightening in credit standards, which is also visible in our most recent bank
lending survey. Household borrowing has continued to weaken as well, reflecting rising
lending rates, tighter credit standards and a sharp fall in the demand for mortgages. As
loan creation decelerates, money growth is also slowing rapidly, with a marked decline
in its most liquid components, including overnight deposits, only partially compensated
by a shift to term deposits.
Conclusion
Summing up, the Governing Council will stay the course in raising interest rates
significantly at a steady pace and in keeping them at levels that are sufficiently
restrictive to ensure a timely return of inflation to our two per cent medium-term target.
Accordingly, we today decided to raise the three key ECB interest rates by 50 basis
points and we expect to raise them further. In view of the underlying inflation pressures,
we intend to raise interest rates by another 50 basis points at our next monetary policy
meeting in March and we will then evaluate the subsequent path of our monetary policy.
Keeping interest rates at restrictive levels will over time reduce inflation by dampening
demand and will also guard against the risk of a persistent upward shift in inflation
expectations. Moreover, from the beginning of March 2023, the APP portfolio will
decline at a measured and predictable pace, as the Eurosystem will not reinvest all of
the principal payments from maturing securities.
Our future policy rate decisions will continue to be data-dependent and determined
meeting by meeting. We stand ready to adjust all of our instruments within our mandate
to ensure that inflation returns to our medium-term target.
We are now ready to take your questions.