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, 16 March 2023.
* * *
Good afternoon, the Vice-President and I welcome you to our press conference.
Inflation is projected to remain too high for too long. Therefore, the Governing Council
today decided to increase the three key ECB interest rates by 50 basis points, in line
with our determination to ensure the timely return of inflation to our two per cent
medium-term target. The elevated level of uncertainty reinforces the importance of a
data-dependent approach to our policy rate decisions, which will be determined by 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 monitoring current market tensions closely and stand ready to respond as
necessary to preserve price stability and financial stability in the euro area. The euro
area banking sector is resilient, with strong capital and liquidity positions. In any case,
our policy toolkit is fully equipped to provide liquidity support to the euro area financial
system if needed and to preserve the smooth transmission of monetary policy.
The new ECB staff macroeconomic projections were finalised in early March before the
recent emergence of financial market tensions. As such, these tensions imply additional
uncertainty around the baseline assessments of inflation and growth. Prior to these
latest developments, the baseline path for headline inflation had already been revised
down, mainly owing to a smaller contribution from energy prices than previously
expected. ECB staff now see inflation averaging 5.3 per cent in 2023, 2.9 per cent in
2024 and 2.1 per cent in 2025. At the same time, underlying price pressures remain
strong. Inflation excluding energy and food continued to increase in February and ECB
staff expect it to average 4.6 per cent in 2023, which is higher than foreseen in the
December projections. Subsequently, it is projected to come down to 2.5 per cent in
2024 and 2.2 per cent in 2025, as the upward pressures from past supply shocks and
the reopening of the economy fade out and as tighter monetary policy increasingly
dampens demand.
The baseline projections for growth in 2023 have been revised up to an average of 1.0
per cent as a result of both the decline in energy prices and the economy's greater
resilience to the challenging international environment. ECB staff then expect growth to
pick up further, to 1.6 per cent, in both 2024 and 2025, underpinned by a robust labour
market, improving confidence and a recovery in real incomes. At the same time, the
pick-up in growth in 2024 and 2025 is weaker than projected in December, owing to the
tightening of monetary policy.
The decisions taken today are set out in a press release available 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.
Economic activity
The euro area economy stagnated in the fourth quarter of 2022, thus avoiding the
previously expected contraction. However, private domestic demand fell sharply. High
inflation, prevailing uncertainties and tighter financing conditions dented private
consumption and investment, which fell by 0.9 per cent and 3.6 per cent respectively.
Under the baseline, the economy looks set to recover over the coming quarters.
Industrial production should pick up as supply conditions improve further, confidence
continues to recover, and firms work off large order backlogs. Rising wages and falling
energy prices will partly offset the loss of purchasing power that many households are
experiencing as a result of high inflation. This, in turn, will support consumer spending.
Moreover, the labour market remains strong, despite the weakening of economic
activity. Employment grew by 0.3 per cent in the fourth quarter of 2022 and the
unemployment rate stayed at its historical low of 6.6 per cent in January 2023.
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. As energy prices fall and risks around the energy supply recede, it is
important to start rolling back these measures promptly and in a concerted manner.
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 and as stated in the European
Commission's guidance of 8 March 2023, 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
Inflation edged down to 8.5 per cent in February. The decline resulted from a renewed
sharp drop in energy prices. By contrast, food price inflation increased further, to 15.0
per cent, with the past surge in the cost of energy and of other inputs for food
production still feeding through to consumer prices.
Moreover, underlying price pressures remain strong. Inflation excluding energy and
food increased to 5.6 per cent in February and other indicators of underlying inflation
have also stayed high. Non-energy industrial goods inflation rose to 6.8 per cent in
February, mainly reflecting the delayed effects of past supply bottlenecks and high
energy prices. Services inflation, which rose to 4.8 per cent in February, is also still
being driven by the gradual pass-through of past energy cost increases, pent-up
demand from the reopening of the economy and rising wages.
Wage pressures have strengthened on the back of robust labour markets and
employees aiming to recoup some of the purchasing power lost owing to high inflation.
Moreover, many firms were able to raise their profit margins in sectors faced with
constrained supply and resurgent demand. At the same time, most measures of
longerterm inflation expectations currently stand at around two per cent, although they warrant
continued monitoring, especially in light of recent volatility in market-based inflation
expectations.
Risk assessment
Risks to the outlook for economic growth are tilted to the downside. Persistently
elevated financial market tensions could tighten broader credit conditions more strongly
than expected and dampen confidence. 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 expected. However,
companies could adapt more quickly to the challenging international environment and,
together with the fading-out of the energy shock, this could support higher growth than
currently expected.
The upside risks to inflation include existing pipeline pressures that could still send retail
prices even higher than expected in the near term. Domestic factors, such as a
persistent rise in inflation expectations above our target or higher than anticipated
increases in wages and profit margins, could drive inflation higher, including over the
medium term. Moreover, a stronger than expected economic rebound in China could
give a fresh boost to commodity prices and foreign demand. The downside risks to
inflation include persistently elevated financial market tensions that could accelerate
disinflation. In addition, falling energy prices could translate into reduced pressure from
underlying inflation and wages. A weakening of demand, including owing to a stronger
deceleration of bank credit or a stronger than projected transmission of monetary policy,
would also contribute to lower price pressures than currently anticipated, especially
over the medium term.
Financial and monetary conditions
Market interest rates rose considerably in the weeks following our last meeting. But the
increase has strongly reversed over recent days in a context of severe financial market
tensions. Bank credit to euro area firms has become more expensive. Credit to firms
has weakened further, owing to lower demand and tighter credit supply conditions.
Household borrowing has become more expensive as well, especially owing to higher
mortgage rates. This rise in borrowing costs and the resultant decline in demand, along
with tighter credit standards, have led to a further slowdown in the growth of loans to
households. Amid these weaker loan dynamics, money growth has slowed sharply,
driven by its most liquid components.
Conclusion
Summing up, inflation is projected to remain too high for too long. Therefore, the
Governing Council today decided to increase the three key ECB interest rates by 50
basis points, in line with our determination to ensure the timely return of inflation to our
two per cent medium-term target. The elevated level of uncertainty reinforces the
importance of a data-dependent approach to our policy rate decisions, which will be
determined by 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 monitoring current market tensions closely and stand ready
to respond as necessary to preserve price stability and financial stability in the euro
area.
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.
We are now ready to take your questions.