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,
Athens, 25 October 2023.
* * *
Good afternoon, the Vice-President and I welcome you to our press conference. I would
like to thank Governor Stournaras for his kind hospitality and express our special
gratitude to his staff for the excellent organisation of today's meeting of the Governing
Council.
The Governing Council today decided to keep the three key ECB interest rates
unchanged. The incoming information has broadly confirmed our previous assessment
of the medium-term inflation outlook. Inflation is still expected to stay too high for too
long, and domestic price pressures remain strong. At the same time, inflation dropped
markedly in September, including due to strong base effects, and most measures of
underlying inflation have continued to ease. Our past interest rate increases continue to
be transmitted forcefully into financing conditions. This is increasingly dampening
demand and thereby helps push down inflation.
We are determined to ensure that inflation returns to our two per cent medium-term
target in a timely manner. Based on our current assessment, we consider that the key
ECB interest rates are at levels that, maintained for a sufficiently long duration, will
make a substantial contribution to this goal. Our future decisions will ensure that our
policy rates will be set at sufficiently restrictive levels for as long as necessary.
We will continue to follow a data-dependent 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.
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 remains weak. Recent information suggests that manufacturing
output has continued to fall. Subdued foreign demand and tighter financing conditions
are increasingly weighing on investment and consumer spending. The services sector
is also weakening further. This is mainly because weaker industrial activity is spilling
over to other sectors, the impetus from reopening effects is fading and the impact of
higher interest rates is broadening. The economy is likely to remain weak for the
remainder of this year. But as inflation falls further, household real incomes recover and
the demand for euro area exports picks up, the economy should strengthen over the
coming years.
Economic activity has so far been supported by the strength of the labour market. The
unemployment rate stood at a historical low of 6.4 per cent in August. At the same time,
there are signs that the labour market is weakening. Fewer new jobs are being created,
including in services, consistent with the cooling economy gradually feeding through to
employment.
As the energy crisis fades, governments should continue to roll back the related support
measures. This is essential to avoid driving up medium-term inflationary pressures,
which would otherwise call for even tighter monetary policy. Fiscal policies should be
designed to make our economy more productive and to gradually bring down high
public debt. Structural reforms and investments to enhance the euro area's supply
capacity - which would be supported by the full implementation of the Next Generation
EU programme - can help reduce price pressures in the medium term, while supporting
the green and digital transitions. To that end, the reform of the EU's economic
governance framework should be concluded before the end of this year and progress
towards Capital Markets Union and the completion of Banking Union should be
accelerated.
Inflation
Inflation dropped to 4.3 per cent in September, almost a full percentage point lower than
its August level. In the near term, it is likely to come down further, as the sharp price
increases in energy and food recorded in autumn 2022 will drop out of the yearly rates.
September's decline was broad-based. Food price inflation slowed again, although it
remains high by historical standards. In annual terms, energy prices fell by 4.6 per cent
but, most recently, have risen again and become less predictable in view of the new
geopolitical tensions.
Inflation excluding energy and food dropped to 4.5 per cent in September, from 5.3 per
cent in August. This fall was supported by improving supply conditions, the
passthrough of previous declines in energy prices, and the impact of tighter monetary policy
on demand and corporate pricing power. Goods and services inflation rates fell
substantially, to 4.1 per cent and 4.7 per cent respectively, with services inflation also
being pulled down by pronounced base effects. Price pressures in tourism and travel
appear to be moderating.
Most measures of underlying inflation continue to decline. At the same time, domestic
price pressures are still strong, reflecting also the growing importance of rising wages.
Measures of longer-term inflation expectations mostly stand around 2 per cent.
Nonetheless, some indicators remain elevated and need to be monitored closely.
Risk assessment
The risks to economic growth remain tilted to the downside. Growth could be lower if
the effects of monetary policy turn out stronger than expected. A weaker world
economy would also weigh on growth. Russia's unjustified war against Ukraine and the
tragic conflict triggered by the terrorist attacks in Israel are key sources of geopolitical
risk. This may result in firms and households becoming less confident and more
uncertain about the future, and dampen growth further. Conversely, growth could be
higher than expected if the still resilient labour market and rising real incomes mean
that people and businesses become more confident and spend more, or the world
economy grows more strongly than expected.
Upside risks to inflation could come from higher energy and food costs. The heightened
geopolitical tensions could drive up energy prices in the near term, while making the
medium-term outlook more uncertain. Extreme weather, and the unfolding climate crisis
more broadly, could push food prices up by more than expected. A lasting rise in
inflation expectations above our target, or higher than anticipated increases in wages or
profit margins, could also drive inflation higher, including over the medium term. By
contrast, weaker demand - for example owing to a stronger transmission of monetary
policy or a worsening of the economic environment in the rest of the world amid greater
geopolitical risks - would ease price pressures, especially over the medium term.
Financial and monetary conditions
Longer-term interest rates have risen markedly since our last meeting, reflecting strong
increases in other major economies. Our monetary policy continues to transmit strongly
into broader financing conditions. Funding has become more expensive for banks, and
interest rates for business loans and mortgages rose again in August, to 5.0 per cent
and 3.9 per cent respectively.
Higher borrowing rates, with the associated cuts in investment plans and house
purchases, led to a further sharp drop in credit demand in the third quarter, as reported
in our latest bank lending survey. Moreover, credit standards for loans to firms and
households tightened further. Banks are becoming more concerned about the risks
faced by their customers and are less willing to take on risks themselves.
Against this background, credit dynamics have weakened further. The annual growth
rate of loans to firms has dropped sharply, from 2.2 per cent in July to 0.7 per cent in
August and 0.2 per cent in September. Loans to households remained subdued, with
the growth rate slowing to 1.0 per cent in August and 0.8 per cent in September. Amid
weak lending and the reduction in the Eurosystem balance sheet, the annual growth
rate of M3 fell to -1.3 per cent in August - the lowest level recorded since the start of
the euro - and still stood at -1.2 per cent in September.
Conclusion
The Governing Council today decided to keep the three key ECB interest rates
unchanged. The incoming information has broadly confirmed our previous assessment
of the medium-term inflation outlook. Inflation is still expected to stay too high for too
long, and domestic price pressures remain strong. At the same time, inflation dropped
markedly in September, including due to strong base effects, and most measures of
underlying inflation have continued to ease. Our past interest rate increases continue to
be transmitted forcefully into financing conditions. This is increasingly dampening
demand and thereby helps push down inflation.
We are determined to ensure that inflation returns to our two per cent medium-term
target in a timely manner. Based on our current assessment, we consider that rates are
at levels that, maintained for a sufficiently long duration, will make a substantial
contribution to the timely return of inflation to our target. Our future decisions will ensure
that the key ECB interest rates will be set at sufficiently restrictive levels for as long as
necessary to ensure such a timely return. We will continue to follow a data-dependent
approach to determining the appropriate level and duration of restriction.
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.