luis de guindos : the inflation outlook and monetary policy in the euro area keynote speech by mr luis de guindos, vice - president of the european central bank, at the first annual conference, organised by the central bank of cyprus, limassol, 4 october 2023. * * * introduction i will start by giving you an overview of the economic outlook for the euro area before going on to look at how the ecb has adjusted its monetary policy to this outlook. i will then discuss in more detail the transmission of our monetary policy in the current environment and the sources of uncertainty that appear particularly relevant at this stage. the outlook for inflation and growth in the euro area economic activity broadly stagnated over the first half of the year and is likely to remain subdued in the coming months. weaker foreign demand and tight financing conditions are dampening growth, especially in the manufacturing sector. the services sector, which had been resilient so far, is now starting to " catch down " to manufacturing. the labour market remains resilient despite the slowdown in activity, with the unemployment rate standing at its historical low of 6. 4 per cent in august. however, there are signs that labour market momentum is slowing as the economy weakens. the employment purchasing managers'index declined significantly between the second and the third quarters of 2023, despite a slight uptick in september. the services sector, which has been a major driver of employment growth since mid - 2022, is now also creating fewer jobs. in september ecb staff revised down projected gdp growth, particularly for this year and next, due to a greater contractionary effect from tightening financing conditions and the weakening international trade environment. beyond the near term, ecb staff expect growth to recover owing to higher real disposable income thanks to rising wages and falling inflation, which is set to underpin spending. ecb staff now expect the euro area economy to expand by 0. 7 % in 2023, 1. 0 % in 2024 and 1. 5 % in 2025. inflation fell markedly from its double - digit peak last october, with the headline rate having declined to 4. 3 % in september ( flash estimate ). in the coming months, the sharp increases recorded in the autumn of 2022 will drop out of the yearly rates, lending further support to a deceleration in inflation. at the same time, underlying price pressures remain strong, although most measures of inflation have started to ease thanks to

policy rates. what happened? the incoming macroeconomic data remained in line with our baseline scenario and confirmed that risks to price stability are mainly on the upside over the medium term, as identified by both our economic and monetary analysis. however, the continued financial market volatility and ongoing reappraisal of risk has undoubtedly led to an increase in uncertainty surrounding the economic outlook, due to the possible effects of these financial developments on the real economy. therefore, it was appropriate to gather additional information before drawing further conclusions for monetary policy. this ( very attentive ) " wait and see " attitude did not jeopardise the maintenance of price stability over the medium term. indeed, a market - driven tightening of monetary conditions could be observed, as money market rates have risen, lending standards have somewhat tightened and the euro exchange rate has again appreciated. by the way, let me remind you that the eurosystem has no target for the euro exchange rate, as the primary objective concerns internal stability. however, the exchange rate is an important indicator in the economic analysis, in particular to the extent that it influences the overall outlook for price stability. at its last meeting on 4 october, the ecb governing council still considered this outlook for price stability over the medium term to be subject to upside risks. it gave itself a period of time to analyse incoming information in order to refine and update its risk assessment. in particular, should financial market tensions persist or intensify, they would affect financing conditions more significantly and eventually economic activity too. these downside risks are, i think, relevant both for the growth and the inflation outlook, as they have the potential to alleviate some of the expected upward pressure on prices of a cyclical nature embedded in the baseline scenario. conversely, should the financial turbulence fade away and the main scenario be confirmed, our monetary policy should be and would be ready to counter possible upside risks to price stability. uncertainty having increased, times have once again become more challenging for central bankers. more than ever they require from us to make appropriate, overall and forwardlooking judgments.