Christine Lagarde, Luis de Guindos: Monetary policy statement (with Q&A)
Christine Lagarde, President of the ECB, Luis de Guindos, Vice-
President of the ECBFrankfurt am Main, 12 September 2024 Jump to the
transcript of the questions and answers
Good afternoon, the
Vice-President and I welcome you to our press conference.
The
Governing Council today decided to lower the deposit facility rate –
the rate through which we steer the monetary policy stance – by 25
basis points. Based on our updated assessment of the inflation
outlook, the dynamics of underlying inflation and the strength of
monetary policy transmission, it is now appropriate to take another
step in moderating the degree of monetary policy restriction.
Recent inflation data have come in broadly as expected, and
the latest ECB staff projections confirm the previous inflation
outlook. Staff see headline inflation averaging 2. 5 per cent in 2024,
2. 2 per cent in 2025 and 1. 9 per cent in 2026, as in the June
projections. Inflation is expected to rise again in the latter part of
this year, partly because previous sharp falls in energy prices will
drop out of the annual rates. Inflation should then decline towards
our target over the second half of next year. For core inflation, the
projections for 2024 and 2025 have been revised up slightly, as
services inflation has been higher than expected. At the same time,
staff continue to expect a rapid decline in core inflation, from 2. 9
per cent this year to 2. 3 per cent in 2025 and 2. 0 per cent in 2026.
Domestic inflation remains high as wages are still rising at
an elevated pace. However, labour cost pressures are moderating, and
profits are partially buffering the impact of higher wages on
inflation. Financing conditions remain restrictive, and economic
activity is still subdued, reflecting weak private consumption and
investment. Staff project that the economy will grow by 0. 8 per cent
in 2024, rising to 1. 3 per cent in 2025 and 1. 5 per cent in 2026.
This is a slight downward revision compared with the June projections,
mainly owing to a weaker contribution from domestic demand over the
next few quarters.
We are determined to ensure that inflation
returns to our two per cent medium-term target in a timely manner. We
will keep policy rates sufficiently restrictive for as long as
necessary to achieve this aim. We will continue to follow a data-
dependent and meeting-by-meeting 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. We are not pre-committing to a
particular rate path.
The decisions taken today are set out in
a press release available on our website. As announced on 13 March
2024, some changes to the operational framework for implementing
monetary policy will take effect from 18 September. In particular, the
spread between the interest rate on the main refinancing operations
and the deposit facility rate will be set at 15 basis points. The
spread between the rate on the marginal lending facility and the rate
on the main refinancing operations will remain unchanged at 25 basis
points.
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
economy grew by 0. 2 per cent in the second quarter, after 0. 3 per
cent in the first quarter, falling short of the latest staff
projections. Growth stemmed mainly from net exports and government
spending. Private domestic demand weakened, as households consumed
less, firms cut down business investment and housing investment
dropped. While services supported growth, industry and construction
contributed negatively. According to survey indicators, the recovery
is continuing to face some headwinds.
We expect the recovery
to strengthen over time, as rising real incomes allow households to
consume more. The gradually fading effects of restrictive monetary
policy should support consumption and investment. Exports should also
continue contributing to the recovery as global demand rises.
The labour market remains resilient. The unemployment rate was
broadly unchanged in July, at 6. 4 per cent. At the same time,
employment growth slowed to 0. 2 per cent in the second quarter, from
0. 3 per cent in the first. Recent survey indicators point to a
further moderation in demand for labour, and the job vacancy rate has
fallen closer to pre-pandemic levels.
Fiscal and structural
policies should be aimed at making the economy more productive and
competitive, which would help to raise potential growth and reduce
price pressures in the medium term. Mario Draghi's report on the
future of European competitiveness and Enrico Letta’s report on
empowering the Single Market stress the urgent need for reform and
provide concrete proposals to make this happen. 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. Inflation
According to Eurostat’s flash estimate,
annual inflation dropped to 2. 2 per cent in August, from 2. 6 per
cent in July. Energy prices fell at an annual rate of 3. 0 per cent,
after an increase of 1. 2 per cent in the previous month. Food price
inflation went up slightly, to 2. 4 per cent in August. Goods
inflation and services inflation moved in opposite directions. Goods
inflation declined to 0. 4 per cent, from 0. 7 per cent in July, while
services inflation rose, to 4. 2 per cent from 4. 0 per cent.
Most measures of underlying inflation were broadly unchanged
in July. Domestic inflation edged down only slightly, to 4. 4 per cent
from 4. 5 per cent in June, with strong price pressures coming
especially from wages. Negotiated wage growth will remain high and
volatile over the remainder of the year, given the significant role of
one-off payments in some countries and the staggered nature of wage
adjustments. At the same time, the overall growth in labour costs is
moderating. The growth in compensation per employee fell further to 4.
3 per cent in the second quarter, the fourth consecutive decline, and
ECB staff project it to slow markedly again next year. Despite weak
productivity, unit labour costs grew less strongly in the second
quarter, by 4. 6 per cent, after 5. 2 per cent in the first quarter.
Staff expect unit labour cost growth to continue declining over the
projection horizon owing to lower wage growth and a recovery in
productivity. Finally, profits are continuing to partially offset the
inflationary effects of higher labour costs.
The disinflation
process should be supported by receding labour cost pressures and the
past monetary policy tightening gradually feeding through to consumer
prices. Most measures of longer-term inflation expectations stand at
around 2 per cent, and the market-based measures have fallen closer to
that level since our July meeting. Risk assessment
The risks
to economic growth remain tilted to the downside. Lower demand for
euro area exports, owing for instance to a weaker world economy or an
escalation in trade tensions between major economies, would weigh on
euro area growth. Russia’s unjustified war against Ukraine and the
tragic conflict in the Middle East are major sources of geopolitical
risk. This may result in firms and households becoming less confident
about the future and global trade being disrupted. Growth could also
be lower if the lagged effects of monetary policy tightening turn out
stronger than expected. Growth could be higher if inflation comes down
more quickly than expected and rising confidence and real incomes mean
that spending increases by more than anticipated, or if the world
economy grows more strongly than expected.
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 push energy prices and freight
costs higher in the near term and disrupt global trade. 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 monetary policy dampens demand more than expected, or if
the economic environment in the rest of the world worsens
unexpectedly. Financial and monetary conditions
Market interest
rates have declined markedly since our July meeting, mostly owing to a
weaker outlook for global growth and reduced concerns about inflation
pressures. Tensions in global markets over the summer led to a
temporary tightening of financial conditions in the riskier market
segments.
Overall, financing costs remain restrictive as our
past policy rate increases continue to work their way through the
transmission chain. The average interest rates on new loans to firms
and on new mortgages stayed high in July, at 5. 1 and 3. 8 per cent
respectively.
Credit growth remains sluggish amid weak demand.
Bank lending to firms grew at an annual rate of 0. 6 per cent in July,
down slightly from June, and growth in loans to households edged up to
0. 5 per cent. Broad money – as measured by M3 – grew by 2. 3 per cent
in July, the same rate as in June. Conclusion
The Governing
Council today decided to lower the deposit facility rate by 25 basis
points. We are determined to ensure that inflation returns to our two
per cent medium-term target in a timely manner. We will keep policy
rates sufficiently restrictive for as long as necessary to achieve
this aim. We will continue to follow a data-dependent and meeting-by-
meeting 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. We are not pre-
committing to a particular rate path.
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.
* * *
I have a question
on the decision to cut by 25 basis points versus 50 basis points. Why
did you go for 25? And my second question is: looking into the future,
given that the Fed also is going to start to cut, the macroeconomic
picture is gloomier than before. Inflation is coming back. Is the
market right to anticipate that you cut by another 50 by the end of
the year?
On your question about our decision, we decided to
cut the deposit facility rate by 25 basis points. And that was a
unanimous decision. We proceeded as we normally do and have very
clearly indicated by obviously looking at data and looking in
particular at data through the prism of our three key criteria. So
when you look at the incoming information, it confirms our previous
projections and it comforts us in our confidence that we are heading
towards our target in a timely manner. During the course of 2025 in
particular, inflation will decline towards our 2% target. And we
thought that given the gradual disinflationary process, it was
perfectly appropriate to moderate the degree of monetary policy
restriction by cutting our deposit facility rate, which I will call
the DFR if you don’t mind from now on, by 25 basis points. When I said
that we looked at all the information that we get on the occasion of a
projection exercise through our three prisms, I’m referring obviously
to the inflation outlook, I’m referring to the underlying inflation
and I’m referring to the transmission of monetary policy. On the
inflation outlook, when we receive the projections of our staff for
September, it’s virtually unchanged relative to June for the inflation
outlook. And it continues to see a return to 2% at the end of 2025.
And this is, by the way, the fifth consecutive projection exercise
pointing to that 2% at the end of 2025. Why do I say that? Because it
certainly reinforces our confidence in the solidity and robustness of
those projections. That’s for the first prism: the inflation outlook.
For the underlying inflation on the other hand, we look at the various
indicators that we have from domestic inflation to PCCI [Permanent and
Common Component of Inflation]. And here we see one particular
indicator, the domestic indicator, which is abating a little bit
because it moved from 4. 5% to 4. 4% between June and July, and it is
not satisfactory. It is resistant. It is persistent. This is the
reason why we have to be resilient in our approach and very attentive
to the various components of core inflation as measured by those
various indicators. The third prism is the policy transmission. And on
that front, we all observe that the financing conditions continue to
be restrictive and the footprint of our monetary policy in the real
economy has been visible. On the basis of that review of incoming
data, staff analysis, consistency of the projections for the fifth
exercise in a row, that decision to cut by 25 basis points was
perfectly legitimate and, as I said, unanimously decided. I am tempted
to quote the Spanish Que sera sera because we have consistently said,
and we repeat again, that we shall remain data-dependent. And that is
particularly justified in view of the uncertainty that abounds. We
shall be data-dependent. We shall decide meeting by meeting. And our
path, of which the direction is pretty obviously a declining path, is
not predetermined neither in terms of sequence nor in terms of volume.
And I would like to add one thing which I have already said before,
which is still true, which is that data dependency does not mean data
point dependency. We’re not going to be fixated on one single number.
We are looking at a whole battery of indicators. And I’m saying that
in particular because September will certainly deliver a low reading
of inflation. Very likely. We expect, because of the base effect,
particularly on energy, our inflation numbers to be up in the fourth
quarter, so the last three months of 2024. But September is going to
deliver a low reading. But we’re not just looking at one indicator.
We’re looking at a whole range of data that we receive.
The
October meeting is a short five weeks away. To use your own words from
March, do you think you will know a lot more or just a little more
come 17 October? My second question is about something else. It’s
about something that the ECB has been championing for years, and that
is cross-border consolidation between banks. It seems it’s finally
happening, with UniCredit building up a stake in Commerzbank. Does the
ECB welcome this development?
On your first question, we can
all count: it is five weeks before 17 October, which is a relatively
short period of time compared with other intervals that we’ve had in
the past. I would simply repeat what I have said. We are going to be
data-dependent. We are going to decide meeting by meeting. I’m not
giving you any commitment of any kind as far as that particular date
is concerned. And our path is not predetermined at all. On the other
matter that you referred to, typically we do not comment on individual
institutions. And as you know well, we have a clear procedure which
involves our supervision authority, the SSM [Single Supervisory
Mechanism], which at certain thresholds of equity ownership or
transfer of shares, if you will, has to be consulted and has to
authorise. And of course I’m confident that the authorities of these
institutions concerned, namely UniCredit and Commerzbank, will be
perfectly aware of their regulatory requirements and will comply with
such requirements. The SSM will do what it has to do in full
independence. Clearly, cross-border mergers have been hoped for by
many authorities, and it will be very interesting to see that process
unfold in the weeks to come.
My first question: you said again
that the rates need to be sufficiently restrictive for some time. How
many times can the ECB cut interest rates before they are no longer
sufficiently restrictive? Where do you see the so-called neutral rate?
And the second one is more on the effect of interest rate cuts. How
much of a boost could such cuts deliver to the euro area economy given
that at least some, if not most, of the problems are
structural?
I’m going to spend a bit more time on your second
question because on the first one – how long are we going to be
sufficiently restrictive? Until we have been sufficiently restrictive.
Becausewhat we want is to achieve the goal of returning inflation to
target in a timely manner. As I said, for the fifth projection
exercise we have inflation at target during the second half of 2025.
And that is on the basis of the baseline that we have in our
projection. And we’re going to observe how that baseline evolves over
the course of time as data come in to decide for how long we have to
continue cutting rates and at what point we have been sufficiently
restrictive. So I’m not going to give you any idea as to where r* is
because this is an unobservable concept anyway. And as we get closer
to it, we will know certainly better. As you probably know, the staff
have produced a very good paper on r*, which indicates that it’s
probably a tad higher than where it used to be. But I’m not endorsing
this. As I said, as we get closer to it, we will know better whether
we are there, and there are multiple factors that are going to have an
impact on that. On your second question of whether this 25-basis-point
cut is going to be a boost for our economy given that so much is
structural. I know I’m preaching to the converted here, but obviously
there is a lag between the time when we make a decision and when the
impact is actually felt and can be observed in the economy. What we’re
still observing at the moment is the impact of our tightening
decisions from more than a year ago – almost two years ago now. This
continues to have an impact. We believe that the peak has been reached
in relation to GDP. But there will be continued, although downward
sloping, effects of those decisions. And we will have the same kind of
lag applying to the decision that we are making now. So that’s point
number one. The passing of time does not satisfy the instantaneous
satisfaction that we would have to see the results coming out of our
decisions. This is the reality of monetary policy and the functioning
of our economies.
The second part of my answer to your
question, because you refer to structural causes, gives me a chance to
actually comment on the Draghi report. We haven’t had time to dissect
everything. Neither has anyone for that matter, because it’s
sufficiently substantive and material enough to require more time and
special attention. But it’s a formidable report in that it poses a
diagnosis which is severe, but which is just in our view. And it also
points to structural reforms and practical proposals to achieve such
structural reforms that could be extremely helpful for Europe to be
stronger, but also for us as the central bank to achieve better
results in our monetary policy. If productivity can rise as a result
of the structural reforms, for instance, that would be very good news
for us. If the capital markets union can be implemented and more
financing be made available in order to finance innovation, that is
good news for us as well when it comes to inflation, price stability
and the components that underlie this work that we do.
Are you
worried about the risk of below-target inflation? In France, INSEE
estimates that inflation will be 1. 6% in December, and we can add
that oil prices are the lowest since the coronavirus (COVID-19). Is
that a risk? And my second question is about the Mario Draghi report:
Could it have an impact on monetary policies and the ECB’s
mandates?
As you will appreciate, I’m not going to give you an
answer that is country-specific because we work on a euro area basis.
But obviously it’s a risk that we have to be attentive to, which is
why we are targeting that 2% sustainably, has to be as symmetric in
the medium term as we have anticipated in our in our strategy review,
which remains completely valid. You mentioned energy. Energy has been
one of the key factors that took prices up directly and indirectly
through all sorts of channels. And in the same vein as it took prices
up, it is helping to move prices down. This is an exogenous matter,
and it is one that can move again and that we have to be prepared for.
I think I have partially responded to your second question. Some of
the proposals in the Draghi report as well as in the Letta report, by
the way - because achieving the single market and improving
competitiveness in our view can be very complementary - touch directly
on what we are specifically concerned about. And the Capital Markets
Union is one in particular on which the Governing Council has had a
strong view and issued a special opinion upon. In the same vein, the
financing of innovation, the increase of productivity and
competitiveness in relation to its external position, all of that
matters when it comes to the work that we have to do. I didn’t see in
Mario Draghi’s report any suggestion that the mandate of the ECB
should be modified. We have a single mandate, as you know, which is
price stability. We comply with the treaty and with the mandate that
was given by the founding fathers of Europe. And we will deliver on
that mandate. And whatever is suggested by Mario Draghi has a lot more
to do with structural reforms. And I very much hope that the executive
authorities in charge will actually take it to heart and we’ll see a
path towards those structural reforms.
Firstly, I’d like to
ask about services inflation, which the latest reading showed went up
again. How much concern does that give you and what do you see as the
risks going forward on that as you’ve raised your forecast slightly
for core inflation? And the second question, if I may, is, back on the
Draghi report. Does the ECB intend to adjust monetary policy in any
way to facilitate implementation of Draghi’s proposals?
Thank
you for pointing to this services inflation because that is clearly
the component of prices that requires very attentive understanding and
monitoring. And I’ll come to that in a second. But suffice to say that
it went up from 4. 0% to 4. 2%. Whereas so many other components are
on the declining path, that particular segment is increasing. And
we’ve tried to decompose what is behind it and it’s a combination of
holiday packages, insurance and – I’m trying to remember what the
third one is, I’m sure it will come back – but it’s predominantly
these two. We are looking attentively to the nexus of three elements:
number one, wages, number two, profits, number three, productivity,
and services is particularly sensitive to wage increases. So, our
expectation is that services inflation will decline over the course of
2025. Why? Because what staff had anticipated, which is moderation of
wage growth, buffering of wage costs by slightly declining profit. And
increase of productivity is actually being demonstrated by numbers, by
observations. If you look at wages, whether you look at compensation
per employee, whether you look at negotiated wages, whether you look
at unit labour cost – growth in all of these is going down. Wage
tracker, same thing. And our expectation is that it will continue to
go down in the course of 2025. On negotiated wages, we will still have
relatively high numbers and we know that some are in the making at the
moment, the auto workers’ unions, the IGMetall request and in various
other countries, but with some heterogeneity, will continue to move
wages higher in the first half of 2025, but then it’s definitely on a
declining path. The growth is already on a declining path, but it will
pick up again in the latter part of 2024 and very early in 2025, and
then it will continue to decline. But it is definitely declining.
That’s on the wages. On profits, we are now observing from high
numbers that we had at the end of 2020 up until the end of 2023, we
are seeing declining numbers on profits. As a result of that, you can
obviously deduct that profits are actually buffering and absorbing
some of these labour cost increases. On productivity, it is on an
increasing path, as considered and envisaged by staff, a little less
than what they had projected, but it’s also heading in the right
direction. So that really confirms the views that they had taken
initially, and that has given us confidence that services inflation
will move downward as well. That wages growing moderately and more
moderately now, profit absorbing more wages and productivity
increasing a little bit by virtue of cyclicality will lead us to
having services inflation less than where they are at the moment. But
it’s obviously a sector that is resistant and to which we have to be
very attentive. Mario Draghi’s report includes so many important
structural reforms that are going to be the responsibility of
governments, that will require the leadership of the Commission and
the leadership of those leaders in Europe who are determined to
strengthen Europe to give it more sovereignty and to give it more
capacity in the current geopolitical circumstances, that I’m really
certain that monetary policy will do what it has to do, which is to
provide price stability and to deliver on its mandate. While
structural reforms are not the responsibility of a central bank, they
are the responsibility of the governments.
I have two
questions. The first one is: were you expecting such a slowdown in the
German economy and how does it factor into your projections and
balancing of risks? And the second one: I would like to go back to
UniCredit and Commerzbank. In compliance with all the prudential
requirements and buffers, do you believe that the emergence of a pan-
European bank could be a positive for the industry as a whole and the
eurozone?
Our staff provides projections, goes into real in-
depth analysis of the situation of every country and receives the
feedback of the national central banks. They don’t provide projections
and they don’t provide analysis in the vacuum of the wonderful main
building and Eurotower of the ECB. We do reach out and we do work
together on a Eurosystem basis. The slowdown of the German economy was
certainly anticipated by the Bundesbank, certainly the ECB as well,
and shared on a Eurosystem basis. So it’s embedded and included in the
projection that we have and we analysed that very carefully with
members of the Governing Council in the last couple of days because
there is clearly heterogeneity amongst various countries. When you
look at countries separately as they come together to form the system,
you see for instance that at the moment, Spain and the Netherlands are
delivering strong GDP numbers, while at the other end Germany is on
the other side. Your other question about pan-European banks: I think
there are quite a few pan-European banks. What you’re talking about
here is more a cross-border merger between two large national
institutions, and that is something which, as I said, will be reviewed
from a regulatory standpoint and which certainly will satisfy many of
those who have expected cross-border mergers to result from banking
union when it is achieved.
You emphasise that one part of the
decision on the deposit rate was unanimous. Were there other parts of
the decision that weren’t unanimous?
We had extensive
discussions on all the data that we received, all the analysis that
was produced by staff. And we tested the rationale behind the current
recovery, which is moderate, and the pick-up in recovery that we
expect in 2025 and 2026. And I think we were convinced that while
private consumption is low and has actually weakened, it should
economically result from the combination of higher net income, fading
monetary policy impact and low inflation. It should necessarily result
from those forces that consumption and investment actually pick up. So
we tested all that and we discussed, and some tend to be a bit more
pessimistic, some are more optimistic, but we really discussed in
depth the rationale behind those outlook numbers that we have for
2024, for 2025, for 2026. And the reason why we revised down by 0. 1
percentage points only is really a combination of reduced net export
numbers, given the uncertainty and the geopolitical risk that we have
going forward, and a carryover of the situation that we have now,
which is reduced activity because consumption has been lower than we
had anticipated. But as I said, we are going to assess all the data
that come in each and every time along the way and see that we
continue to reach our target in a timely manner.
I have two
questions. I have one about the projections. On one hand, we have no
changes on the inflation side, but on the other hand, we have our
revision in growth outlook caused by weaker internal demand, which is
the main contributor to inflation. How does this add up? And the other
question is: I saw you welcome Mr Escrivá, the new Governor of Banco
de España and I was wondering if you could tell us your first
impressions, and what do you expect from his contribution to the
Governing Council?
You are correct that our projection numbers
for HICP, which is the headline inflation, have not changed a bit.
They are the same as in June. We haven’t revised. The one that we have
slightly revised is core inflation. We have revised core, which takes
out energy and food, by 0. 1 percentage points. Well, we have revised
2024-25. We’ve not revised 2026. And that is caused by what? By the
fact that energy prices have significantly impacted downward and have
benefited the headline inflation. The fact that food has slightly
increased, but very little. And as a result of these two components,
there’s a bit of a trade-off and a net-off, if you will, with other
prices, notably services. We have revised downwards the outlook for
growth, because the consumption that we had anticipated for now,
essentially, because net income has begun to increase, inflation has
gone down significantly and we were expecting consumption to pick up,
has not picked up. And I think that we will be looking at that
carefully when we produce our next growth and GDP numbers.
José Luis Escrivá has joined the circle of governors and we
have welcomed him in the circle of governors. Like other governors, he
has made some very useful contributions. And I hope, like any other
governor, he will continue to not only give his personal views, which
might be inspired in part by the Spanish situation, but he will have
this European dimension that other governors also have when they sit
around the table of the Governing Council. It is a process and it’s a
journey that I hope will be productive and pleasant, both for him and
for the group of governors around the table. But I can assure you that
he was welcomed and he was contributing.