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Christine Lagarde, President of the ECB, Luis de Guindos, Vice- President of the ECBFrankfurt am Main, 30 January 2025 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 three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which we steer the monetary policy stance – is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

The disinflation process is well on track. Inflation has continued to develop broadly in line with the staff projections and is set to return to our two per cent medium-term target in the course of this year. Most measures of underlying inflation suggest that inflation will settle at around our target on a sustained basis. Domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. But wage growth is moderating as expected, and profits are partially buffering the impact on inflation.

Our recent interest rate cuts are gradually making new borrowing less expensive for firms and households. At the same time, financing conditions continue to be tight, also because our monetary policy remains restrictive and past interest rate hikes are still transmitting to the stock of credit, with some maturing loans being rolled over at higher rates. The economy is still facing headwinds but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time.

We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. 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.

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 stagnated in the fourth quarter, according to Eurostat’s preliminary flash estimate. It is set to remain weak in the near term. Surveys indicate that manufacturing continues to contract while services activity is expanding. Consumer confidence is fragile, and households have not yet drawn sufficient encouragement from rising real incomes to significantly increase their spending.

Nevertheless, the conditions for a recovery remain in place. While the labour market has softened over recent months it continues to be robust, with the unemployment rate staying low, at 6. 3 per cent in December. A solid job market and higher incomes should strengthen consumer confidence and allow spending to rise. More affordable credit should also boost consumption and investment over time. Provided trade tensions do not escalate, exports should support the recovery as global demand rises.

Fiscal and structural policies should make the economy more productive, competitive and resilient. We welcome the European Commission’s Competitiveness Compass, which provides a concrete roadmap for action. It is crucial to follow up, with further concrete and ambitious structural policies, on Mario Draghi’s proposals for enhancing European competitiveness and on Enrico Letta’s proposals for empowering the Single Market. Governments should implement their commitments under the EU’s economic governance framework fully and without delay. This will help bring down budget deficits and debt ratios on a sustained basis, while prioritising growth-enhancing reforms and investment. Inflation

Annual inflation increased to 2. 4 per cent in December, up from 2. 2 per cent in November. As in the previous two months, the increase was expected and primarily reflected past sharp drops in energy prices falling out of the calculation. Along with a month-on-month increase in December, this led energy prices slightly higher on an annual basis, after four consecutive declines. Food price inflation edged down to 2. 6 per cent and goods inflation to 0. 5 per cent. Services inflation edged up to 4. 0 per cent.

Most underlying inflation indicators have been developing in line with a sustained return of inflation to our medium-term target. Domestic inflation, which closely tracks services inflation, has remained high, as wages and some services prices are still adjusting to the past inflation surge with a substantial delay. At the same time, recent signals point to continued moderation in wage pressures and to the buffering role of profits.

We expect inflation to fluctuate around its current level in the near term. It should then settle sustainably at around the two per cent medium-term target. Easing labour cost pressures and the continuing impact of our past monetary policy tightening on consumer prices should help this process. While market-based indicators of inflation compensation have largely reversed the declines observed in the autumn, most measures of longer-term inflation expectations continue to stand at around 2 per cent. Risk assessment

The risks to economic growth remain tilted to the downside. Greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by geopolitical risks, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, which could disrupt energy supplies and further weigh on global trade. Growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. It could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster.

Inflation could turn out higher 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 more than expected. By contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand by more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Greater friction in global trade would make the euro area inflation outlook more uncertain. Financial and monetary conditions

Market interest rates in the euro area have risen since our December meeting, partly mirroring higher rates in global financial markets. While financing conditions remain tight, our interest rate cuts are gradually making it less expensive for firms and households to borrow.

The average interest rate on new loans to firms declined to 4. 5 per cent in November, while the cost of issuing market-based debt remained at 3. 6 per cent. The average rate on new mortgages edged down to 3. 5 per cent.

Growth in bank lending to firms rose to 1. 5 per cent in December, up from 1. 0 per cent in November, amid a strong monthly flow. Growth in debt securities issued by firms moderated to 3. 2 per cent in annual terms. Mortgage lending continued to rise gradually but remained muted overall, with an annual growth rate of 1. 1 per cent.

Credit standards for business loans tightened again in the fourth quarter of 2024, having broadly stabilised over the previous four quarters, as reported in our latest bank lending survey. The renewed tightening mainly reflected banks becoming more concerned about the risks faced by their customers and less willing to take on risks themselves. Demand for loans by firms increased slightly in the fourth quarter but remained weak overall. Credit standards for mortgages were broadly unchanged, after three quarters of easing, while the demand for mortgages again increased strongly, mainly because of more attractive interest rates. Conclusion

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which we steer the monetary policy stance – is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. 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 stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to take your questions.

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The first question is about the future. Where do we go from here? Are you still confident about the direction? Your fellow Board member Isabel Schnabel said that we are getting closer and closer to the point where you need to have a discussion about how much further rates can come down. Did you start having the discussion today and what is your own view on this point? The second question is about the neutral rate. Speaking in Davos, you gave a slightly different range for your neutral rate estimate than in the press conference here. Why did you change the estimate? Why did you lower the midpoint? What is the significance, if there is a significance, of this change?

First of all, I just want to remind you that by lowering by 25 basis points today our three interest rates, particularly the DFR, we have now cut by 125 basis points relative to the high level where we were. Secondly, there was no discussion as to whether this decision was appropriate or not. It was a unanimous decision, so all governors supported the decision that was articulated by Philip Lane this morning of cutting by 25 basis points. You will have seen in the monetary policy statement, clearly stated, that at this point in time we are still in restrictive territory, and we have not had a discussion, because it would be premature at this point in time about the point where we have to stop. We know the direction of travel. You mentioned it in your question. And this is the direction that we will take. At which pace, with what sequence, what magnitude will be informed by the data that we will collect in the coming weeks and months, and by the analysis that our staff will conduct. We are lucky that for our next monetary policy meeting in March, we will receive a projection prepared by staff, which will be informed by the economic environment as it unfolds. And we will have in the meantime two additional readings on inflation. Those are data points, granted, but a series of inflation readings are informing those decisions. On the r-star – natural interest rate – you will be pleased to see in eight days, on 7 February, a publication by staff on the revision of the natural interest rate. This is not something that we have discussed. It’s a range, and it’s a range that does not give a guideline or a destination. It’s an indication and in many ways a conceptual principle that is elaborated by a number of models. That is what staff will publish and will comment upon. So you will have plenty of it to elaborate upon.

I have a question on the economic outlook. You’re saying that you’re expecting that exports will contribute positively to economic recovery or activity. But if you look at the uncertainties in that world, how much do you actually think this is something which is realistic given the slowness in China, given the Trump administration? That is my first question. My second question is whether, given that bleak economic picture and also the disinflationary trend and this restrictive monetary policy stance, why didn’t you discuss a 50 basis points cut?

I can reassure you right away, we did not even utter the two numbers 5, 0. So 50 basis points was not in the debate at all. As I said, there was rallying support unanimously by all members of the Governing Council for 25 basis points. Your question on exports, it’s an interesting one. We took the precaution in the monetary policy statement to refer to exports as a potential engine for growth, not the main one, but an additional one. And we took the precaution to say that this is provided there is no trade or additional trade friction, something along those lines. That is in the economic activity paragraph. And then we talk about exports yet again in the risk section. And we clearly analyse the trade environment, the framework within which trade takes place and the uncertainty associated with it as a potential risk. But obviously there are rumours, there are statements, there are assumptions, but we don’t have anything that is clear and tangible, and that can be inserted into the analytical work that staff does. So we will be looking very carefully at the numbers that come in, at the information that consolidates, and obviously staff will incorporate all that in the work that they are going to do for the March projections. I am not sure that there will be by March enough certainty to actually be very confident. I think we will still be plagued by uncertainty in that respect, and there will be more to come. But as it comes, we will be taking that into account.

The first question is on inflation. Your confidence in reaching the 2% target is very much based on the expectation that wage growth and services inflation will slow down significantly. That hasn’t materialised yet. Services inflation is still around 4%. At what point in time do you need to see hard evidence of a slowdown in services inflation to continue cutting rates, let’s say, beyond March? My second question is on a completely different topic. Your Czech counterpart yesterday said that his institution will assess including bitcoin into foreign currency reserves and US President Trump has backed the idea of a national strategic bitcoin reserve. What do you think about such ideas? Is that something the ECB is looking into?

Yes, we are confident that headline inflation will reach our target in the course of 2025 and that’s the 2% medium-term target, sustainably so. And you are right that there is one particular item which is still resisting. The others are moving down. When you look at goods, when you look at non-energy industrial goods, when you look at subsets of all that, they are definitely moving down. I have said in previous press conferences that when goods are going down to 0. 5%, we are not going to expect services to be at 2%, because we would be clearly undershooting. But services, and in particular if we look at the various underlying measurements, the domestic one that strips out anything that has to do with exports is still resisting. And it has actually gone up a little bit, because on services we were at 3. 9% in November, we moved to 4% in December. We are not data point-dependent but we look carefully at services, and we know that those services are largely labour-intensive, with or without contract. We used to have that distinction in the time of COVID. We have less of it at the moment but it is largely labour-intensive and, as a result, wage- sensitive. We try to measure and to understand wages as much as possible because they are so relevant for services. All the indicators that we have at the moment are heading downward and are confirming our confidence that wages in 2025 will be going down. Whether you look at compensation per employee, which is quite a useful and relevant indicator, whether you look at the wage tracker that we have, whether we look at Indeed, whether we look at the ratios of vacancies to unemployment, all of those indicators are heading in the same direction. We are not celebrating that, but we are taking note and acknowledging the impact that it will have on services. Some of you will remember that I, and we, have also focused on the distinction between the newcomers and the latecomers. We carried out, for instance, a particular review and tried to get a better and deep understanding of those latecomers that waited for a period of time until they decided to hike prices. That is clearly the case for insurance companies, for instance, that do not increase their prices on a monthly or quarterly basis. Rather, they generally wait until the expiry of a contract and then hike prices. We will be very attentive to how the latecomers that hiked prices in January to March 2024, and whether this process under which they caught up with inflation is going to be duplicated this year again. We don’t think so. We conduct a corporate telephone survey, the result of which you will see tomorrow, because we publish tomorrow. Our understanding from the corporate telephone survey as well, because we asked them how do you see negotiations taking place and when do you expect increases, is that all of this is heading in that direction. It gives us the confidence that wages are on their way down and therefore will impact the price of services, and that we will see a declining movement in the course of 2025. We say in the monetary policy statement that the next couple of readings will still be resistant, if you will, largely because of base effects on energy prices. But from there on, we see this declining path in the course of 2025. But once again, we don’t look at one data point. It’s not just compensation per employee; it’s not just negotiated wages. It’s a combination of it all because it’s a complex matter, depending on Member States, depending on collective bargaining agreements and their renewal; all of that. On this matter that you referred to and whether central bank reserves should or could include bitcoins, I think there is a view around the table of the Governing Council, and most likely the General Council as well, that reserves have to be liquid, that reserves have to be secure, that they have to be safe, that they should not be plagued by the suspicion of money laundering or other criminal activities. And as a result, I am confident that bitcoin will not enter the reserves of any of the central banks of the General Council. I had a good conversation with my colleague from the Czech Republic, and I leave it to him to make whatever announcement he wants to make. But I am confident that he is convinced, as we all are, of the necessity to have liquid, secure and safe reserves.

Are you comfortable with going on cutting rates whereas the Fed has stopped? What impact do you foresee? My second question is if tariffs are introduced, do you think monetary policy will have to adapt immediately or is it necessary to wait for the impacts on activity?

I am comfortable with one thing. We are comfortable with one thing, which is to reach our target. We are mission-driven. We want that 2% medium-term sustainable inflation and we will do everything that is required in order to reach that goal. As I said to another colleague of yours earlier on, under the baseline that we have and with the data that we have received, we can comfortably indicate that we are directionally on this downward slope, the pace and sequence of which will be determined by data and will be decided on a meeting-by-meeting basis. And for those who would like to have this solid forward guidance, it would be totally unrealistic to do anything of that nature, simply because we are facing significant and probably rising uncertainty at the moment. So this is what we have to do. And we continue to be guided by this sort of threefold analysis, which includes the inflation outlook, the underlying inflation and the transmission of monetary policy. Are we comfortable doing what we have to do? Yes, absolutely, because we are mission- driven. The second question you had related to tariffs. As I said earlier on, for the moment there is nothing that we can actually capture in terms of policy determination, in terms of numbers, in terms of scope or in terms of custom line items to understand exactly what is considered. When that happens, then of course it will enter into our assessment and into the macroeconomic analysis that is produced by our staff. But it’s far more complicated than “it’s this way or this way” or “it’s inflationary or deflationary”, depending on whether there is one set of decisions with variable rates around the world, rerouting of trade, whether there is retaliation or not. All we know for sure it that is that it will have a global negative impact.

In the statement, you mentioned headwinds, and GDP was released this morning. Of course, we’re below expectations – especially for France and Germany. Is the recovery delayed, and how long will it take to come out of stagnation? And the second question: you were mentioning before that since December long-term yields have gone up significantly, following especially the Treasury sell-off, and this besides the economic divergence between the EU and the United States. Are you worried about the yields that are going up, and how are you assessing the situation?

Is the recovery delayed? First of all, there is recovery. I think that’s the first thing that we have to keep at the front of our mind. We went from a very low 2023 to almost double the growth in 2024. Granted, it is not at potential yet, but it’s certainly a recovery. And given the job market and given the real income increase, we have good reasons to believe that consumption will pick up and will continue to support this recovery process that we expect to continue. We never talked about stagflation. The fourth quarter was stagnation of growth, but it’s one quarter. If you look at the whole year, it’s a different story. So recovery there is. Stagflation there is not. Inflation is going down, and we have recovery. Will it be delayed? We shall see. As I said, it’s a process that is ongoing and that has been quite something in the course of 2024. On the yield increase, whether you look at the short end or the long end of the curve, yes, it has increased, and it’s a global process. It has been predominantly in the United States, but it has spilled over across the world, and the euro area has not been spared of those spillovers. It’s largely attributable to spillovers from the United States – not only – partly because of energy prices, but also for other reasons. There is probably less of a downside risk expectation concerning inflation on the part of the markets, which probably explains partly this yield increase. But as I said, largely spillovers, partly euro-specific. But it doesn’t stop our monetary policy from transmitting quite materially. When I look at the decline of interest rates for corporates, the decline of interest rates to households for mortgages, it is really channelling through into the economy. And when I look, for instance, at the consumer survey and the intention to invest, there is clearly an added demand on the housing sector, for instance. So more to be seen on that front, particularly fuelled by lower interest rates.

I have another few questions on the natural rate debate. Can you give us any idea of your views on how the ECB will decide when we are there? Conceptually, will you just take the mid-range of the staff forecast, or have you already discussed how to determine that? And do you have any views on whether, as we are getting closer to the level, wherever it is, the reaction function of the ECB will have to change? Will you maybe have to act more slowly or take more time to see how monetary policy actually works?

It’s a nice question. But let’s face it: we are currently restrictive. We are not at the neutral rate. This is a debate that is entirely premature. When we get closer to that, we will operate on the basis of a staff research paper, on the basis of the analysis provided by staff, and then that will help us determine how close we are and what our monetary policy stance should be. If you’re asking me today whether we should go below the neutral rate in order to stimulate the economy, I cannot tell you that. That’s pretty obvious. We decide meeting by meeting on the basis of data, and we are not pre-committing to any particular pace. So how could I tell you if and when we arrive at this conceptual principle of the neutral rate and what we will do afterwards? This is going to depend on the data that we receive. I know staff are going to work very hard on models, but we will be looking at all sorts of information and intelligence. You know the famous reference to looking out of the window. We will also be looking out of the window.

You had a dinner guest on Tuesday evening, which if I’m not mistaken was the first time. Could you walk us through the exchange with President von der Leyen and what you talked about and how it fed into the deliberations of the Governing Council? And my second question is on the withdrawal of the Fed from the NGFS. The timing was delicate, just days prior to Donald Trump taking office. Did this exit surprise you either in substance or in timing? Did you expect it? And what does it mean for the global cooperation of central banks?

President von der Leyen honoured us with her presence at dinner on Tuesday. She was not the first one to attend what I very immodestly call the “Presidents’ dinners”. Paschal Donohoe, the President of the Eurogroup, had also attended one of our dinners, and it was a very rich experience which all Governors felt could be repeated with other guests from around Europe. So I was particularly grateful to the President that she came, despite the crazy agenda that she has. Let’s face it: this week is particularly heavy for her, and she managed to come. It gave us a chance to understand better from her exposé and her remarks what exactly the Commission was going to focus on in terms of competitiveness, in terms of simplification and in terms of keeping the goals but being flexible on the approach. And I think that she was herself – but she can speak for herself better than me – pleased with the exchange that we had because it took the form of her explaining the policies considered by the Commission in order to restore competitiveness, in order to incentivise innovation, in order to eliminate some of the red tape and so on and so forth. But it was also a chance for her to hear from the Governors what their concerns were and to check facts and policy recommendations. So it was in that respect really an interesting dinner. And there will be more of those, as I have other guests up my sleeve, which I’m not going to disclose at this point in time. You asked me a question about the withdrawal from the NGFS. The NGFS includes, I think, around 150 members around the world. We are an active member of the NGFS. We actually provide the scenarios that are used by the NGFS and most members. And we see huge value in this multilateral comparing of notes, comparing of scenarios, comparing of risks and comparing of policies. I think, in this day and age, having a multilateral setting where these issues can be debated and analysed is of great value.

I have two questions. First, you mentioned rising real incomes. How far has this process gone comparing the levels with pre-pandemic levels? And my second question is related to Bulgaria. Bulgaria is preparing to ask for an extraordinary convergence report. Do you have recommendations for easing this process? Would a potential extraordinary convergency report be focused mainly on the technical criteria for entering the Eurozone, or will it take a more comprehensive approach about policies and about legislation like the release in June?

On rising real income, it’s a fact. And in many Member States there has been a complete catch-up with pre-pandemic levels. What has been different from pre- pandemic levels is the level of savings. The level of savings has increased. It has varied over the course of time, but in net terms it has increased. And we very much hope that if confidence can be restored, particularly in view of a degree of anxiety and uncertainty about European political developments, for instance, consumers and investors will restore their previous pattern of consumption and investment. On Bulgaria, there is a convergence process that is well advanced. We are marginally involved in the process because we do not pass judgement on anything else than convergence towards inflation, and we look at the fiscal position and the sustainability. But on those fronts and from what I have seen and the discussions that I have had with the Bulgarian authorities, I’m confident that this process is going well. And the special convergence report that has been asked* by the Bulgarian authorities will, I suppose – it’s not my decision – be determined by the Commission and will proceed so that there can be a review of all the criteria – not just inflation – that Bulgaria has to satisfy. I’m only giving you a partial answer because the rest can only be given by the Commission.

*While the Bulgarian authorities may submit a request for an ad-hoc convergence assessment, they have not yet done so.