RegStream

Monetary policy in times of stubborn inflation

Isabel Schnabel Member of the Executive Board of the European Central Bank

Anniversary Dinner Porto Business School, 23 November 2023 www. ecb. europa. eu ©

Economic growth and inflation in the euro area since the start of the pandemic Rubric

Real GDP

(index: Q4 2019 = 100)

September 23 ECB staff projections Realised GDP March 2020 ECB staff projections

103

110

105

100

95

90

85

Inflation

(annual percentage changes, quarterly data)

September 2023 MPE Realised HICP October 2023 March 2020 MPE

2. 0 1. 6 1. 2 0. 8 0. 4 0. 0 -0. 4

2019 2020 2021 2022

2. 9

12

10

8

6

4

2

0

80

2019

2020

2021

2022

2023

2024

2025

-2

2019

2020

2021

2022

2023

2024

2025

Sources: Eurostat, ECB and Eurosystem.

Latest observation: Q3 2023 for realised GDP (diamond).

Sources: Eurostat, ECB and Eurosystem.

Latest observation: Q3 2023 for quarterly data, October 2023 for monthly data (diamond).

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ECB has taken determined policy action to tackle unprecedented inflation surge Rubric

ECB key interest rates

(%)

DFR

MRO

MLF

Monetary policy assets

(€ billion)

MRO LTRO TLTRO Private APP

Public APP

PEPP

6

5

4

3

2

1

0

-1 1999

2002

2005

2008

2011

2014

2017

2020

2023

Source: ECB.

Latest observation: November 2023.

6

5

4

3

2

1

0

-1

8000

7000

6000

5000

4000

3000

2000

1000

0 2007

2009

2011

2013

2015

2017

2019

2021

2023

Source: ECB.

Notes: Public APP is PSPP, Private APP is CBPP3, ABSPP and CSPP.

Latest observation: November 2023.

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Inflation has declined on the back of large base effects related to energy and food Rubric

Crude oil and natural gas prices

(oil: EUR/barrel, gas: EUR/MWh)

Brent oil spot

TTF gas spot (rhs)

HICP inflation and contributions

(annual percentage changes and percentage point contribution)

Energy Services

Food HICP

NEIG

12

10

8

6

4

2

0

175

150

125

100

75

50

25

-2 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23

Sources: Eurostat and ECB calculations.

Latest observation: October 2023.

0 Jan-21

Oct-21

Jul-22

Apr-23

Sources: Bloomberg and ECB calculations.

Latest observation: 16 November 2023.

350

300

250

200

150

100

50

0

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Disinflation process is projected to slow with inflation moving towards 2% by end-2025 Rubric

HICP inflation projections

(annual percentage changes)

September 2023 MPE September 2023 ECB staff projections October 2023

12 10 8 6 4 2 0 -2

2016201720182019202020212022202320242025

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

12

10

8

6

4

2

0

-2

HICP excluding energy and food inflation

projections

(annual percentage changes)

September 2023 ECB staff projections September 2023 MPE October 2023

12 10 8 6 4 2 0 -2

2016201720182019202020212022202320242025

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

12

10

8

6

4

2

0

-2

Source: September 2023 MPE and Eurostat.

Notes: The ranges shown around the central projections are based on past projection errors, after adjustment for outliers. The bands, from darkest to lightest, depict the 30%, 60% and 90% probabilities that the outcome will fall within the respective intervals. For more information, see Box 6 of the March 2023 ECB staff macroeconomic projections for the euro area.

Latest observation: October 2023 for monthly data (diamond).

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Labour hoarding weakens monetary transmission as labour shortages persist Rubric

Unemployment rate and employment

(lhs: thousands of persons; rhs: percentage of the labour force)

Labour as a factor limiting production

(percentage of firms)

Employment (lhs) Unemployment rate (rhs)

Construction

Services

Industry

165000

160000

155000

150000

145000

140000

135000

13. 0

12. 0

11. 0

10. 0

9. 0

8. 0

7. 0

40

35

30

25

20

15

10

5

130000

2000

2004

2008

2012

2016

2020

6. 0

Sep-23

0 1995

1999

2003

2007

2011

2015

2019

Oct-2023 2023

Source: ECB calculations based on Eurostat data.

Notes: The monthly employment data have been computed manually as the difference between labour force and unemployment.

Latest observation: September 2023.

Source: European Commission.

Latest observation: October 2023.

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Strong wage growth and falling productivity put upward pressure on unit labour costs Rubric

Labour productivity per hour

(index 2019 Q4 = 100)

Wage trackers

(annual percentage change)

Latest agreements Latest agreements including one-offs Indeed wage tracker ECB negotiated wages

7

6

5

4

3

2

1

104

103

102

101

100

99

98

97

0 22Q1

22Q2

22Q3

22Q4

23Q1

23Q2

23Q3

23Q4

Sources: Calculated based on micro data on wage agreements provided by Deutsche Bundesbank, Banco de España, the Dutch employer association (AWVN), Oesterreichische Nationalbank, Bank of Greece, Banca d ’Italia and Banque de France.

Notes: Indicator of latest wage agreements shows the wage growth implied by agreements reached in a quarter for 12 months ahead. Indeed tracker measures wage growth in online job ads, computed by the Central Bank of Ireland.

Latest observations: October 2023 for Indeed Wage Tracker; Q3 2023 for indicators of agreements and ECB negotiated wages.

latest

7

96

2015

2017

2019

2021

2023

Sources: ECB calculation based on Eurostat data.

Notes: The dashed line represents the historical average from January 2000 to December 2019.

Latest observation: 2023 Q2.

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Firms often raised prices above cost increases but are more reluctant to lower them

Rubric

Contributions to GDP deflator

(annual percentage changes and percentage change

contributions)

Unit taxes Unit labour costs

Unit profits GDP deflator

7

6

5

4

3

2

1

0

-1

-2

-3

2015

2016

2017

2018

2019

2020

2021

2022

2023

70

60

50

40

30

20

10

0

Selling price expectations

(share of firms expecting lower/higher selling prices)

Lower

Higher

70

60

50

40

30

20

10

0

70

60

50

40

30

20

10

0

2023

2022 Manufacturing

Retail

Services

2023

2022

2022

2023

Sources: Eurostat, ECB calculations.

Notes: Unit taxes refer to unit net indirect taxes defined as indirect taxes minus subsidies.

Latest observation: 2023 Q2.

Source: European Commission (including Eurostat) and ECB calculations.

Notes: Data are non-seasonally adjusted.

Latest observation: October 2023.

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Share of services and non-energy goods with very high inflation rates remains large Rubric

Weighted distribution of price changes

(%)

Services

Above 5. 0% Between 3. 0% and 5. 0% Between 2. 0% and 3. 0% Below 2. 0%

100%

80%

60%

40%

20%

Non-energy industrial goods Above 5. 0% Between 3. 0% and 5. 0% Between 2. 0% and 3. 0% Below 2. 0%

100%

80%

60%

40%

20%

0%

2019

2020

2021

2022

2023

0%

2019

2020

2021

2022

2023

Source: Eurostat, ECB calculations.

Notes: Based on 39 items for Services and 33 items for Non- energy industrial goods; the weight of items sums up the weight of items in the HICP basket in the different categories.

Latest observation: October 2023.

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Strong transmission of monetary policy to funding costs and bank lending Rubric

Composite cost of borrowing

(percentages per annum)

Bank loans to firms and households

(monthly flow in EUR bn)

Firms

Households for house purchase

Loans to firms

Loans to households

8

6

4

2

80

60

40

20

0

-20

0 1999

2003

2007

2011

2015

2019

2023

Sources: ECB (MIR) and ECB calculations.

Notes: The indicator for the total cost of bank borrowing for firms is calculated by aggregating short-term and long- term rates using a 24-month moving average of new business volumes.

Latest observation: September 2023.

-40

Jan-22

Jun-22

Nov-22

Apr-23

Sep-23

Sources: ECB (BSI).

Notes: Loans to households and firms are adjusted for sales and securitisation. Loans to firms are also adjusted for cash pooling.

Latest observation: September 2023.

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Limited pass- through to deposit rates and moderate decline in house prices so far

Rubric

Household deposit rate pass-through

and savings ratio

(lhs: percentage per annum: rhs: percentage share of nominal income)

Savings ratio

Pre- pandemic average

ECB policy rate Time deposits Overnight deposits

26

24

22

20

18

16

14

5

4

3

2

1

0

-1 Jan-22 Aug-22 Mar-23 Oct-23

12

20Q1

21Q1

22Q1

23Q1

Sources: Eurostat, ECB (MIR, FM) and ECB calculations.

Notes: Time deposits are those of maturity of up to 2 years. Pre-pandemic average of savings ratio is calculated over the period 1999 Q1-2019 Q4.

Last observations: October 2023 for the ECB policy rate, September 2023 for deposit rates, 2023 Q2 for savings ratio.

House prices

(Monthly RRE price indices; December 2019 = 100)

EA DE ES FR

IT NL PT

160

150

140

130

120

110

100

90

Sources: Europace, Eurostat, Immobiliare. it, Indomio. es, Meilleursagents. com, Statistics Netherlands.

Notes: RRE stands for Residential Real Estate. Last EA observation from Eurostat is for Q2 2023, so several countries with more timely data available are added. For IT and ES an average listing price index is reported. For all other countries the index reported is a hedonic price index based on transaction prices. Latest observation: September 2023 for DE and NL, August 2023 for ES, FR , IT and PT, Q2 2023 for EA.

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Greater share of services in value added dampens monetary policy transmission

Rubric

Sectoral shares in euro area

gross value added

(percentages)

55

50

45

Market services

Capital- intensive (rhs)

35

30

25

40

1995 1998 2001 2004 2007 2010 2013 2016 2019 2022

20

Survey: Impact of changes in financing

conditions on firms’ activity

(percentage of firms)

Negative impact No impact Positive impact Past 12 months

More impact Similar impact Less impact Next 12 months

All

IndustryServices

All

Industry Services

100%

75%

50%

25%

0%

Sources: Eurostat and ECB calculations.

Notes: The market services sector includes, among others, wholesale and retail trade, transportation, accommodation and food services, information and communication, and financial and real estate services. The capital-intensive sector includes, among others, mining, manufacturing, energy and water supply, and construction.

Sources: ECB Corporate Telephone Survey.

Notes: The chart shows the answers to the question “How do financing conditions (cost and availability of funding) since mid-2022 affect business activity over past 12 months and in the next 12 months?”.

Latest observations: October 2023.

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Energy shock threatens to leave permanent scars in the euro area Rubric

Industrial production: manufacturing sector

(index: December 2019 = 100)

Total

High energy-intensive

Low energy- intensive

120

110

100

90

80

70

60

2019

2020

2021

2022

2023

Sources: Eurostat, Trade Data Monitor and ECB staff calculations.

Notes: Data are seasonally-adjusted. Industrial production indices for individual sectors are aggregated with value-added weights. Low (high) energy- intensity sectors are defined as those with an energy intensity lower (higher) than that of the median sector. For more details, see Chiacchio, De Santis, Gunnella and Lebastard (2023).

Latest observation: September 2023.

Real business investment

(index: 2019 Q4 = 100)

Real investment

Pre- pandemic trend

120

115

110

105

100

95

90

85

80

2017

2018

2019

2020

2021

2022

2023

Source: ECB calculation based on Eurostat data.

Notes: Pre-pandemic trend estimated on the basis of quarterly data between 2013 Q1 and 2019 Q4. Real intangible investment in Ireland.

Latest observation: 2023 Q2.

the statistical volatility of

investment adjusted for

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Euro area economy could be hit by new supply- side shocks in future

Rubric

Momentum of HICP and main components (annualised 3m-on-3m percentage changes, percentage points

contributions)

Energy

Food NEIG Services HICP

10

8

6

4

2

0

-2

-4

Jan-23

Apr-23

Jul-23

Oct-23

Sources: Eurostat, ECB calculations.

Latest observation: October 2023.

Global food price effects of a one-degree

temperature rise during El Niño

(percent)

12

10

8

6

4

2

0

5

4

3

2

1

6 7 Months Sources: Haver, NOAA, Bloomberg and ECB calculations.

Notes: Price reaction shows impact of a 1°C increase in temperature during El Niño controlling for fertiliser and oil prices and global industrial activity with 68% confidence intervals.

Latest observation: May 2023 (monthly sample starting in January 1960).

10 11 12

8

9

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Longer-term inflation expectations continue to signal some upside risks Rubric

SPF: Cross-sectional distribution of longer-term inflation point forecasts

(percent)

2003-2020

2021Q1-2023Q3

2023Q4

CES: Cross-sectional distribution of inflation point forecasts (1 to 3 years)

(percent)

Inflation expectations one year ahead, median

Inflation expectations three years ahead, median

50

40

30

20

10

0

.

2 1 ≤

3

.

1

4

.

1

5

.

1

6

.

1

7

.

1

8

.

1

9

.

1

0

.

2

1

.

2

2

.

2

3

.

2

4

.

2

.

5 2 ≥

Sources: ECB SPF Latest observation: 2023Q4.

30

25

20

15

10

5

0

1 0 1 2 3 4 5 6 7 8 9 - ≤

0 1

1 1 ≥

Sources: ECB CES and ECB calculations Latest observation: September 2023.

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Portugal: Variable mortgage rates accelerate monetary policy transmission Rubric

Share of stock of loans to households repricing within one year (June 2022)

(percentages)

Lending rates on outstanding mortgages

(percentages per annum)

Euro area

Portugal

Euro area

Portugal

100

90

80

70

60

50

40

30

20

10

0

Sources: ECB (BSI) and ECB calculations.

Notes: Short-term debt includes short-term loans, long-term loans expiring within a year and long-term loans with residual time to next interest rate fixation lower than a year.

Long-term debt includes long-term loans not considered as short-term debt.

Latest observation: June 2022.

7

6

5

4

3

2

1

0 Jan-19

Mar-20

May-21

Jul-22

Sep-23

Sources: ECB (MIR) and ECB calculations.

Notes: The shaded area represents the country range.

Last observation: September 2023.

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Portugal: Real consumption growth similar to EA average despite stronger transmission Rubric

Interest payables as share of gross disposable income

(percentages)

Euro Area

Portugal

Real consumption

(y-o-y growth rate)

Euro Area

Portugal

4

3

2

1

0

2019

2020

2021

2022

2023

4

2

0

30

20

10

0

-10

-20

-30

2019

2020

2021

2022

2023

Source: Eurostat and ECB calculations.

Notes: The blue area shows interest payables as a share of gross disposable income as a range across euro area countries (excluding the Netherlands).

Latest observation is 2023 Q2 for EA and the range and 2022 for Portugal, as only annual data is available for Portugal.

Sources: Eurostat and ECB calculations.

Notes: The blue area shows the y-o-y growth rate range across all euro area countries.

Latest observation: 2023 Q2.

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Portugal: Lower deposit rate pass-through with households shifting to savings certificates

Rubric

ECB policy rate and household deposit

rate pass-through (percentages per annum)

ECB relevant policy rate Time deposits - Euro area Overnight deposits - Euro area Time deposits - Portugal Overnight deposits - Portugal

5

4

3

2

1

0

Household deposit volumes

(SA monthly flows in EUR bn)

Dep. redeemable at notice Overnight deposits

Portugal

Certificados de aforro Time deposits M3 deposits

Euro area

80

60

40

20

0

-20

-40

-60

4

3

2

1

0

-1

-2

-3

-1

Jan-22

Aug-22

Mar-23

Oct-23

Sources: ECB (MIR, FM) and ECB calculations.

Notes: Time deposits are those of maturity of up to 2 years. The shaded area represents the country range for time deposits.

Latest observation: October 2023 for the policy rate, September 2023 for deposit rates.

-80

Mar-22

Dec-22

Sep-23

-4 Mar-22

Dec-22

Sep-23

Sources: ECB (BSI), Banco de Portugal and ECB calculations.

Notes: Time deposits are those of maturity of up to 2 years. Deposits redeemable at notice are those of maturity of up to 3 months. The seasonal adjustment of the data for Portugal is not official. “Certificados de aforro“ are "deposit-like" non-tradable debt instruments issued by the Portuguese government and are not included in M3 deposits.

Latest observation: September 2023.

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Portugal: Sovereign spreads low and resilient as fiscal outlook is favourable Rubric

10-year sovereign to OIS spread

(percentages per annum)

IT

ES

GR

PT

Government debt

(% of GDP)

Portugal

Euro area

40

35

30

25

20

15

10

5

0

-5 2008 2011 2014 2017 2020 2023

2021 2022 2023

Sources: Bloomberg, Refinitiv and ECB calculations.

Latest observation: 17 November 2023.

4. 0

3. 5

3. 0

2. 5

2. 0

1. 5

1. 0

0. 5

0. 0

-0. 5

140

130

120

110

100

90

80

70

60

2008

2012

2016

2020

2024

2028

2032

Sources: European Commission, Spring 2023.

Note: European Commission’s debt outlook based on the Spring 2023 Economic Forecast and a no-fiscal-policy change assumption beyond the two-year forecast horizon.

Latest observation: 2022.

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Thank you very much for your attention!

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