PRESS CONFERENCE

Christine Lagarde, President of the ECB,
Luis de Guindos, Vice-President of the ECB

Frankfurt am Main, 12 September 2024

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.