PRESS CONFERENCE

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

Frankfurt am Main, 11 April 2024

Good afternoon, the Vice-President and I welcome you to our press conference.

The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed our previous assessment of the medium-term inflation outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits. Financing conditions remain restrictive and our past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We consider that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. Our future decisions will ensure that our policy rates will stay sufficiently restrictive for as long as necessary. If our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, we will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and 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 remained weak in the first quarter. While spending on services is resilient, manufacturing firms are facing weak demand and production is still subdued, especially in energy-intensive sectors. Surveys point to a gradual recovery over the course of this year, led by services. This recovery is expected to be supported by rising real incomes, resulting from lower inflation, increased wages and improved terms of trade. In addition, the growth of euro area exports should pick up over the coming quarters, as the global economy recovers and spending shifts further towards tradables. Finally, monetary policy should exert less of a drag on demand over time.

The unemployment rate is at its lowest level since the start of the euro. At the same time, the tightness in the labour market continues to gradually decline, with employers posting fewer job vacancies.

Governments should continue to roll back energy-related support measures so that disinflation can proceed sustainably. Implementing the EU’s revised economic governance framework fully and without delay will help governments bring down budget deficits and debt ratios on a sustained basis. National fiscal and structural policies should be aimed at making the economy more productive and competitive, which would help to reduce price pressures in the medium term. At the European level, an effective and speedy implementation of the Next Generation EU programme and a strengthening of the Single Market would help foster innovation and increase investment in the green and digital transitions. More determined and concrete efforts to complete the banking union and the capital markets union would help mobilise the massive private investment necessary to achieve this, as the Governing Council stressed in its statement of 7 March 2024.

Inflation

Inflation has continued to decline, from an annual rate of 2.6 per cent in February to 2.4 per cent in March, according to Eurostat’s flash estimate. Food price inflation dropped to 2.7 per cent in March, from 3.9 per cent in February, while energy price inflation stood at -1.8 per cent in March, after -3.7 per cent in the previous month. Goods price inflation fell again in March, to 1.1 per cent, from 1.6 per cent in February. However, services price inflation remained high in March, at 4.0 per cent.

Most measures of underlying inflation fell further in February, confirming the picture of gradually diminishing price pressures. While domestic inflation remains high, wages and unit profits grew less strongly than anticipated in the last quarter of 2023, but unit labour costs remained high, in part reflecting weak productivity growth. More recent indicators point to further moderation in wage growth.

Inflation is expected to fluctuate around current levels in the coming months and to then decline to our target next year, owing to weaker growth in labour costs, the unfolding effects of our restrictive monetary policy, and the fading impact of the energy crisis and the pandemic. Measures of longer-term inflation expectations remain broadly stable, with most standing around 2 per cent.

Risk assessment

The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy or a further slowdown in global trade would also 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 be higher if inflation comes down more quickly than expected and rising real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected.

Upside risks to inflation include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and disrupt global trade. Inflation could also turn out higher than anticipated if wages increase by more than expected or profit margins prove more resilient. 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 been broadly stable since our March meeting and wider financing conditions remain restrictive. The average interest rate on business loans edged down to 5.1 per cent in February, from 5.2 per cent in January. Mortgage rates were 3.8 per cent in February, down from 3.9 per cent in January.

Still elevated borrowing rates and associated cutbacks in investment plans led firms to further reduce their demand for loans in the first quarter of 2024, as reported in our latest bank lending survey. Credit standards for loans remained tight, with a further slight tightening for lending to firms and a moderate easing for mortgages.

Against this background, credit dynamics remain weak. Bank lending to firms grew marginally faster in February, at an annual rate of 0.4 per cent, up from 0.2 per cent in January. Growth in loans to households remained unchanged in February, at 0.3 per cent on an annual basis. Broad money – as measured by M3 – grew at a subdued rate of 0.4 per cent in February.

Conclusion

The Governing Council today decided to keep the three key ECB interest rates unchanged. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We consider that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. Our future decisions will ensure that our policy rates will stay sufficiently restrictive for as long as necessary. If our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, we will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and 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 heard you loud and clear on confidence needing to increase for restriction to be removed and I also heard you saying that you are not pre-committed to a specific policy path. I do want to ask you whether you believe that the levels of confidence that you talk about can be reached by the time you next gather to set policy in June. And as a side note to that, I would be interested in knowing whether there were some colleagues around the table today who thought that the time might already have come today.
The second question is – and I know that you are going to say we set policy for the eurozone and I appreciate that – but I'm wondering whether the surprisingly hot inflation data out of the US and the reactions it has triggered over the past 24 hours or so have in any way changed the way you think about the ECB's policy path going forward?

Well, you are asking the first question, but you seem to be covering quite a bit of ground that maybe others wanted to cover as well. So I'll try to respond briefly to give others a chance as well to ask similar questions. So you heard me loud and clear, indicating that new sentence which is prominent in our monetary policy statement – and I'll read it again – that if our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. It's an important sentence because it really describes the mechanics and it better clarifies our reaction function and the process through which we are engaging. I have said previously that in April we get some information and some data, and we looked at all that, but in June we know that we will get a lot more data and a lot more information and we will also have new projections, which will incorporate and be informed by all that will be published before the projection is completed. So we are data dependent. We will be looking at all this information, all this data and the projection results that will be produced by the entire Eurosystem, not just the ECB. Then we will determine whether all of that confirms our hope that inflation returns to target in a sustained manner, and if as a result, our confidence is sufficiently reinforced. That is really the mechanics that we will adopt, that we have resolved to adopt and that we will follow in the coming meetings. Now, you asked me whether everybody was exactly on the same page. Truth be told, a few members felt sufficiently confident on the basis of the limited data that we received in April and agreed to rally to the consensus of a very large majority of the governors, who were comfortable with the need to reinforce confidence when receiving a lot more data in June. Your third question: you asked whether the US CPI number received yesterday had any bearing on the subsequent market development. I have said in the past that we are data dependent, we are not Fed dependent. Those numbers were not from the Fed, they were from CPI, and obviously anything that happens matters to us and will in due course be embedded in the projection that will be prepared and released in June. The United States is a very large market, a very sizeable economy, as well as a major financial centre, so all that finds its way into our projections. Thank you.

I have a question referring to the Fed as well, because clearly if the Fed doesn't cut, we'll probably see that in our exchange rate of the euro to the dollar. How much is it a concern to you that the euro exchange rate could actually fall to parity or below, and what does it mean for inflation? And then did you discuss shrinking the balance sheet a little bit faster than we are and than is currently planned, because clearly it's also a policy tool?

First of all I would not speculate what other central banks are or are not going to do. I think that, as I just responded to the previous questions, consequences in terms of impact on price stability, impact on inflation – whether it is imported inflation or otherwise – all that of course needs to be taken into account and is monitored very carefully and finds its way into our projections. So all of that will be included, embedded, monitored and taken into account in our projections. But we don't target exchange rates, and we don’t comment on exchange rates, and I'm not going to go any further than that. I would simply mention that there are multiple channels through which influence can be exercised, it’s not just through exchange rates. I think there are other channels. The size of our balance sheet has quite significantly reduced already and I'm sure you have followed that very carefully. The entire, very large TLTRO repayment that was coming due in March has been entirely repayed of course and an additional amount over EUR 30 billion has also been added to the repayment. In addition to that, given the APP gradual runoff, we also reduce our balance sheet by an average of about EUR 30 billion per month. That process is ongoing and will continue to happen as anticipated, as predicted and as determined by the maturity of those bonds that come to runoff, and then we will move to the reduction of the PEPP reinvestment, from the 1^st of July until the end of December. That's the plan, but there is no further discussion on that.

Inflation was on the way up in 2021-2022 and a global phenomenon or so it turned out, even though initially the ECB was not expecting it to spread to the eurozone so much -- the ECB projections did not expect inflation to be as high in the eurozone as it was in the US. What makes you think that this time around it will be different and the eurozone can diverge from the US, where inflation rates are refusing to fall further? And is your confidence regarding the conditions being met in June lower than it was a month ago as you were speaking at the ECB Watchers, or is it intact?

Thank you for picking up on the Watchers speech – I think the one you are referring to is the one in which I tried to describe as accurately as possible the sequences that we went through: the hiking cycle, the holding cycle and the prospect of the dialing down cycle. I think that most, if not all that I have said in that speech still holds to this day. And I described, I think in very specific terms, what the confidence level should be and on what basis we're going to nurture that confidence and reinforce it over the course of time in that process. So I'm not going to comment on whether I'm more or less confident – I think that what we are saying in the monetary policy statement (MPS) today is that if -- and I'm not going to bore you with repeating it – but if the updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase our confidence that inflation is sustainably at 2% as we anticipate, then it would be appropriate. That very much stands and is completely the continuation of the Watchers speech that I gave about 20 days ago. You asked me about the distinction that we should or should not draw between euro area inflation and US inflation, and why would we not be entirely US inflation dependent in a way, or US CPI dependent, and should we take our cue. We are operating in the euro area with the euro area economy for the benefit of the Europeans. Our objective is price stability, and we have to determine our monetary policy decisions on the basis of the data that are produced by the euro area, on the basis of the global environment – and that includes obviously the United States, but it also includes China, which matters, it also includes Japan, which matters, and a lot of emerging market economies that also have a bearing – but we focus predominantly on the territory for which we have responsibility for monetary policy. As you know, and as I'm sure all of you in the room know, the nature of inflation in the euro area was different from the nature of inflation in the United States. Notably, the drivers of it were different, the fiscal response was different, the consumption by US consumers is of a different nature, investments were different, so I don't think that we can draw conclusions based on an assumption that the two inflations are the same. They are not the same. The two economies are not the same. The political regimes are not the same. The fiscal policies are different. As a result of that, we have to focus on what we have jurisdiction for, which is the euro area, taking into account what happens in the rest of the world, but not assuming that what happens in the euro area will be the mirror of what happens in the United States. We are looking at two different things.

First, to return to the theme of transatlantic divergence: if this divergence on monetary policy that is expected materialises, does that mean that the ECB is likely to have to ease policy more because of a spillover from tighter financial conditions from the US, or does it mean that you are likely to do less because of foreign exchange markets potentially putting upward pressure on inflation in the euro area? Second question is on energy markets: we've seen an increase of roughly 10% in oil prices in recent weeks. How big a concern for you is that and and could that derail the potential rate cut in June?

In many ways you've answered the first question or you at least gave me the elements of my answer to your questions. We are data dependent. We will operate meeting by meeting, and we will take into account all the data that actually matter and how they unfold and develop and affect our economy. As a result of that I cannot pre-commit to any route, to easing more or easing less, unless and until we have the data and we can analyse the data. So that will take its course as the events unfold. As I said, I'm not going to speculate on the monetary policy stance and decisions of another central bank.
On the energy market: there is one particular segment in the monetary policy statement that I wouldn't want to let go unnoticed because I think it's important, particularly in relation to energy prices, and that's the portion that relates to inflation. I'll read it again for you: inflation is expected to fluctuate around current levels in the coming months and to then decline to our target next year, owing to weaker growth in labour costs, the unfolding effect of our restrictive monetary policy, and the fading impact of the energy crisis and the pandemic. A lot of those fluctuations that we refer to in that particular paragraph will actually be associated with the very low energy cost that we had in two episodes over the course of 2023. Obviously the price of energy as we see it unfolding in the weeks and months to come will have a bearing related to that base to which prices are compared. So declines in inflation, which we have observed so far, are not going to be linear, and we will have fluctuations around the current level, based on our projections, until it declines to our target in mid-2025. And energy prices obviously will matter in that respect.

I have one question about the ECB not pre-committing to a particular rate path. Could we still count on a path of seasons, for example going from a restrictive season to what you said in the past could be the gradual normalisation process? And my second question is on TPI, just because maybe there are starting to be some small tensions in the markets as several countries may qualify for excessive deficit procedures. What is the impact of this event, if any, on Transmission Protection Instrument eligibility, as the first criterion of this eligibility does mention excessive deficit procedures?

The ECB is a bank of all seasons, and I don’t think that we can be tied to any particular season. We will be data-dependent, and if the data continue to move in the direction of the disinflationary path that we see, then progress will be continued as well in the path that we adopt. But this is going to be data-dependent, and that is the reason why we state very clearly in the monetary policy statement that we are not pre-committing to a particular rate path. The direction is rather clear, but there is no pre-commitment to any particular path and it will all depend on the data that come about. On your TPI question, there is a very clear press release that we have posted and that stands, which I'm not going to comment upon yet again. But the excessive deficit procedure is one of the four components that we assess when we determine eligibility, and it’s an alternative condition that is indicated in that particular segment, which will be taken into account by the Governing Council. So, I think you have the answer right there.

I have one question on budgetary policies. As you know, Germany is already pursuing a restrictive budgetary policy, as Italy and for sure France will also have to, given their public deficits are larger than expected. Would this situation of restrictive policy offer a reason for the ECB to maybe accelerate future rate cuts?

On fiscal affairs, I’m going to limit myself to the comments that we included in the monetary policy statement, where we indicate that governments should continue to roll back energy-related support measures so that disinflation can proceed sustainably. Of course, we then say that implementing the EU’s revised economic governance framework fully and without delay will help governments bring down budget deficits and debt ratios on a sustained basis. We had the privilege of Valdis Dombrovskis being with us during the Governing Council meeting this morning, and I think all governors were very pleased to hear him confirm that the revised economic governance framework will be put to a vote to the European Parliament before the end of their session, which I think has another two weeks to go. So, this is good news to the extent that there will be a framework within which governments are expected to operate and which will be guiding principles and helpful from our monetary policy standpoint.

Firstly, services inflation is still very sticky. It has flatlined for the last five months, and the underlying momentum is now accelerating. Would you say that the ECB could theoretically still go ahead with a cut in June if services inflation sticks at around 4%? Secondly, can you give us a bit of a colour of the discussion within the Governing Council around the balance of risk surrounding inflation? Some of your colleagues have suggested that the balance of risk is now more balanced. Where do you stand?

On your first question, you are right, and I think we point out very clearly in the monetary policy statement that services inflation is still holding at high levels. It has been at 4% for the last five months. Domestic inflation, which comprises a lot of services as well, is at 4.5% and has been there for the last three months, if I recall. And this is a segment, and those are numbers and indicators, that we’re going to monitor very carefully and that we will look at very carefully. The momentum is also something that we will be very attentive to. But we’re not going to wait until everything goes back to 2% to make the decisions that will be necessary in order to make sure that inflation returns to 2% sustainably, at target, in a timely manner. It’s inevitable that some items will be slightly higher. We know that, for instance, if you look at the disaggregation of items, goods have gone down from 1.6% in February to 1.1%. So, it’s inevitable that some items and some segments will be at higher levels, and we will look at all of them to make our determination and to decide whether on the basis of that assessment we are confident enough. That’s the first point. On the balance of risk, I know one or two governors are keen on this balance of risk concerning inflation, but we’ve always tried to stay away from that in relation to inflation. Historically, we have determined whether it was to the upside, to the downside or broadly balanced in relation to activity, not in relation to inflation. And what we prefer to do, as a matter of principle, is identify those components that will bring an upside to the risk and those that will bring a downside to the risk. That’s what we have done repeatedly in the monetary policy statement. We do that yet again, and when you look at the level of uncertainty around, it’s probably the right approach to do so in relation to inflation.

My first question is a follow-up on oil prices. How much of an upward concern is that when it comes to inflation going forward? And my second question is on the bank lending survey that you mentioned. What is your main takeaway from that? Is it that there is less demand by companies, or is it more that mortgages and consumer credit have picked up a bit?

On oil prices, they have increased, as was said by one of your colleagues, by roughly 10% in recent weeks, and this is obviously an item which matters a lot. We have learned from the recent shocks that energy costs play a significant role, and we are very attentive to those evolutions. We are largely informing our assessment on the basis of futures. So we look at how futures evolve as well. It’s not just the price of the barrel of Brent that we look at. We also try to anticipate as much as possible. It’s not perfect, but we try to use futures as an indicator of where the markets are seeing prices of oil for the future. On your second question, the bank lending survey is always informative, but it’s a survey. It indicates what the banks assess, assume and expect from their customers – both corporate customers and households, or people. Predominantly mortgages and a bit on consumption, but predominantly mortgages. So we have that. And we also have the hard data, which is interest rates that are offered to those customers, and the volume of loans on an annual basis. So, if you only look at the bank lending survey, what you see is the anticipation by banks that demand will be slightly lower on the corporate side while it will be slightly higher on the household side. If you look at volume, there is a slight – not a major – uptick in the volume of loans to corporates and a slight – stable compared with the last month – uptick in the volume of loans offered to households. And as a final point, on both corporate loans and loans to households we have a slight decline in the interest rate that is offered to borrowers. So, you can deduct from that that the financial sector is expecting that financing costs are likely to be smaller in the future. It’s the beginning. In many of those numbers and data indicators that we have, we see positive developments, but it’s the beginning of developments. As I said earlier, we want to reinforce that confidence that things are going in the right direction, both in terms of growth but more importantly in terms of inflation decline.

I would like to know what fluctuations on the current inflation number could be tolerated if they come from supply shocks and not from demand maybe going again above 3%. As you have just mentioned, the last inflation spike started as a supply shock. Secondly, public deficit spreads are as tight as I can remember. Are you glad that you could deliver your restrictive monetary policy without creating big tensions, or do you fear that this will incentivise deficits?

On your first question, we know that there will be fluctuation. That’s the reason why we put it in the monetary policy statement. We know that there’s not going to be a linear decline of inflation over the course of the next months or quarter. But what our projections are telling us is that we will have those bumps on the road, if you will, but we will reach the target in mid-2025, so a return to 2% in mid-2025. Between now and 2025, there will be ups and downs. And, as I said, a lot of that is related to the base effects that result from the two significant changes in energy prices in the course of 2023. How much can we tolerate? I think what is really important is the data. It’s the overall data. It’s the projection. We have embedded in our projection of last March those bumps on the road. They are in there. They are in the baseline. What we need to see is how far away from those bumps embedded in the baseline we are likely to go if we are facing supply shocks, as you suggested. But bumps will be there. It will not be linear. Bumps are embedded in the projection of March. We will take stock of that in June as well and update our projections at that point in time. On your second question, without being triumphant and without celebrating anything yet, what we are observing is a decline in inflation and a disinflationary process that is in progress and that is comforting us that the monetary policy that we have adopted so far has contributed significantly to this. And we will continue to operate on the basis of the three criteria that I have mentioned several times, which are in the monetary policy statement: being particularly attentive to wages and the evolution of wages, which constitute a large contributor to services; paying close attention to profits, to make sure that unit profits actually absorb as much as possible of the wage increases; and continuing to be very attentive to productivity, which is also something that we expect will improve in the course of 2024.