ECB Governing Council keeps three key ECB interest rates unchanged

Press conference by ECB President Christine Lagarde and ECB Vice-President Luis de Guindos

Frankfurt am Main, 7 March 2024

Jump to the transcript of the questions and answers

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

The Governing Council today decided to keep the three key ECB interest rates unchanged. Since our last meeting in January, inflation has declined further. In the latest ECB staff projections, inflation has been revised down, in particular for 2024 which mainly reflects a lower contribution from energy prices. Staff now project inflation to average 2.3 per cent in 2024, 2.0 per cent in 2025 and 1.9 per cent in 2026. The projections for inflation excluding energy and food have also been revised down and average 2.6 per cent for 2024, 2.1 per cent for 2025 and 2.0 per cent for 2026. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages. Financing conditions are restrictive and our past interest rate increases continue to weigh on demand, which is helping push down inflation. Staff have revised down their growth projection for 2024 to 0.6 per cent, with economic activity expected to remain subdued in the near term. Thereafter, staff expect the economy to pick up and to grow at 1.5 per cent in 2025 and 1.6 per cent in 2026, supported initially by consumption and later also by investment.

We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary.

We will continue to follow a data-dependent 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.

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 remains weak. Consumers continued to hold back on their spending, investment moderated and companies exported less, reflecting a slowdown in external demand and some losses in competitiveness. However, surveys point to a gradual recovery over the course of this year. As inflation falls and wages continue to grow, real incomes will rebound, supporting growth. In addition, the dampening impact of past interest rate increases will gradually fade and demand for euro area exports should pick up.

The unemployment rate is at its lowest since the start of the euro. Employment grew by 0.3 per cent in the final quarter of 2023, again outpacing economic activity. As a result, output per person declined further. Meanwhile, employers are posting fewer job vacancies, while fewer firms are reporting that their production is being limited by labour shortages.

Governments should continue to roll back energy-related support measures to allow the disinflation process to proceed sustainably. Fiscal and structural policies should be strengthened to make our economy more productive and competitive, expand supply capacity and gradually bring down high public debt ratios. A speedier implementation of the Next Generation EU programme and more determined efforts to remove national barriers to deeper and more integrated banking and capital markets can help increase investment in the green and digital transitions and reduce price pressures in the medium term. The EU’s revised economic governance framework should be implemented without delay.

Inflation

Inflation edged down to 2.8 per cent in January and, according to Eurostat’s flash estimate, declined further to 2.6 per cent in February. Food price inflation fell again, to 5.6 per cent in January and 4.0 per cent in February, while energy prices in both months continued to decline compared with a year ago but at a lower rate than in December. Goods price inflation also fell further, to 2.0 per cent in January and 1.6 per cent in February. Services inflation, after remaining at 4.0 per cent for three months in a row, edged lower to 3.9 per cent in February.

Most measures of underlying inflation declined further in January as the impact of past supply shocks continued to fade and tight monetary policy weighed on demand. However, domestic price pressures are still elevated, in part owing to robust wage growth and falling labour productivity. At the same time, there are signs that growth in wages is starting to moderate. In addition, profits are absorbing part of the rising labour costs, which reduces the inflationary effects.

Inflation is expected to continue this downward trend in the coming months. Further ahead, it is expected to decline to our target as labour costs moderate and the effects of past energy shocks, supply bottlenecks and the reopening of the economy after the pandemic fade. 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 risen since our January meeting and our monetary policy has kept broader financing conditions restrictive. Lending rates on business loans have broadly stabilised, while mortgage rates declined in December and January. Nevertheless, lending rates remain elevated, at 5.2 per cent for business loans and 3.9 per cent for mortgages.

Bank lending to firms had turned positive in December, growing at an annual rate of 0.5 per cent. But, in January, it edged lower, to 0.2 per cent, owing to a negative flow in the month. The growth in loans to households continued to weaken, falling to 0.3 per cent on an annual basis in January. Broad money – as measured by M3 – grew at a subdued rate of 0.1 per cent.

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. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.

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.

Questiosn and answers

The first question would be on the more abrupt revision of inflation than expected. How does that translate on the rate outlook? And my second question would be more on the discussions you’ve been having inside the Governing Council. Have you also discussed perhaps doing too much, and by that, risk that inflation is going to undershoot the target at some point in time?

Thank you very much for your question and allow me to preface my response to your question with something that we discussed this morning, which is a little bit unrelated to monetary policy, which has to do with the topic of concern to many European institutions, which is the capital markets union. As some of you will remember, the Governing Council had taken a view on the capital markets union back in 2020, when the Commission had published its action plan at the time. And given the momentum and the special efforts deployed by the euro area, deployed by the Commission, to progress the capital market union, we have decided to update significantly that statement and we have unanimously agreed on a new statement which is more specific, which sets out the imperative of moving fast and making progress. That statement will be available before close of business today. It will come after all the monetary policy documents are made available, so that we don’t mix the two of them. It was a decision that we made after a good discussion on the matter yesterday and a little bit this morning.

On inflation, first of all, I would observe that we are on this disinflationary process, and we are making progress. We came from 2.9% in December, 2.8% in January, 2.6% in February. There is a definite decline which is under way, and we are making good progress towards our inflation target. And we are more confident as a result. But we are not sufficiently confident, and we clearly need more evidence, more data. We know that this data will come in the next few months. We will know a little more in April, but we will know a lot more in June. So, this is what we have determined during our discussion this morning. And as usual, we have proceeded with a review of the three criteria, which you know is the inflation outlook which, as you will have noted in the monetary policy statement, has been slightly revised, a bit more for 2024 for headline [inflation], but slightly, both for headline and core [inflation] in the next two years, 2025 and 2026. But we feel more confident about those projections. The second element that we look at, as you know, is the underlying inflation and on that front as well we are seeing a narrowing of the range between the various measures that we use. We are also seeing a general moderation, with one exception. I’ll come back to that if you want. We have looked carefully at the strength of monetary policy transmission. Those are the three components that we are very keen to check carefully and to monitor meeting-by-meeting to see what information it delivers. And it’s clearly a positive signal, but certainly not enough of a series of signals to make us confident enough yet at this point in time.

Just to follow up since you said you will know a lot more in June. Was this the majority view in the Governing Council that you will not have enough information in April to be ready for an interest rate cut? Secondly, you’re clearly very focused on wage growth. Can you be a bit specific how much further it needs to slow down for you to be comfortable with an interest rate cut?

There was general broad agreement about the fact that we will get a lot more data and a lot more information in June. That’s a certainty. There was also a very broad agreement around the fact that we will not change our views on one single data [point]. And what we are seeing in the data at the moment is indicating certain movements that are directionally good, but it is not strong enough and durable enough, for the moment, to give us sufficient confidence. So that was a generally accepted sentiment around the room and the decision that we made was a unanimous decision, by the way. You are correct that while we continue to look at the three components of the reaction function; the inflation outlook, the underlying inflation and the strength of monetary policy, there are two components that we are particularly vigilant about. And those two components are the wages evolution as well as the profits evolution. Unit labour costs, unit profits are two items that we will be particularly attentive to and will continue to be attentive to. I mentioned that in the underlying inflation measurements there is one which is not moving in the same direction as the others. The others are generally declining and the range between the various instruments is narrowing as well. But there is one that is not declining and that is domestic inflation. Domestic inflation is largely informed by services, which itself is for most services labour-intensive, and therefore very sensitive to wage evolution. So those are the two components that we will particularly zero in and try to be laser focused on to see whether there is confirmation or not of this beginning of moderation that we are seeing on the wage front, and confirmation of what has been observed on the profits, as to whether or not profits absorb and act as a buffer for the wage increases. We will have the Q4 numbers for CPE, for compensation per employee, tomorrow. Our assessment for the moment is: [the CPE was] declining, relative to the third quarter. I think it’s a conservative assessment given the various other elements that we try to look at. We look at some backward-looking elements, but we also try to be as forward-looking as we can by really following very carefully all the new agreements that are signed and how terms and conditions will apply going forward.

Underlying inflation is one of the three criteria you look at and the only one that remains above 2% at least at the current time. It’s forecasted at 2.6% for this year. Is it a level at which you are comfortable to cut rates? And the second question; a few days ago, Mario Draghi told in a speech in Washington that the euro zone needs low capital costs to finance huge investments. Do you agree with that and what do you think about the fact that these investments in transitions may be delayed because of high rates?

I wouldn’t say that underlying inflation is the only figure that is above 2%. We tried to look at the inflation outlook, which includes of course the headline inflation, which is the one that under our strategy review we have agreed is the compass that we’re using. We’re also looking at the inflation without energy and food, otherwise called core inflation. But we don’t only look at core. We look at other measurements of underlying inflation to try to remove the noise from the signals and try to really measure each and every time what is going to be the best indicator to give us the measurements of what is to come. I wish everything was closer to our target. We’re not there yet. We are not there. Even on headline inflation, we are still projecting 2.3%, which is a revision from what we had before. But we’re still at 2.3% in 2024 and we are at 2% in 2025. Core inflation is at 2.6% in 2024 and then moving to 2.1% in 2025 and finally reaching 2% in 2026. I am not saying here that we will wait until we are at 2% and that we see 2% to take a decision. This is not what I’m saying here. But in terms of projections, both headline and core, this is what we are seeing. We are all looking forward to the two Italian reports, if I may say, because there will be a report by Enrico Letta on the single market which, if fully implemented, would certainly deliver more growth than we have at the moment. And we’re very much looking forward to the report of President Draghi on the competitiveness of Europe, which is obviously a major topic going forward. I’m sure he will be making recommendations and I will wait until we have the report to react to his proposals. But we have a mandate, we have a mission, we are determined to reaching our 2% inflation target in the medium term and we will be riveted to that.

Since our last meeting here, market expectations have gone through a serious revision. There’s been a big repricing. How is the current market pricing aligning with your own views? Are you happy with what’s been happening in the market? Is this a better reflection of where you think policy might be going? The other question is about the framework review. Could you tell us where that is standing now? Where is it going? What’s the next step in terms of timeline? And is the minimum reserve ratio part of that discussion?

I’ve tried in the past to refrain from passing judgement and commenting specifically on market expectations. I just note that it seems to be converging better, but everyone has to do their job. They do their job. We do our job. We look at the three elements, we look at our projections, we try to anticipate the impact of our monetary policy and that’s how we make decisions. Not by being determined by what markets consider. In terms of the operational framework, we have had a discussion, short of course because the main agenda yesterday and today was monetary policy. But we had a discussion yesterday morning on the operational framework to narrow areas of discussions and arrive at a platform that hopefully will be a consensus between the governors. My strong expectation is that it will be completed on the occasion of our meeting on March 13, and it will then be released, published, explained. Our communications department has some ideas as to how to best do it because it is a highly technical matter. Some of you are fully versed in the sophistication and the delicacies of the operational framework, but it warrants a good review, a good explanation. So I hope that March 13 will be the date when we will go out with the operational framework.

And on the minimum reserve ratio?

That will be part of what is being announced.

The first question is about the pace at which you’re going to be normalising policy once you do start cutting rates. Some of your colleagues on the Governing Council have said they think that it’ll be a gradual pace and there’s a benefit to doing that. What do you think gradual means in that context? Do you agree with them? The second question is a bit different. There have been various proposals put forward to utilise the frozen assets of the Russian central bank to fund in some way the Ukrainian government and their defence against the Russian aggression. What do you think about that?

On your first question, I would use the analogy of seasons and episodes. We are still in the holding season. We will move to the restrictiveness season, that will take a while. And once that season is over, we will move into a normalisation season. But if that’s the definition of gradual, so be it. But I would not commit to any kind of pace, rhythm, magnitude, because we will continue to be data dependent. We will continue to observe how the economy evolves, how the labour market moves, how wages moderate, and the impact of tightening on the financing of the economy. All these factors will be taken into account to determine future moves. On your second question, it’s a matter which is under discussion at the European Commission level. It’s a matter which is highly debated within the G7, which is a complicated issue which has legal ramifications. And while there is no doubt in anybody’s mind that Ukraine will need significant financing for its completely legitimate reparation programme, as a result of this aggressive and unjustified war by Russia against Ukraine. The financing, the sources of financing, the terms under which it is deployed by those who will support Ukraine, need to be agreed and need to respect the international legal environment in which we operate and be particularly attentive to the international monetary order and the rule of law which has been enforced for decades. They are interesting propositions that are being reviewed concerning the interest generated by the proceeds, such interest belonging actually to Euroclear, which could possibly prosper. But that’s clearly work in progress on which we have no final say. It will be for the leaders to decide what happens.

The first question is do you see any possibility that the Federal Reserve decisions could affect the ECB moves? The second one is about the commercial real estate (CRE) market. Do you see any vulnerabilities in the European CRE market considering the stress that we’re seeing in the United States?

On the mandate that we have – the mission that we have – the ECB acts independently and we will do what we have to do when we have to do it. Obviously we are mindful of the international environment in which we operate. But if the conditions are satisfied, if our diagnosis is that we have been restrictive for long enough to be sufficiently confident that we will reach our 2% target, we will make our decision. I know there are writings here and there and views about the order and the sequence and reference to previous episodes, but I really think that we have to act in accordance with our mandate. The second question, if I may, dear Vice President, I will pass on to you. It’s not that I don’t want to answer, but you’re far more qualified than me.

Vice-President Luis de Guindos: Well, good afternoon. Commercial real estate, as you perfectly know, is something that we have reiterated as one of the main risks for financial stability in the euro area. We have seen an important reduction in the volumes of transactions in commercial real estate, even before starting the tightening of monetary policy, and we have seen a decline in prices as well. What I can say with respect to commercial real estate that I think is relevant is first that the exposure of the European banks to commercial real estate is quite limited. If you look at the figures, commercial real estate credit amounts to something close to 5% of the total assets of the European banks. But the problem is not the average. The problem – and this happens quite often in economics – is the disparity around the average. There are some banks that have higher exposure and a higher concentration of commercial real estate in their portfolios and in their balance sheets.This is something that we have been monitoring very closely. So far, we have not seen any sort of widespread contagion because of the evolution of commercial real estate. We have indicated several times that the exposure of the non-banks is much larger than the exposure of the banks. So to repeat, this is something that we have been looking at very carefully and it’s one of the main risks for financial stability at present.

What would the ECB’s approach be if we see that inflation remains around this 2.5% area, in the following months. In order words, how much growth are you willing to sacrifice for a small deviation? Another question: Unit labour costs are partly being absorbed by profits. In your view, will this continue in the future? And do you think it will be enough to offset the inflationary impact of wage increases?

It’s not a question of sacrificing growth. And I would just remind you that, in our projection, while aiming at reaching our target timely and in a sustainable manner, as our projections indicate, we also project recovery during the second-half of 2024 and more importantly, in 2025 and 2026. Our projection is 1.5% in 2025 and 1.6% in 2026. What we are really seeing is a slight delay in a process that we had anticipated. We stick to our projections. Maybe you have observed that recently we have reduced our errors in our projections significantly and they certainly make us feel more confident, not sufficiently confident yet, but more confident that we will reach the target. Your second question was about the unit labour costs and you suggested that unit profits would absorb, or were absorbing all the labour costs. This is not quite the case yet and we have seen some encouraging numbers in the late part of 2023 and earlier part of 2024. This is really one of the hypotheses that we made for our projections, and our projections are predicated on that precisely. We want to see that movement confirmed by both moderation of wages, as we anticipate, but also by the squeezing of profit margins so that the unit profits absorb part of the unit labour costs.

Even if the decision was unanimous, did anyone at the Governing Council suggest cutting rates today? Is there a huge difference between cutting rates in April or doing so in June? I mean both in terms of economic pain but also given the amount of data that you will have for that decision. Is there really a difference?

So first of all, we have not discussed rate cuts at this meeting. What we have done is that we have just begun discussing the dialling back of our restrictive stance. But of course we need a lot more information coming in in the next few months to be sufficiently confident. Your second question related to the degree of information. Well, when you look at what will be published and what data we will have, in terms of activity, wages and profits, we will have a little in April, and we will have a lot more of that for our June meeting. It matters, because we are data dependent, and we are adamant that we will be data dependent.

Two questions from a US angle. Firstly, investors are betting that the Fed and ECB will both start cutting around June and at a similar pace. Given the different economic landscapes on both sides of the Atlantic, do you think it’s reasonable that they should be expecting that with inflation and growth lower in the euro zone? Secondly, the language that you’ve used today is similar to what we heard from Fed Chair Jay Powell yesterday, in terms of there being no rush to cut rates. Notwithstanding what you said about your ability to act independently, does it broadly make sense for major central banks to lower interest rates at the same time?

I think I addressed this earlier on when I said that the ECB is an independent central bank and will act independently. We will decide on the basis of the three criteria that I mentioned earlier. On the basis of the measurements that we have, the projections that we have, and the additional data that we need, we will determine what action we need to take, and that will be done independently from what my colleague at the Fed decides to do. As to whether or not investors are reasonable or not, that’s not for me to say. What I hope we can do is being attentive and monitor carefully. Once the data confirms that we are sufficiently confident to reach our 2% target in the medium term and make sure that it will be sustainable, we will act. That’s what I can tell you. By the way, I didn’t say that there was no rush. I said that we did not discuss cuts for this meeting, but we are just beginning to discuss the dialling back of our restrictive stance, provided that we have enough and certainly more information to be sufficiently confident.

I wanted to come back to what you mentioned at the beginning – the loss of competitiveness of Europe. How permanent do you think it is? How worried should Europe be about that? Then, returning to wages: can you explain a little bit your thoughts about it? You said you don’t have enough data for now, but what kind of data do you need to see to be confident enough? What kind of level do you want to see? And isn’t some kind of catch-up of purchasing power needed for the European economy?

Regarding the first question: I think that we will learn a lot more on competitiveness and how dramatic or not dramatic it is when we read the report by President Draghi. But, you can observe that Europe has lost competitiveness in a durable manner for the last couple of decades and that was accentuated certainly during the financial crisis. It is one of the reasons why the Governing Council was of unanimous and very strong support for the capital markets union to be rolled out, obstacles to be removed, supervision to be strengthened and capital to be kept and made to work at home, in Europe, rather than elsewhere. It’s not the response, but it’s certainly one of the responses that matters to us because it is conducive to the transmission of monetary policy in a slightly different way. Regarding your second question, when we look at the underlying inflation and the measurement of underlying inflation, there is one obvious outlier in the measurements – and that is domestic inflation, and that is services. So you have to get under the skin of that and determine what it is behind it and what drives it up: clearly it is wages. And because of this determination to avoid what I’ve called the tit-for-tat on previous occasions, we are also very attentive to profits. So it’s a combination of the two. I’m not suggesting that wages should decline or that wage growth should be dampened. That is not what I’m saying. I’m saying that it’s a major component of services and domestic inflation. Services is moving just a tiny bit – it was at 4% for the last three months and it’s moved to 3.9%. Domestic inflation is slightly up. So, we have to be especially attentive to wages. And as I’m sure many of you know, a lot of the indicators that we have and a lot of the data that we receive are a bit outdated. We will get the Q4 number tomorrow, which is more than two months after the end of the quarter. So we have to look at other indicators as well. We have our wage tracker, which includes all the agreements that are negotiated and signed. There is about a third of employees covered by that wage tracker whose contracts have already ended or will end at the latest in March. So we need to have that as well. We look at the Indeed tracker, as everybody does as well, and all these elements are showing us that there is an element of moderation. So growth is moderating. It’s not going up as much as it did in late 2022 and in the course of 2023. The growth of it is moderating. That’s what we will be looking at very, very carefully. The fourth element that we also pay attention to is the corporate telephone survey and the SMA, to hear from corporate employers what the labour shortage is and how much hoarding they have, to try to anticipate in a labour market that is still very tight, where wages are going to go.

For a better understanding regarding wage growth and inflation: Even if wages continue to increase, the declining trend in underlying inflation may continue. It’s just a possibility, but in this case which would you consider more important when it comes to deciding when to cut interest rates? The declining trend or wage growth rate?

We will be looking at all of that, because we continue to look at the three key components: the inflation outlook, which tells us what we should expect on the basis of the projections that are prepared by staff. That indicates clearly that we are in this disinflationary process – that inflation is declining. But we also look at the underlying inflation and what feeds some of this underlying inflation, including wages in particular. We look at that because we want to be stable on three accounts: inflation outlook, underlying inflation and strength of transmission. Regarding the latter, I think we’re seeing a good and solid transmission to the financing sector and then further down the road to the economy.

Source – ECB