ECB cuts interest rates! Lagarde signals further surprises to come!

so the Pres the vice president and I welcome you today to our press conference the governing Council today decided to lower the deposit facility rate the rate through which we steer the monetary policy STS 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% in 24 2.2% in 25 and 1.9% in 26 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 24 and 25 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% this year to 2.3% in 25 and 2% in 26 domestic inflation remains high as well wages are still rising at an elevated Pace however labor 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% in 24 rising to 1.3% in 25 and 1.5% in 26 this is a slight downward revision compared with the June projections mainly owing to weaker contribution from domestic demand over the next few quarters we are determined to ensure that inflation returns to our 2% 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 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-commit to a particular rate path the decisions taken today are set out in a press release available on our website as announced on March 13 2024 some changes to the operational framework for implementing monetary policy will take effect from 18th of 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 refinance finc in operations will remain unchanged at 25 basis points so I will now outline in more details how we see the economy and inflation developing and we'll then explain our assessment of Financial and monetary conditions turning to the economic activity the economy grew by 0.2% in the second quarter after 0.3% in the first quar water 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 effect of restrictive monetary policy should support consumption and investment exports should also continue contributing to the recovery AS Global demand Rises the labor market remains resilient the unemployment rate was broadly unchanged in July at 6.4% at the same time employment growth slowed to 0.2% in the second quarter from 0 3% in the first recent survey indicators point to a further mod ER ation in demand for labor 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 the potential growth and reduce price pressures in the medium term Mario dr's report on the future of European competitiveness and enrio L 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 the direction of their medium-term plans for fiscal and structural policies looking at inflation now according to eurostat's flash estimate annual inflation dropped to 2.2% in August from 2.6% in July Energy prices fell at an annual rate of 3% after an increase of 1.2% in previous month food price inflation went up slightly to 2.4% in August Goods inflation and services infl inflation moved in opposite directions Goods inflation declined to 0 4% from 0.7% in July while Services inflation Rose to 4.2% from 4% most measures of underlying inflation were broadly unchanged in July domestic inflation edged down only slightly to 4.4% from 4.5% in June with strong price pressures coming especially from wages negotiated wage growth will remain high and vol volatile over the remainder of the Year given the significant role of oneoff payments in some countries and the staggered nature of wage adjustments at the same time the overall growth in labor costs is moderating the growth in compensation per employee fell further to 4.3% in the second quarter the fourth consecutive Decline and ECB staff project it to slow markedly again next year despite weak productivity unit labor cost grew less strongly in the second quarter by 4.6% after 5.2% in the first quarter staff expect unit labor 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 labor costs the disinflation process should be supported by receding labor 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% and the market based me measures have fallen closer to that level since our July meeting let's look at our 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 effect effects of monetary policy tightening turn out stronger than expected but 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 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 weaker outlook for Global growth and reduced concerns about inflation pressures tensions in global markets over the summer led to a temper tightening of financial conditions in the riskier market segment 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% respectively credit growth gr remains sluggish amid weak demand Bank lending to firms grew at an annual rate of 0.6% in July down slightly from June and growth in loans to households edged up to 0.5% broad money as measured by M3 grew by 2.3% in July the same rate as in June to conclude 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 2% medium-term Target in a timely manner we will keep policy rates sufficiently restrictive for as long as necessary to achieve the same we will continue to follow a data dependent and meeting by- meeting approach to determining the appropriate level and duration of restrictions 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-commit 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 and we are now ready to take your questions