ECB Cuts Rates, Christine Lagarde Holds Press Conference

welcome [Music] sorry [Music] [Music] [Applause] [Music] [Music] [Music] good afternoon and Welcome to our press conference we are here with President lagard and Vice President D gindos my name is wolfang prel we're also joined by journalists uh via remote connection uh so when uh you take the floor I would ask you to turn on your cameras and your microphones and with that I would like to hand over to president lagard Lagarde opening statement president lagard please thank you very much good afternoon 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 ECB cuts rates monetary policy stance by 25 basis points based on our updated assessment of the inflation out out look 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 6 domestic inflation remains high as 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 refinancing 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 quarter fallowing 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 moderation 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'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 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 inflation 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 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 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 projected to slow marketly again next year despite weak productivity unit labor costs 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 measures have fallen closer to that level since our July meeting let's look at our risk risks to economic growth 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 tension 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 Poli 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 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 about inflation pressures tensions in global markets over the summer led to a temporary 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 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 this aim 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 prec 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 and we are now ready to take your questions thank you president lagard and the first question goes to ANB of cmbc Q&A begins please president L thank you very much um I have a question of course on the decision to cut by 25 basis points versus 50 so why did you go for 25 and my second question is uh looking into the future given that the FED also is going to start to cut um the macroeconomic picture is gloomier than before inflation is coming back so what is the market right to anticipate um that you cut another 50 by the end of the year thank you thank you so much and good afternoon and it's nice to see you all after the break first of all um so on 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 criterias so when you look at the incoming information it confirms our previous projections and it conforts us in our confidence that we are heading towards our Target in a timely manner so during the course of 25 in particular inflation will decline towards uh 2% Target and we thought that given that 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 it's the deposit facility rate uh 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 uh monetary policy and you know the on the inflation Outlook when we receive the projections of our staff for September it's virtually unch changed relative to June for the inflation Outlook and it continues to see a return to 2% before the end of 25 and this is by the way the five consecutive projection exercise uh pointing to that 2% at the end of 25 so 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 out look the underlying inflation on the other hand we look at the various indicators that we have uh from domestic to pcci 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 uh June and July and it is not satisfactory it is resistant it is persistent this is the reason why we have have to be resilient uh in our approach and very uh attentive to the various um components of um core inflation as measured by those various indicators the third prism is the policy transmission and on that front we all observed that the financing conditions are continue to be restrictive and the footprint of our monetary policy in the real economy has been visible so on the basis of that uh 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 drink to the Future well future I I'm tempted to quote you know Spanish 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 so we shall be data dependent we shall decide meeting by meeting and uh our path of which the direction is pretty obvious a declining path is not predetermined neither in terms of sequence nor in terms of uh 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 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 third in the fourth quarter so the last three months of 24 but September is going to deliver a low reading but we not just looking at one indicator we're looking at a whole range of data that we receive thank you Madame lagard and the next question goes to Franchesco can us Franchesco please thank you very much good afternoon everybody um so um the October meeting is a short five weeks away so to use your own words from from March do you think you will know a lot more or just a little more come October 17th second question is about something else is about something that ECB has been championing for years and that is crossb consolidation between Banks it seems it's finally happening with unicredit building up a stake in Commerce Bank so does the ECB welcome this development thank you very much for your two questions um you know on your first questions um we can all count it is six weeks before October 17th which is a relatively short period of time compared to 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 on the other matter that you referred to um typically we do not comment on uh individual institutions and uh as as you know well we have a clear procedure which involves our supervision Authority the SSM which at certain thresholds of [Music] um Equity ownership or transfer of of of shares if you will has to be consulted has to authorize and of course I'm confident that the authorities of these institutions concerned namely unicredit and Commerce Bank will be perfectly aware of their regulatory requirements and will comply with such requirements the SSM will do what it has to do uh in full Independence and uh clearly crossborder mergers have been hoped for by many authorities and it will be uh very interesting to see that process unfold in the weeks to come thank you and the next question goes to mark shers of Bloomberg Mark please yes thank you um the first one um you said again that the rates needs to be sufficiently restrictive for some time um how many times can the ECB cut interest rates um before they are no longer sufficiently restrictive so basic 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 thank you I'm going to thank you for your two questions I'm going to spend a bit more time on your second question because on the first one you know how long are you are we going to be sufficiently restrictive until we have been sufficiently restrictive because what 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 comes in to decide for how long we have to continue uh cutting rates and at what point we have been sufficiently restrictive so I'm not going to give you any idea as to where uh our star is because this is an unobservable concept anyway and we will as we get closer to it will know certainly better U as as you probably know staff has produced a very good uh paper on our star which indicates that it's probably a a tat higher than where it used to be but you know I'm not endorsing this I think as I said as we get closer to it we will know better whether uh we are there and there are multiple factors that are going to impact on that now your second question uh is this 25 basis point Cuts going to be a boost uh for our economy given that so much is structural so I know I'm I'm preaching the converted here but obviously there is a lag between the time when we make a decision and the impact is actually felt and can be observed in the economy what we are 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 um 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 uh 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 do refer to structural causes gives me a chance to actually um command the drag gear report you know it's we haven't had time to dissect everything not neither has anyone for that matter because it it's sufficiently substantive and and material enough to require more time and and and special attention but it's a formidable report in that it it pauses a diagnosis which is severe but which is just in our view and it also points to structural reforms practical proposals to achieve such structural reforms that could be extremely helpful for Europe to be stronger but also for us as 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 Market 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 underly uh this work that we do thank you Madame lagard and the next question goes to O Kul um of b o please thank you for my question Madame leard are you worried about the risk of below Target inflation uh in France in estimates that uh inflation will be 1.6% in December and and uh we can add that oil prices are at the lowest in covid so is it a risk and second question about the Mario Dr report uh Can it have an impact on monetary policies on the ecb's mandates thank you as you will appreciate I'm not going to um give you an answer that is country specific because we work on on a Euro area basis um but obviously it's a risk that we have to be attentive to which is why we are targeting uh that 2% sustainably um has to be asymmetric in the medium term as we have uh anticipated in our in our strategy review which remains completely valid uh you mentioned two things uh you mentioned one one thing in particular you mentioned energy well energy has been a 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 well this is an exogenous um matter and this is one you know that can move again and that we have to be prepared for the second question you ask is um and I think I have partially responded to your question um some of the prop proposals uh in the dragy report as well as in the Lea report by the way because the single achieving the single market and improving the competitiveness in in in our view can be very complimentary but some of those proposals touch directly on on what we are specifically concerned about and the Capital Market Union is one in particular on which the governing Council has had a a strong View and issued a special um opinion upon in the same vein uh the financing on of innovation the increase of productivity the competitiveness in relation to its external position all of that actually matters when it comes to the work that we have to do I didn't see in Mario dr's report any uh suggestion that the Mandate of the ECB should be uh 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 uh hopefully we can uh not hopefully but we will deliver on that on that mandate and whatever is uh suggested by Mario dragi has a lot more to do with structural reforms um and I very much hope that the executive authorities in charge will actually take it to heart and will see a path towards those structural reforms thank you uh turning to uh the remote participants I'd like to give the floor to Martin Arnold of the financial times Martin please so Martin is still with us today ah byway hello president nard uh two questions from me if I may firstly uh I'd like to ask about Services inflation which the latest reading showed was went up again uh how much concern does that give you uh and what are what do you see as the risks going forward uh on that as you've raised your forecast slightly for core inflation and the uh second question if I may is is back on the dragy report uh does the ECB intend to adjust monetary policy in any way uh to facilitate implementation of uh dr's proposals thank you very much well thank you so much uh for your for your two questions and thank you for um pointing to this uh Services inflation because that is clearly uh the the the component of uh prices um that requires very attentive uh understanding monitoring and I'll come to that in a second but suffice to say that it went up um from 4.2 to 4.4 so whereas so many other components are on a declining path uh that particular segment is is uh increasing and we've tried to decompose what is behind it and it's a combination of uh holiday packages um insurance and I'm trying to remember what is the third one um I'll come back in in in I'm sure it will come back but it's it's predominantly these two we are looking attentively to the the the the the Nexus of three elements number one wages number two profits number three productivity and services is particularly sensitive to uh wage increases so our expect expectations is that Services uh inflation will decline over the course of 25 why because what staff had anticipated which is moderation of wage wages growth buffer buffering of uh wages cost by slightly declining profit and increase of productivity is actually uh being demonstrated by numbers by observations if you look at wages whether you look at CP compensation per employee whether you look at negotiated wages whether you look at uh unit labor cost all of that is going down wage tracker same thing and our expectations is that it will continue to go down in the course of 25 we will on negotiated wages we will still have relatively High numbers and we know that some are in the making at the moment uh the auto workers um unions the E Metal uh request and and in various other countries but uh with some erogen erogeneity U will continue to move wages um higher in the first half of 25 but then it's definitely on a decline path it is already on a the growth is on a decline PA declining path but it will pick up again in the latter part of 24 very early in 25 and then it will continue to uh to decline and the numbers that we have for growth uh in wages I will share with you I've got my unit uh unit profit growth so I'll I'll I'll I'll give you the number later if you're interested but it is definitely declining that's on the wages on on the uh on profit we are now observing from high numbers that we had at the uh end of 20 up until the end of 23 we are seeing declining numbers on on on profits and as a result of that you can obviously deduct that profits are actually buffering and absorbing some of these labor cost increases on productivity it is also on a declining path uh moderate and not as uh as sorry it's on an increasing path um as 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 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 you know cyclicality uh will lead us to having Services uh prices uh less than where they are at the moment but it's obviously uh a sector that is um as I said which is resistant and on which we have to be uh very attentive you had a second question if I remember and I'm trying to [Music] um oh yeah you know Mario dr's report includes so many important structural reforms that are going to be the responsibility of governments uh that will require the leadership of the commission and the leadership of those leaders in Europe who are determined to strengthen uh Europe to give it more sovereignty to give it uh more capacity uh in the current geopolitical circumstances that I'm I'm really uh 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 thank you Madame lagard and staying with the remote participants I'd like to give the floor to Sylvia Batson of the Italian TV channel class CNBC Sylvia please thank you very much wolf Kung so good afternoon President and Vice President I would have two questions if I may the first one is were you expecting such a Slowdown in German economy and how does it factor in in your projections and balancing of risks and the second one I would like to go back on unicredit Commerce Bank so in compliance with all the credential requirements and buffer uh do you believe that the emergence of a pan European Bank could be a positive for the industry as a whole and EUR Zone thank you very much you know our staff provides uh projections uh goes into real in-depth analysis of the situation of every country and wees the feedback of the national Central Bank so they don't provide uh projections or they don't provide analysis in in the vacuum of um the uh the wonderful main building and Euro Tower of of the ECB we do reach out we do work together on a eurosystem basis and the uh the Slowdown of the German economy was certainly anticipated uh by the um by you know the the bundes bank certainly the ECB as well and and shared on a on a eurosystem basis so it's embedded and included in the projection that we have and we analyed that very carefully with govern with members of the governing Council in the last uh couple of days because there is clearly heterogeneity uh amongst uh various countries when you look at countries um separately as they come together to form the system you see for instance that at the moment Spain or the Netherlands are are are are you know delivering strong um uh GDP numbers while at the other end Germany is on on the on the other side your other question about paneuropean Banks I think there are uh quite a few paneuropean Banks what we are what you're talking about here is more a crossborder 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 uh crossb mergers to result from you know banking Union when it is achieved so thank you and the next question goes to uh Christian Zen be of Frank for Alon chrisan please yes thank you very much uh you emphasized that one part of the decision uh with the deposit rate was Anonymous where the other parts of the decisions that weren't Anonymous uh what part of the decision you know we we had extensive discussions on um all the data that we received all the analysis uh that was produced by by staff and you know we we we tested uh the rational behind the the current recovery which is moderate and the pickup in recovery that we expect uh in 205 and 26 and I think the U we were convinced that while consumption is low and has actually weakened it should economically result from the combination of higher net income fading monetary uh 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 we we discussed and you know some tend to be a bit more pessimistic some are more optimistic but we really discussed in depth the rational behind uh those uh those U Outlook uh numbers that we have for 24 for 25 for 26 and the reason why we revised by 0 1% 0 1% only uh is really a combination of reduced uh 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 uh activity because consumption has been lower than we had anticipated but as I said we are going to assess each and every time along the way all the data that come in and and uh see that we continue to reach our Target in a timely manner thank you and the last question today goes to Andres stum of expansion Andres please thank you Madame lard I have two questions uh I have one about the projections uh on the one hand we have no changes in the inflation side but on the other hand we have our Revision in growth Outlook caused by a weaker internal demand which is the main contributor to to inflation how does this add up and the the the other question is I see I saw you welcome Mr escriba the new governor of Bango spa and I was wondering if you could tell us your first impressions and what do you expect from his contribution to the governing Council thank you thank you very much for your two questions um so you are correct that our um 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 one% well we have revised 24 25 we have not revised 2 26 and that is caused by what by the fact that energy prices have significantly impacted downward uh and have benefited to 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 uh Services now we have r ized downwards uh the U the outlook for growth um because the consumption that we had anticipated for for now essentially because net income has has begun to uh to increase inflation has gone down significantly and we were expecting consumption to pick up has not picked up um and I think that we will be looking add that carefully when we uh produce our next um growth um and GDP uh numbers Jose Lis Esa has joined uh the circle of the governors and uh we have greeted him we have welcomed him uh in the circle of Governors like other Governors he has made some very useful contributions and I hope like any other Governor uh he will continue to uh not only give his personal views and which might be inspired in part by you know 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 and uh it it it is a process and it's a it's a journey that I hope will be uh productive and and uh Pleasant both for him and for the group of Governors around the table but I can assure you that he was welcome and uh and he was uh he was contributing thank you that concludes our press conference um thank you very much for participating the next uh press conference will be on 17th of October and that will be the external governing Council press conference which will take place in lubiana in Slovenia yeah thank you very much e e e e e e e e e e e