Christine Lagarde, President of the ECB,
Luis de Guindos, Vice President of the ECB
Frankfurt am Main, 18 July 2024
Hello, Mr. Vice President and I welcome you to our press conference.
Today, the Governing Council decided to leave the ECB’s three key interest rates unchanged. Incoming information broadly supports our previous assessment of the medium-term outlook for inflation. While some indicators of core inflation increased in May due to one-off factors, most indicators were either stable or slightly decreased in June. As expected, the inflationary impact of high wage growth was muted by profits. Monetary policy keeps financing conditions tight. At the same time, domestic price pressures are still high, inflation in services is elevated, and overall inflation is likely to remain above our target next year as well.
We are committed to ensuring that inflation returns to our 2% medium-term objective in time. We will keep interest rates tight enough for as long as necessary to achieve this goal. We will continue to take a data-based, appointment-by-appointment approach to determining the appropriate level and duration of restrictions. Our decisions on interest rates will be based mainly on our assessment of the inflation outlook in light of new economic and financial data, the dynamics of core inflation and the strength of monetary policy transmission. We are not committed to a specific rate in advance.
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 to develop, and then explain our assessment of financial and monetary conditions.
Economic activity
Incoming information suggests that the eurozone economy grew in the second quarter, but probably at a slower pace than in the first quarter. Services continue to lead the recovery, while industrial production and goods exports are weak. Investment indicators point to subdued growth in 2024 amid heightened uncertainty. Looking ahead, we expect the recovery to be supported by consumption driven by strengthening real incomes due to lower inflation and higher nominal wages. In addition, exports should pick up along with growth in global demand. Finally, monetary policy should become less of a drag on demand over time.
The labor market remains resilient. The unemployment rate was unchanged at 6.4 percent in May, remaining at the lowest level since the introduction of the euro. Employment, which rose 0.3 percent in the first quarter, was supported by further increases in the labor force, which grew at the same pace. More jobs were likely created in the second quarter, especially in the services sector. Companies are gradually reducing their job offers, but from high levels.
Domestic fiscal and structural policies should focus on increasing the productivity and competitiveness of the economy, which in the medium term would help increase potential growth and reduce price pressures. Effective, swift and full implementation of the EU’s Next Generation Programme, progress towards the Capital Markets Union and the completion of the Banking Union and the strengthening of the Single Market are key factors that would help boost innovation and increase investment in the green and digital transformation. . We welcome the European Commission’s recent guidance calling on EU member states to strengthen fiscal sustainability and the Eurogroup’s statement on fiscal policy for the euro area in 2025. Full and prompt implementation of the revised EU economic governance framework will help governments reduce budget deficits and debt ratios on a sustained basis.
Inflation
Year-on-year inflation slowed to 2.5 percent in June from 2.6 percent in May. Food prices rose 2.4 percent in June – down 0.2 percentage points from May – while energy prices were broadly unchanged. The growth in prices of goods and services did not change in June at 0.7% or 4.1%. While some indicators of core inflation increased in May due to one-off factors, most indicators were either stable or slightly decreased in June.
Domestic inflation remains high. Wages are still growing at an increased rate, compensating for the past period of high inflation. Higher nominal wages, together with weak productivity, contributed to unit labor cost growth, although it slowed somewhat in the first quarter of this year. Given the staggered nature of wage adjustments and the large contribution of one-off payments, labor cost growth is likely to remain elevated in the near term. At the same time, recent data on compensation per employee is in line with expectations, and the latest survey indicators signal that wage growth will moderate over the next year. In addition, profits fell in the first quarter, helping to offset the inflationary effects of higher unit labor costs, and surveys suggest that profits should continue to be muted in the near term.
Inflation is expected to hover around current levels for the rest of the year, partly due to the energy-related benchmark. In the second half of next year, a decline towards our target is expected as a result of weaker growth in labor costs, the effects of our restrictive monetary policy and the fading impact of past inflation. Indicators of longer-term inflation expectations remained more or less stable, with most hovering around 2%.
Risk assessment
Risks to economic growth are tilted to the downside. A weaker global economy or an escalation of trade tensions between major economies would weigh on eurozone growth. Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are the main sources of geopolitical risk. This can lead to less confidence in the future by firms and households and disrupt global trade. Growth could also be lower if the effects of monetary policy are stronger than expected. Growth could be higher if inflation falls faster than expected and rising confidence and real incomes mean spending rises more than expected, or if the global economy grows stronger than expected.
Inflation could be higher than expected if wages or profits rise more than expected. Rising inflation risks also stem from heightened geopolitical tensions, which could push energy prices and transportation costs higher in the near term and disrupt global trade. In addition, extreme weather fluctuations and the developing climate crisis more broadly could increase food prices. Conversely, inflation may surprise to the downside if monetary policy dampens demand more than expected or if the economic environment in the rest of the world deteriorates unexpectedly.
Financial and monetary conditions
June’s policy rate cut was smoothly reflected in money market interest rates, while broader financial conditions were somewhat volatile. Funding costs remain restrictive as our previous rate hikes continue to feed through the transmission chain. The average interest rate on new loans to companies fell slightly to 5.1 percent in May, while mortgage rates remained unchanged at 3.8 percent.
Credit standards for loans remain tight. According to our latest bank lending survey, business lending standards tightened slightly in the second quarter, while mortgage standards eased slightly. Business demand for loans fell slightly, while household demand for mortgages rose for the first time since the start of 2022.
Overall, credit growth remains weak. Bank loans to companies and households grew at an annual rate of 0.3 percent in May, only slightly more than in the previous month. Year-on-year growth in broad money – measured by M3 – rose to 1.6 percent in May from 1.3 percent in April.
Conclusion
Today, the Governing Council decided to leave the ECB’s three key interest rates unchanged. We are committed to ensuring that inflation returns to our 2% medium-term objective in time. We will keep interest rates tight enough for as long as necessary to achieve this goal. We will continue to take a data-based, appointment-by-appointment approach to determining the appropriate level and duration of restrictions. Our decisions on interest rates will be based mainly on our assessment of the inflation outlook in light of new economic and financial data, the dynamics of core inflation and the strength of monetary policy transmission. We are not committed to a certain rate in advance.
In any case, we stand ready to adjust all our instruments within our mandate to ensure that inflation returns to our medium-term objective and to maintain the smooth functioning of the monetary policy transmission.
We are now ready to answer your questions.