March 16 (Reuters) - Following is the text of European
Central Bank President Christine Lagarde's statement after the
bank's policy meeting on Thursday:
Link to statement on ECB website: Inflation is projected to remain too high for too long.
Therefore, the Governing Council today decided to increase the
three key ECB interest rates by 50 basis points, in line with
our determination to ensure the timely return of inflation to
our two per cent medium-term target. The elevated level of
uncertainty reinforces the importance of a data-dependent
approach to our policy rate decisions, which will be determined
by 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 monitoring current market tensions closely and stand
ready to respond as necessary to preserve price stability and
financial stability in the euro area. The euro area banking
sector is resilient, with strong capital and liquidity
positions. In any case, our policy toolkit is fully equipped to
provide liquidity support to the euro area financial system if
needed and to preserve the smooth transmission of monetary
policy.
The new ECB staff macroeconomic projections were finalised in
early March before the recent emergence of financial market
tensions. As such, these tensions imply additional uncertainty
around the baseline assessments of inflation and growth. Prior
to these latest developments, the baseline path for headline
inflation had already been revised down, mainly owing to a
smaller contribution from energy prices than previously
expected. ECB staff now see inflation averaging 5.3 per cent in
2023, 2.9 per cent in 2024 and 2.1 per cent in 2025. At the same
time, underlying price pressures remain strong. Inflation
excluding energy and food continued to increase in February and
ECB staff expect it to average 4.6 per cent in 2023, which is
higher than foreseen in the December projections. Subsequently,
it is projected to come down to 2.5 per cent in 2024 and 2.2 per
cent in 2025, as the upward pressures from past supply shocks
and the reopening of the economy fade out and as tighter
monetary policy increasingly dampens demand.
The baseline projections for growth in 2023 have been revised up
to an average of 1.0 per cent as a result of both the decline in
energy prices and the economy’s greater resilience to the
challenging international environment. ECB staff then expect
growth to pick up further, to 1.6 per cent, in both 2024 and
2025, underpinned by a robust labour market, improving
confidence and a recovery in real incomes. At the same time, the
pick-up in growth in 2024 and 2025 is weaker than projected in
December, owing to the tightening of monetary policy.
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 euro area economy stagnated in the fourth quarter of 2022,
thus avoiding the previously expected contraction. However,
private domestic demand fell sharply. High inflation, prevailing
uncertainties and tighter financing conditions dented private
consumption and investment, which fell by 0.9 per cent and 3.6
per cent respectively.
Under the baseline, the economy looks set to recover over the
coming quarters. Industrial production should pick up as supply
conditions improve further, confidence continues to recover, and
firms work off large order backlogs. Rising wages and falling
energy prices will partly offset the loss of purchasing power
that many households are experiencing as a result of high
inflation. This, in turn, will support consumer spending.
Moreover, the labour market remains strong, despite the
weakening of economic activity. Employment grew by 0.3 per cent
in the fourth quarter of 2022 and the unemployment rate stayed
at its historical low of 6.6 per cent in January 2023.
Government support measures to shield the economy from the
impact of high energy prices should be temporary, targeted and
tailored to preserving incentives to consume less energy. As
energy prices fall and risks around the energy supply recede, it
is important to start rolling back these measures promptly and
in a concerted manner. Measures falling short of these
principles are likely to drive up medium-term inflationary
pressures, which would call for a stronger monetary policy
response. Moreover, in line with the EU’s economic governance
framework and as stated in the European Commission’s guidance of
8 March 2023, fiscal policies should be oriented towards making
our economy more productive and gradually bringing down high
public debt. Policies to enhance the euro area’s supply
capacity, especially in the energy sector, can help reduce price
pressures in the medium term. To that end, governments should
swiftly implement their investment and structural reform plans
under the Next Generation EU programme. The reform of the EU’s
economic governance framework should be concluded rapidly.
Inflation
Inflation edged down to 8.5 per cent in February. The decline
resulted from a renewed sharp drop in energy prices. By
contrast, food price inflation increased further, to 15.0 per
cent, with the past surge in the cost of energy and of other
inputs for food production still feeding through to consumer
prices.
Moreover, underlying price pressures remain strong. Inflation
excluding energy and food increased to 5.6 per cent in February
and other indicators of underlying inflation have also stayed
high. Non-energy industrial goods inflation rose to 6.8 per cent
in February, mainly reflecting the delayed effects of past
supply bottlenecks and high energy prices. Services inflation,
which rose to 4.8 per cent in February, is also still being
driven by the gradual pass-through of past energy cost
increases, pent-up demand from the reopening of the economy and
rising wages.
Wage pressures have strengthened on the back of robust labour
markets and employees aiming to recoup some of the purchasing
power lost owing to high inflation. Moreover, many firms were
able to raise their profit margins in sectors faced with
constrained supply and resurgent demand. At the same time, most
measures of longer-term inflation expectations currently stand
at around two per cent, although they warrant continued
monitoring, especially in light of recent volatility in
market-based inflation expectations.
Risk assessment
Risks to the outlook for economic growth are tilted to the
downside. Persistently elevated financial market tensions could
tighten broader credit conditions more strongly than expected
and dampen confidence. Russia’s unjustified war against Ukraine
and its people continues to be a significant downside risk to
the economy and could again push up the costs of energy and
food. There could also be an additional drag on euro area growth
if the world economy weakened more sharply than expected.
However, companies could adapt more quickly to the challenging
international environment and, together with the fading-out of
the energy shock, this could support higher growth than
currently expected.
The upside risks to inflation include existing pipeline
pressures that could still send retail prices even higher than
expected in the near term. Domestic factors, such as a
persistent rise in inflation expectations above our target or
higher than anticipated increases in wages and profit margins,
could drive inflation higher, including over the medium term.
Moreover, a stronger than expected economic rebound in China
could give a fresh boost to commodity prices and foreign demand.
The downside risks to inflation include persistently elevated
financial market tensions that could accelerate disinflation. In
addition, falling energy prices could translate into reduced
pressure from underlying inflation and wages. A weakening of
demand, including owing to a stronger deceleration of bank
credit or a stronger than projected transmission of monetary
policy, would also contribute to lower price pressures than
currently anticipated, especially over the medium term.
Financial and monetary conditions
Market interest rates rose considerably in the weeks following
our last meeting. But the increase has strongly reversed over
recent days in a context of severe financial market tensions.
Bank credit to euro area firms has become more expensive. Credit
to firms has weakened further, owing to lower demand and tighter
credit supply conditions. Household borrowing has become more
expensive as well, especially owing to higher mortgage rates.
This rise in borrowing costs and the resultant decline in
demand, along with tighter credit standards, have led to a
further slowdown in the growth of loans to households. Amid
these weaker loan dynamics, money growth has slowed sharply,
driven by its most liquid components.
Conclusion
Summing up, inflation is projected to remain too high for too
long. Therefore, the Governing Council today decided to increase
the three key ECB interest rates by 50 basis points, in line
with our determination to ensure the timely return of inflation
to our two per cent medium-term target. The elevated level of
uncertainty reinforces the importance of a data-dependent
approach to our policy rate decisions, which will be determined
by 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 monitoring current market tensions closely and stand ready
to respond as necessary to preserve price stability and
financial stability in the euro area.
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.
(Compiled by Toby Chopra)
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