May 4 (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: Good afternoon, the Vice-President and I welcome you to our
press conference.
The inflation outlook continues to be too high for too long. In
light of the ongoing high inflation pressures, the Governing
Council today decided to raise the three key ECB interest rates
by 25 basis points. Overall, the incoming information broadly
supports the assessment of the medium-term inflation outlook
that we formed at our previous meeting. Headline inflation has
declined over recent months, but underlying price pressures
remain strong. At the same time, our past rate increases are
being transmitted forcefully to euro area financing and monetary
conditions, while the lags and strength of transmission to the
real economy remain uncertain.
Our future decisions will ensure that the policy rates will be
brought to levels sufficiently restrictive to achieve a timely
return of inflation to our two per cent medium-term target and
will be kept at those 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 policy rate decisions will continue to 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 key ECB interest rates remain our primary tool for setting
the monetary policy stance. In parallel, we will keep reducing
the Eurosystem’s asset purchase programme (APP) portfolio at a
measured and predictable pace. In line with these principles,
the Governing Council expects to discontinue the reinvestments
under the APP as of July 2023.
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 grew by 0.1 per cent in the first quarter
of 2023, according to Eurostat’s preliminary flash estimate.
Lower energy prices, the easing of supply bottlenecks and fiscal
policy support for firms and households have contributed to the
resilience of the economy. At the same time, private domestic
demand, especially consumption, is likely to have remained weak.
Business and consumer confidence have recovered steadily in
recent months but remain weaker than before Russia’s unjustified
war against Ukraine and its people. We see a divergence across
sectors of the economy. The manufacturing sector is working
through a backlog of orders, but its prospects are worsening.
The services sector is growing more strongly, especially owing
to the reopening of the economy.
Household incomes are benefiting from the strength of the labour
market, with the unemployment rate falling to a new historical
low of 6.5 per cent in March. Employment has continued to grow
and total hours worked exceed pre-pandemic levels. At the same
time, the average number of hours worked remains somewhat below
its pre-pandemic level and its recovery has stalled since
mid-2022.
As the energy crisis fades, governments should roll back the
related support measures promptly and in a concerted manner to
avoid driving up medium-term inflationary pressures, which would
call for a stronger monetary policy response. 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 also help reduce price pressures in the
medium term. In this regard, we welcome the publication of the
European Commission’s legislative proposals for the reform of
the EU’s economic governance framework, which should be
concluded soon.
Inflation
According to Eurostat’s flash estimate, inflation was 7.0 per
cent in April, after having dropped from 8.5 per cent in
February to 6.9 per cent in March. While base effects led to
some increase in energy price inflation, from -0.9 per cent in
March to 2.5 per cent in April, the rate stands far below those
recorded after the start of Russia’s war against Ukraine. Food
price inflation remains elevated, however, standing at 13.6 per
cent in April, after 15.5 per cent in March.
Price pressures remain strong. Inflation excluding energy and
food was 5.6 per cent in April, having edged down slightly
compared with March to return to its February level. Non-energy
industrial goods inflation fell to 6.2 per cent in April, from
6.6 per cent in March, when it declined for the first time in
several months. But services inflation increased to 5.2 per cent
in April, from 5.1 per cent in March. Inflation is still being
pushed up by the gradual pass-through of past energy cost
increases and supply bottlenecks. In services, especially, it is
still being pushed higher also by pent-up demand from the
reopening of the economy and by rising wages. The information
available up to March suggests that indicators of underlying
inflation remain high.
Wage pressures have strengthened further as employees, in a
context of a robust labour market, recoup some of the purchasing
power they have lost as a result of high inflation. Moreover, in
some sectors firms have been able to increase their profit
margins on the back of mismatches between supply and demand and
the uncertainty created by high and volatile inflation. Although
most measures of longer-term inflation expectations currently
stand at around two per cent, some indicators have edged up and
warrant continued monitoring.
Risk assessment
Renewed financial market tensions, if persistent, would pose a
downside risk to the outlook for growth as they could tighten
broader credit conditions more strongly than expected and dampen
confidence. Russia’s war against Ukraine also continues to be a
significant downside risk to the economy. However, the recent
reversal of past adverse supply shocks, if sustained, could spur
confidence and support higher growth than currently expected.
The continued resilience of the labour market, by bolstering
household confidence and spending, could also lead to higher
growth than anticipated.
There are still significant upside risks to the inflation
outlook. These include existing pipeline pressures that could
send retail prices higher than expected in the near term.
Moreover, Russia’s war against Ukraine could again push up the
costs of energy and food. A lasting rise in inflation
expectations above our target, or higher than anticipated
increases in wages or profit margins, could also drive inflation
higher, including over the medium term. Recent negotiated wage
agreements have added to the upside risks to inflation,
especially if profit margins remain high. The downside risks
include renewed financial market tensions, which could bring
inflation down faster than projected. Weaker demand, due for
example to a more marked slowing of bank lending or a stronger
transmission of monetary policy, would also lead to lower price
pressures than currently anticipated, especially over the medium
term.
Financial and monetary conditions
The euro area banking sector has proved resilient in the face of
the financial market tensions that arose ahead of our last
meeting. Our policy rate increases are being transmitted
strongly to risk-free interest rates and to the financing
conditions for firms, households and banks. For firms and
households, loan growth has weakened owing to higher borrowing
rates, tighter credit supply conditions and lower demand. Our
latest bank lending survey reported a tightening of overall
credit standards, which was stronger than banks had expected in
the previous round and suggests that lending may weaken further.
Weak lending has meant that money growth has also continued to
decline.
Conclusion
Summing up, the inflation outlook continues to be too high for
too long. In light of the ongoing high inflation pressures, the
Governing Council today decided to raise the three key ECB
interest rates by 25 basis points. Overall, the incoming
information broadly supports the assessment of the medium-term
inflation outlook that we formed at our previous meeting.
Headline inflation has declined over recent months, but
underlying price pressures remain strong. At the same time, our
past rate increases are being transmitted forcefully to euro
area financing and monetary conditions, while the lags and
strength of transmission to the real economy remain uncertain.
Our future decisions will ensure that the policy rates will be
brought to levels sufficiently restrictive to achieve a timely
return of inflation to our two per cent medium-term target and
will be kept at those 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 policy rate decisions will continue to 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.
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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