PRESS CONFERENCE

Christine Lagarde, President of the ECB,
Luis de Guindos, Vice-President of the ECB

Ljubljana, 17 October 2024

Good afternoon, the Vice-President and I welcome you to our press conference. I would like to thank Governor Vasle for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council.

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which we steer the monetary policy stance – is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity. Meanwhile, financing conditions remain restrictive.

Inflation is expected to rise in the coming months, before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation.

We are determined to ensure that inflation returns to our two per cent 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 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-committing to a particular rate path.

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 incoming information suggests that economic activity has been somewhat weaker than expected. While industrial production has been particularly volatile over the summer months, surveys indicate that manufacturing has continued to contract. For services, surveys show an uptick in August, likely supported by a strong summer tourism season, but the latest data point to more sluggish growth. Businesses are expanding their investment only slowly, while housing investment continues to fall. Exports have weakened, especially for goods.

Although incomes rose in the second quarter, households consumed less, contrary to expectations. The saving rate stood at 15.7 per cent in the second quarter, well above the pre-pandemic average of 12.9 per cent. At the same time, recent survey evidence points to a gradual recovery in household spending.

The labour market remains resilient. The unemployment rate stayed at its historical low of 6.4 per cent in August. However, surveys point to slowing employment growth and a further moderation in the demand for labour.

We expect the economy to strengthen over time, as rising real incomes allow households to consume more. The gradually fading effects of restrictive monetary policy should support consumption and investment. Exports should contribute to the recovery as global demand rises.

Fiscal and structural policies should be aimed at making the economy more productive, competitive and resilient. That would help to raise potential growth and reduce price pressures in the medium term. To this end, it is crucial to swiftly follow up, with concrete and ambitious structural policies, on Mario Draghi's proposals for enhancing European competitiveness and Enrico Letta’s proposals for empowering the Single Market. 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 this direction in their medium-term plans for fiscal and structural policies.

Inflation

Annual inflation fell further to 1.7 per cent in September, its lowest level since April 2021. Energy prices dropped sharply, at an annual rate of -6.1 per cent. Food price inflation went up slightly, to 2.4 per cent. Goods inflation remained subdued, at 0.4 per cent, while services inflation edged down to 3.9 per cent.

Most measures of underlying inflation either declined or were unchanged. Domestic inflation is still elevated, as wage pressures in the euro area remain strong. Negotiated wage growth will remain high and volatile for the rest of the year, given the significant role of one-off payments and the staggered nature of wage adjustments.

Inflation is expected to rise in the coming months, partly because previous sharp falls in energy prices will drop out of the annual rates. Inflation should then decline to target in the course of next year. The disinflation process should be supported by easing labour 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 per cent.

Risk assessment

The risks to economic growth remain tilted to the downside. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by sources of geopolitical risk, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, which could also disrupt energy supplies and global trade. Lower demand for euro area exports due, for instance, to a weaker world economy or an escalation in trade tensions between major economies would further weigh on euro area growth. Growth could also be lower if the lagged effects of monetary policy tightening turn out stronger than expected. Growth could be higher if the world economy grows more strongly than expected or if easier financing conditions and declining inflation lead to a faster rebound in consumption and investment.

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 low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly.

Financial and monetary conditions

Shorter-term market interest rates have declined since our September meeting, owing mainly to weaker news on the euro area economy and the further fall in inflation. While financing conditions remain restrictive, the average interest rates on new loans to firms and on new mortgages were down slightly in August, to 5.0 per cent and 3.7 per cent respectively.

Credit standards for business loans were unchanged in the third quarter, as reported in our latest bank lending survey, after more than two years of progressive tightening. Moreover, demand for loans by firms rose for the first time in two years. Overall lending to firms continues to be subdued, growing at an annual rate of 0.8 per cent in August.

Credit standards for mortgages eased for the third quarter in a row, owing especially to greater competition among banks. Lower interest rates and better housing market prospects led to a strong increase in the demand for mortgages. In line with this, mortgage lending picked up slightly, growing at an annual rate of 0.6 per cent.

Conclusion

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which we steer the monetary policy stance – is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are determined to ensure that inflation returns to our two per cent 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 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-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.

We are now ready to take your questions.

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My first question would be on the next steps. It sounds like you expect to reach a 2% target maybe sooner than predicted in September. Does the decision to cut today really represent a shift of gear? Do you expect a cut at every meeting for the next few meetings now to be the most likely scenario? And the second question would be on the US election. You mentioned trade tensions as a risk, but can you elaborate how you think a return of Donald Trump to the White House and his plan to impose tariffs will alter the outlook for growth and inflation in the euro area?

We decided to cut all our rates by 25 basis points because we believe that the disinflationary process is well on track and all the information that we received in the last five weeks since our last monetary policy decision was heading in the same direction – lower! Whether you looked at inflation numbers, headline core, whether you looked at PMI numbers, all categories, composite manufacturing, services, employment – are heading downwards as well. If we look at all the surveys that are in the works at the moment, of which the specific numbers and data will be available soon, it is the same story. Whether it is the corporate telephone survey or other surveys that we have available, it’s all heading in the same direction – downwards! That really confirmed for us the confidence that we have that the disinflationary process is well on track. That is what has caused us to make the decision to cut our three rates by 25 basis points. We have also reiterated that we will continue to be data dependent and honestly, this decision is a case in point of us being data dependent. We have all the available data all heading in the same direction, the largest countries all also moving in negative territories in PMI numbers. Those are really strong elements – and because of their synchronisation and the similar direction – we have to take into account those data and make the decision that we have made. We are going to continue doing exactly the same thing. It’s clear that between this meeting and the next meeting we have in December, we will be receiving more data – some of it soft, some of it hard – and more readings. All of that will help us decide, as I have said, “meeting by meeting,” what monetary policy stance we should decide at that time. I think there were no variations in that respect from the decision that we made in the past, in terms of methodology. It’s the same steer, the same stance, the three-pronged approach and the meeting-by-meeting data dependency, no predetermined path. On the other point you raised: Trade is obviously an important element and as part of the drivers of activity going forward, we obviously have consumption and investment, but we also have trade. Any restriction, any uncertainty, any obstacles to trade matter for an economy like the European economy, which is very open. Trade within itself, of course, but trade also with the rest of the world. Any hardening of the barriers, the tariffs, the additional obstacles to that possibility to trade with the rest of the world is obviously a downside.

My first question would be on the economic outlook. You were now referring to and pointing out that the economy doesn’t really look great and all signs point towards more downspin. Why didn’t you go for a 50 basis point cut? Is that something you have discussed or whether this is on the table for the next ones? And have you been discussing the topic of the possibility that inflation could also undershoot, if you keep your policy stance restrictive? Thank you.

It is a fact that the economic activity has come in, on the basis of the elements that we have and the indicators that are available, a bit below what we had anticipated. But this is not a projection exercise. We are in between two projection exercises, and clearly December will be another opportunity for us to run all the data and all the information through our models and to apply the three-pronged approach to our stance. What was on the table and what was debated and proposed by our Chief Economist Philip Lane was a 25 basis point cut. End of the story. We had discussions and debates and rationales and narratives, and all of that is part of the debate and the legitimate discussions that we have within the Governing Council. But at the end of the day, there was a unanimous decision to cut rates by 25 basis points. It may have been the Slovenian great atmosphere that precipitated this more than consensus. There was a unanimous decision to cut by 25 basis points and we thought that it was the appropriate decision to make in view of the moment, in view of the indicators that we have and our assessment of this disinflationary process that is really under way and well on track. On the risk of undershooting or overshooting, we can debate ad nauseam on this particular matter and you will find views on both sides of the equation. What is clear to all is that we still have risks on both sides of our forecast, upside and downside, probably a bit more on one than the other, probably more downside risk than upside risk. But I’m talking here about our forecast for inflation and that’s what we are looking at.

Inflation is expected to reach target in the course of next year instead of at the end. Will we reach the neutral rate earlier than before? Will you recalibrate monetary policy and cuts to come? The second question is whether the German economy is the main reason for the shift since September, when today’s cut was unlikely, or at least is it a good reason?

First of all, we don’t recalibrate, we calibrate, and this is really the process through which we go. As laborious as it is, we believe in our three-pronged approach. I won’t bore you with the repetition of it all, but it is inflation outlook, underlying inflation and transmission. And we calibrate our monetary policy on the basis of all the data that are available and applying that three-pronged approach. It’s obvious that the state of the economy and the activity has a bearing on inflation. And to that extent, of course, we take that into account in order to assess inflation and its return in a timely manner to our target. But that’s the extent of our consideration: the bearing of activity on inflation. Because our job is price stability and our mission is to return inflation back to the 2% target in the medium term.

You said earlier we will have more data in December, not much more, but more data, and if they all point in the same direction as you outlined earlier as well, you will just have opened the door widely for a new rate cut in December if I interpret you well? You mentioned tensions in the Middle East that could feed inflation through energy prices. What about domestic stimulus in China, which is huge and could also revive pressures on energy prices through domestic demand and then feed inflation? Is it something that you will combine with those Middle East tensions and look very carefully at in the next months?

It is a fact that at each projection exercise, we receive more data and in particular more updated projections of course, and typically, given that between now and the December meeting there will be more than six weeks, we will also receive more data. As I said, I did not open the door to anything. I repeated that at each and every meeting we will look at the data. Hence we will be data dependent, not data point dependent, nor anything else. Data dependent – all of it. We will determine what is the best rate, what is the best speed, how far and how deep we have to go in order to return inflation to its 2% medium-term target. This is what we will do in December, and I would not give any other commitment, nor make any other statement in that respect. As I said in the monetary policy statement that I read earlier on, we are not pre-committing. Again, I think that the decision that we’re making today is a perfect example of how we can be data dependent. You refer to two areas of big concern. One coupled with obviously a major conflict and horrifying one that is taking place in the Middle East. We of course are concerned beyond the humanitarian approach, beyond the conflict aspects. We are looking at the economic consequences and we are looking in particular at the impact that this conflict could have on trade, because that part of the world is very much open to trade and the passing of ships of all sorts. We are also very attentive to the price of oil that can be impacted, and this oil price is a good segue into your question about China. What will happen in China, what kind of stimulus will be activated, with all full details as is expected at some stage, will also be an indication of the demand addressed by China to the oil market and the impact that it will have on the price of such a commodity. We are looking at all those components and obviously focusing on the economic consequences and the impact that they could have on inflation, and obviously activity to the extent that it impacts inflation.

The first question is about economic growth. Is a soft landing still your main scenario, and am I correct to see that perhaps your attention has shifted slightly from inflation concerns to growth concerns? The second question is about a line in the statement which says the rate is still restrictive. But I’m curious. We thought restrictive is this unobservable concept because we don’t know where the neutral rate is. Perhaps you maybe started having a discussion in the Governing Council on where does restrictive stop? I’m curious if you have any thoughts about where does restriction end and where does accommodation begin?

On the issue of economic growth, are we still on a soft landing expectation? The answer is: on the basis of the information that we have, we certainly do not see a recession. The euro area, on the basis of what we have, is not heading for a recession, and we are still looking at that soft landing that you have just mentioned. You asked me whether we are more concerned about growth than we are about inflation. I would say that we are concerned about growth to the extent that it has an impact on inflation, and we have to be particularly attentive to both because of the impact that it has on inflation, which is our main focus and our key objective, as you know. So there is, and you pointed to it, that sentence which is sort of the magic language. And I’m sure that you will be very attentive if and when that magic language changes a bit. We still say that “we will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim”, which refers to the previous sentence, which is that “we are determined to ensure that inflation returns to our 2% medium-term target in a timely manner”. So there is no question in our mind that we are currently restrictive, hence that sentence. There is also no question in our mind that we are not yet at this 2% medium-term target in a timely manner, and this has to be sustainable. So even if it could well be as markets anticipate, but they are not always right, that the time at which we reach that 2% sustainably has advanced a bit, it is not yet now. And we will have to wait further in order to make sure that we are at that 2% sustainable medium-term target.

In the introductory statement you refer to this updated assessment of your inflation outlook. Does this refer to the September staff forecast, or has this changed since September within the Governing Council? And if so, could you give us a little bit more colour on what the actual change in the inflation outlook has been that you’re referring to? And my second question is also again on the theme of undershooting the 2% target. Even the September forecast projected the 1.9% inflationary rate for 2026, I think from the second or third quarter onwards. Has this been changed, and to which degree do you think it already shows that monetary policy is too tight?

If anything, I would say that what the numbers are showing at the moment is that our monetary policy is working. And the fact that we’ve managed to bring inflation down as we have so far, not to a complete victory, but to have brought it down so much is an indication that our monetary policy is actually working. It’s not the only thing that is operating in that respect, but it is certainly part of the elements to explain that we have moved from very high inflation numbers to much lower [inflation] and hopefully soon to target on a sustainable basis. Our assessment of inflation as we stand now is really based on all the numbers that are available, and that leads us to assess and take a view on inflation now and the potential impact going forward. But that will be done in a strict, rigorous, published way when we have our December projection exercise. And you will be obviously not privy because it will be public, but you will be on the receiving end of this very clear updating. But in the meantime, we are not blind to what happens. And when we receive inflation by way of HICP at 1.7%, when we see core at 2.7%, when we see services moving down to 3.9% and when we look at the three-month-over-three-month services moving significantly from August to September, all of that put together leads us to believe that inflation is definitely on that disinflationary track that I was referring to earlier. On the forecast, again we had a forecast in September. Between September and December, a lot of data, a lot of numbers, a lot of indicators and a lot of surveys will come into play and will be integrated in the work that we do. And we will have a forecast that will be, by the way, extended to 2027 because the December forecast always takes one further year into account. And we shall see. We shall see whether there is a move and in which direction in terms of inflation and in terms of activity. But in between projection exercises, as I said as a case in point, that data matters. We look at everything that we have available, and if it is appropriate to take us closer to this timely reaching of our target of 2% medium-term symmetric, we make the decision, as we have today.

Are you in the ECB somehow surprised by such a rapid drop in inflation, enabling you to perform an actual rate cut which wasn’t fully expected or priced in in September?

That’s a really good question actually. What is a little bit irritating sometimes is the lapse of time between meetings. And on this occasion there were only five weeks. But in those five weeks we received quite a lot of information, some of it by way of hard numbers and readings that were actually updated downwards a little bit today, and some of it by way of PMIs, which are a bit softer than hard data, but all synchronised and moving in the same direction. So were we surprised? I’m not sure that we had anticipated that 1.7% [inflation], nor did anyone else for that matter. Because if I look at analysts and if I look at those whose job it is to project and to forecast, or markets, I think we were all a little bit surprised by the acceleration that is being demonstrated by that number. But it’s certainly raised our confidence that the disinflationary process is well on track. But having said that, we are data dependent. And that’s the beauty of the English language: data are either singular or plural, but it’s the same word. We are not data point dependent. So it’s not because HICP came out at 1.7% or core at 2.7% that we made that decision. We need an array of information and data. And, by the way, we also know for instance, based on the work that has been done and that was already mentioned during the previous press conference in September, on the basis of projections, that the next three months will not have this linear low and below-target inflation number. We know that it will be higher than that because of obvious base effects that we know of already. And we shouldn’t be surprised by that, and we should not be jumping to any kind of conclusions either.

My first question relates to your statement some months ago when you promised the population in the eurozone to break the neck of inflation. If you look at some of the points which you mentioned, like the fact that inflation is going to rise again, and if you look at the service sector, at food prices and all the effects which really concern normal people, would you say that the neck is broken or not? And the second question relates to your interesting speech you held to the Governing Council last night, in which you described the admirable economic development of our host country here. Could you perhaps briefly summarise again what we actually could learn in other countries from this interesting path here in Slovenia?

Thank you for bringing Slovenia back into the picture, because there is a lot to be learned from Slovenia. Have we broken the neck of inflation? Not yet. Are we in the process of breaking that neck? Yes. I was in the market in Ljubljana a couple of days ago to check on prices, because I come to Ljubljana on a regular basis if I can. Food prices are still growing at 2.4% on average in the euro area. And this is not the 2% that we want. We are clearly still above target, and it’s one area, together with energy prices, to which consumers are highly sensitive, which has a bearing on what they do, whether they consume, whether they save, which matters a lot. So we are extremely attentive. We know that food prices in particular are very sensitive, and we know that we are not at target yet on that front. But are we breaking the neck of it? Yes, I think so. It’s not broken completely yet, but we’re getting there. On your second question, I think that the key messages that I wanted to make yesterday, using the beautiful example of Slovenia, is that in times of uncertainty, you have two options. You can either resign yourself and suffer, or you can get a grip of yourself and take uncertainty as an opportunity, which is exactly what Slovenia did when it became independent, when it fought inflation and when it really bounced back in terms of its economy. The second lesson, which is interesting and which I mentioned yesterday as well, is that when there is that expansion and when there is prosperity, it needs to be widely shared. And that is particularly the case in times of the risk of a digital divide. I think it’s a very good case in point where digitalisation has been widely spread and where the Gini coefficient of Slovenia is in the top two of all the OECD countries. So I think the lessons we can learn is that when it’s hard, we have to get a grip of ourselves. We have to push for reform. We have to continue to integrate and innovate. And from our perspective as a central bank, if anything, it should push us in the direction of the capital markets union, of the banking union and making sure that capital flows can actually fuel innovation in Europe.

How important was it for the decision and the debate that even with the new rate cut, financial conditions will remain restrictive? And do recent macroeconomic surprises grant a downward revision on growth in December?

October is not December. I cannot tell you today what our December outlook will be and what the projections will say. I think we have to be nimble. We have to be attentive to the data that we get and work on the basis of that. On the issue of being restrictive, I made the point that we are restrictive at the moment, at the current rate. Even with the 25 basis point cut, we will continue to be restrictive. And we believe that it is necessary and would have to continue to be so until we are confident that we are reaching the 2% target in the medium term. That will come in due course, but we’re not there yet.

You’ve mentioned you do not foresee a recession for the euro area, but at least from Germany we are getting some worrying data. Is there still a chance that this may turn, so that we might see a recession in the euro area?

Even with one of the Member States, however large it is, facing difficult circumstances on the basis of what they themselves are producing, it does not necessarily imply that the whole of the euro area is going to be affected in the same way. And based on the information that we have at the moment, we do not, we do not see a recession in the euro area. Of course, we have to be attentive to particular sectors of the economy. And as we stand here in Slovenia, which is a country that participates in the supply chain of the automotive sector in particular, of course many countries will be paying attention to these sectoral developments. But to your specific question of whether we see a recession, the answer is no.

You talk about fiscal consolidation and how governments must steadily reduce deficits and public debt. The IMF said the same thing just a few days ago. What are the market risks in the event of a failure to consolidate? And my second question is about bank consolidation. There’s a huge debate in the eurozone. Do you see bank consolidation as an opportunity for the area to compete more in the global market?

On fiscal consolidation, we now have a fiscal governance framework that identifies the right equilibrium and balance between fiscal consolidation that is needed in many countries and the necessary investment in growth-enhancing reforms. And I think it is that balancing act which is the virtue and the value of this revised governance framework for fiscal purposes. It’s associated with a timeframe of four or seven years depending on the level and degree of reforms that the Member States will propose and will implement. So if those rail guards are followed and observed by Member States, we believe that it’s the right environment within which to develop activity. And for our part, while the fiscal authorities will do what they have to do in fiscal terms and while the authorities will do what they have to do in structural reforms, we will do our part by maintaining price stability. But of course we are interested in what they do, because everyone has to play their part.

On your bank consolidation question, I have said this last time around, our view is that for bank mergers, to the extent that they strengthen the banking system and on the basis of the cost-benefit analysis that the shareholders and the stakeholders conduct, which is not to say that we are directly involved other than through the supervision authorities that we apply to the requests and applications that are filed with us, it is for them to decide how to progress those projects. And I’m not referring to any particular project, as you know.