PRESS CONFERENCE

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

Frankfurt am Main, 12 December 2024

Good afternoon, the Vice-President and I welcome you to our press conference.

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 disinflation process is well on track. Staff see headline inflation averaging 2.4 per cent in 2024, 2.1 per cent in 2025, 1.9 per cent in 2026 and 2.1 per cent in 2027 when the expanded EU Emissions Trading System becomes operational. For inflation excluding energy and food, staff project an average of 2.9 per cent in 2024, 2.3 per cent in 2025 and 1.9 per cent in both 2026 and 2027.

Most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis. Domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay.

Financing conditions are easing, as our recent interest rate cuts gradually make new borrowing less expensive for firms and households. But they continue to be tight because our monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit.

Staff now expect a slower economic recovery than in the September projections. Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter. Staff see the economy growing by 0.7 per cent in 2024, 1.1 per cent in 2025, 1.4 per cent in 2026 and 1.3 per cent in 2027. The projected recovery rests mainly on rising real incomes – which should allow households to consume more – and firms increasing investment. Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand.

We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. 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 economy grew by 0.4 per cent in the third quarter, exceeding expectations. Growth was driven mainly by an increase in consumption, partly reflecting one-off factors that boosted tourism over the summer, and by firms building up inventories. But the latest information suggests it is losing momentum. Surveys indicate that manufacturing is still contracting and growth in services is slowing. Firms are holding back their investment spending in the face of weak demand and a highly uncertain outlook. Exports are also weak, with some European industries finding it challenging to remain competitive.

The labour market remains resilient. Employment grew by 0.2 per cent in the third quarter, again by more than expected. The unemployment rate remained at its historical low of 6.3 per cent in October. Meanwhile, demand for labour continues to weaken. The job vacancy rate declined to 2.5% in the third quarter, 0.8 percentage points below its peak, and surveys also point to fewer jobs being created in the current quarter.

The economy should strengthen over time, although more slowly than previously expected. The rise in real wages should strengthen household spending. More affordable credit should boost consumption and investment. Provided trade tensions do not escalate, exports should support the recovery as global demand rises.

Fiscal and structural policies should make the economy more productive, competitive and resilient. 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. We welcome the European Commission’s assessment of governments’ medium-term plans for fiscal and structural policies, as part of the EU’s revised economic governance framework. Governments should now focus on implementing their commitments under this framework fully and without delay. This will help bring down budget deficits and debt ratios on a sustained basis, while prioritising growth-enhancing reforms and investment.

Inflation

Annual inflation increased to 2.3 per cent in November according to Eurostat’s flash estimate, from 2.0 per cent in October. The increase was expected and primarily reflected an energy-related upward base effect. Food price inflation edged down to 2.8 per cent and services inflation to 3.9 per cent. Goods inflation went up to 0.7 per cent.

Domestic inflation, which closely tracks services inflation, again eased somewhat in October. But at 4.2%, it remains high. This reflects strong wage pressures and the fact that some services prices are still adjusting with a delay to the past inflation surge. That said, underlying inflation is overall developing in line with a sustained return of inflation to target.

The increase in compensation per employee moderated to 4.4 per cent in the third quarter from 4.7 per cent in the second. Amid stable productivity, this contributed to slower growth in unit labour costs. Staff expect labour costs to increase more slowly over the projection horizon as a result of lower wage growth and higher productivity growth. Moreover, profits should continue to partially offset the effects of higher labour costs on prices, especially in the near term.

We expect inflation to fluctuate around its current level in the near term, as previous sharp falls in energy prices continue to drop out of the annual rates. It should then settle sustainably at around the two per cent medium-term target. Easing labour cost pressures and the continuing impact of our past monetary policy tightening on consumer prices should help this process. Most measures of longer-term inflation expectations stand at around 2 per cent, and market-based indicators of medium to longer-term inflation compensation have decreased measurably since the Governing Council’s October meeting.

Risk assessment

The risks to economic growth remain tilted to the downside. The risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by geopolitical risks, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, which could disrupt energy supplies and global trade. Growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. It could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster.

Inflation could turn out higher 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 more than expected. 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, if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Greater friction in global trade would make the euro area inflation outlook more uncertain.

Financial and monetary conditions

Market interest rates in the euro area have declined further since our October meeting, reflecting the perceived worsening of the economic outlook. Although financing conditions remain restrictive, our interest rate cuts are gradually making it less expensive for firms and households to borrow.

The average interest rate on new loans to firms was 4.7 per cent in October, more than half a percentage point below its peak a year earlier. The cost of issuing market-based debt has fallen by more than a percentage point since its peak. The average rate on new mortgages, at 3.6 per cent in October, is about half a percentage point lower than at its highest point in 2023, even though the average rate on the outstanding stock of mortgages is still set to rise.

Bank lending to firms has gradually picked up from low levels, and increased by 1.2 per cent in October compared with a year earlier. Debt securities issued by firms were up 3.1% in annual terms, which was similar to the increase in the previous few months. Mortgage lending continued to rise gradually in October, with an annual growth rate of 0.8 per cent.

In line with our monetary policy strategy, the Governing Council thoroughly assessed the links between monetary policy and financial stability. Euro area banks remain resilient and there are few signs of financial market stress. Financial stability risks nonetheless remain elevated. Macroprudential policy remains the first line of defence against the build-up of financial vulnerabilities, enhancing resilience and preserving macroprudential space.

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 stabilises sustainably at our two per cent medium-term target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. 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 stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to take your questions.

* * *

I have two questions. The first is on a general flavour of the arguments which have been exchanged in order to reach the decision today. What were the key arguments in favour of that 25 basis points rate cut? Second question, you dropped the reference to keep interest rates restrictive or sufficiently restrictive for the foreseeable future. Does that also mean that you consider perhaps a larger rate cut at your next policy meeting, or is that something you have been discussing, at least?

We had a Governing Council meeting that was the last of 2024 and which really led us to acknowledge, not yet the victory against inflation, not yet “mission accomplished”, but certainly it led us to acknowledge that inflation was really on track, in terms of reaching our 2% target in the medium-term. And that gave us a level of confidence to actually decide to cut and to decide the appropriate cut, which is, in our view, 25 basis points. That proposal was agreed by all members of the Governing Council. There were some discussions, with some proposals to consider possibly 50 basis points. But the overall agreement to which everybody rallied was that 25 basis points was actually the right decision. And I think it was predicated on three key elements. The first element is that inflation in our projections has converged towards 2% for six projection exercises in a row. So, you probably have forgotten, as I wish I had, the days when everybody was considering that maybe we would slip into 2026 and we would not reach 2% in 2025. Well, as I said, six times in a row, our projections are telling us that we will be at 2% target in the course of 2025 and if anything, it has moved a little bit forward in the course of 2025, but suffices to say that in 2025 we shall be at 2%. And that is, you know, clearly reflected in the projections that we have. I think the second element is that the fading of past shocks has pushed underlying inflation down. If I look, for instance, at wages, if I look at profits, and you remember the discussion that we had many times about the buffer that profits could exercise to absorb additional labour costs. We are actually seeing that reality unfolding and the projection for compensation, whether we look at the wage tracker, whether we look at compensation per employee, whether we look at the vacancy ratio, all of that is pointing in the direction of wages gradually, in the course of 2025 reaching a percentage increase that is compatible with our 2% target. And in terms of profits, we are also observing the same movement, of growth in profits having declined and being in a position to absorb some of this labour costs. Productivity: we are beginning to see also some a little bit more promising numbers. So those three components: wages, profit, productivity, also heading in the right direction. And I think the third element that we took into consideration, and that led us to this decision, is that risk to inflation is now two sided, clearly, and that led us to making the decision that we've made, but also removing the reference to restrictiveness that you have mentioned. And by that, I'm also addressing your second question by the same token. But having said all that, we still have service inflation, which is running high. And if we look in particular at domestic inflation, we are still at 4.2% and service inflation has hedged down a little bit from 4 to 3.9, but it is still resistant, and we would really want to see a change in the composition of inflation to feel totally confident that we are really almost at target.

Coming back to inflation, how do you see risks around inflation target? Do you feel the risk of undershooting is higher than the risk of overshooting? And could you give us a sense of those what those risks are?

You know, the risks to inflation are clearly stated in our monetary policy statement. And as I have said, they are more two sided than they were before, and that's really the analysis that we have about risk to inflation. That's how we look at it.

I'm wondering, when you when you changed that language on the need for restrictive policies, you must have had a debate about the neutral rate in one way or another. And I'm just wondering if you can fill us in a little bit on that debate and maybe share how far you think, and the Governing Council believes, current policy settings are from those neutral levels. And the second question I have is that, after what the market has heard so far, it is now pricing a larger 50 basis point cut for January, and I'm just wondering if you have any thoughts on that?

No, I don't really think about that, but I would simply observe that that was the case also a few weeks ago, and things change over the course of time, depending on data, depending on assessment of the situation, and this is exactly what we are going to do. We will continue to be data dependent. We will continue to decide meeting by meeting. We will continue to not have a pre-committed path downward, but it will be again based on the three criteria that we have flagged and that I have repeated at least three times in this monetary policy statement. I will not inflict a third repetition of that. That's what we will do, and we are not anticipating X or Y for the next monetary policy decision that that we will take. A lot is going to be clarified, we hope, in the next few months, not in the next few weeks. If there is one thing that we discussed in the last two days, it's the level of uncertainty that we are facing, and whether it's uncertainty resulting from political situations in some of the member states, whether it's uncertainty resulting from the outcome in terms of policies of the US elections, all of that is largely a question mark, because there is a distance between the words and the action taken. So, neutral rate. What I would really recommend is that you go back to this publication that we had approximately one year ago, which really discusses the tools and the methods that we all try to apply in order to determine something that cannot be determined with great precision, particularly in advance. And those methods are based on either the inflation, financing, savings, economies, and this is what is done by our staff, very ably. But have we discussed the neutral rate in the last couple of days? No.

What happens if the US set a tariff against Europe? Will the ECB react? And second question: inflation and core inflation in the medium term will settle at around 2%, so this is your mandate. Do you think it's time now to focus on improving the domestic demand and growth, that are both slow whereas the American economy is vigorous?

The first one about trade - I've given my views very extensively in a recent Financial Times interview, and I continue to think that restrictions on trade, protectionist measures, are not conducive to growth and ultimately have an impact on inflation that is largely uncertain. In the short term, it's probably net inflationary, probably, but the overall impact on inflation is uncertain, because it is going to depend on the scope of the measures, on the retaliation that is decided, on the rerouting of trade traffic from other parts of the world, and that is a very complex situation with movable parts, which we will determine if and when they come. On your second question, I'm tempted to suggest that you put it to somebody else, because our focus is price stability. That is our mandate, and that's the best we can do to help economic actors to make their decisions and to create growth and create value. Everybody has to do their job. We have to provide price stability. Member states in Europe and in the euro area in particular have to comply and respect the fiscal governance framework that they have established for themselves, and that includes a combination of fiscal consolidation and growth-enhancing measures at the same time. And if other measures which are expected by the economic operators are delivered, then I don't see any reason why demand would not be stimulated as a result. But everybody has to do their job. The central bank cannot be the jack of all trades. We have to do our job, which is to procure price stability.

I have also a question on this dropped reference to keeping policy rates sufficiently restrictive. This was seen as a kind of sign of the tightening bias by many people, I think also within the ECB, that dropping this reference, does it mean you now have an easing bias? Or would that be pushing it too far? Would be interesting to get your thoughts on that. And my second question would be on the staff projections: I think in September, the minutes showed that when the projections were presented, there was already a concern that they might be too optimistic, because of all kind of things that had happened between the cutoff and the meeting. Has this been the case again, this time? And did you discuss how to respond to, in a scenario where those projections turned out to be too optimistic?

On your first question about restrictiveness, we are currently restrictive, and it's stated very clearly in the monetary policy statement, in the fourth paragraph, if I recall, where we say very clearly that - I want to give you the exact reference so that we don't make any mistake. It is in the fourth paragraph; we talk about the financing conditions and we say “but they continue to be tight because our monetary policy remains restrictive”. So, we are currently restrictive. There is no questioning in that respect. And the direction of travel currently is very clear. The pace at which it happens, the data that will determine it, the method that we will apply, the meeting by meeting, all of that is quite clear. But, you know, obviously, a lot of ground has been covered. We have already cut interest rates four times, a total of 100 basis points. We are now, as a result of this decision, today, at 3% for the DFR [Deposit facility rate], and we are in a completely different environment. We are getting much closer to target. As I said earlier, our projections for six times in a row indicate convergence towards 2% in 2025. We see two-sided risk to inflation. So, the macroeconomic landscape in which we make our decisions is vastly different from the days when we were at very high inflation, we had a lot of ground to cover, and risk to inflation was one sided. So as a result of that, it was completely legitimate and natural to remove that reference to being restrictive for long enough, to arrive at target in a timely manner. That is the other word which, as you may have noticed, has disappeared from our monetary policy statement, timely. Now you asked me a second question. You said, what about if staff projections are on the optimist side. First of all, I think that they do those projections in with a great sense of integrity and loyalty to the facts, to what is unquestionable, and they apply the best judgment that they can in the work that they do. So, I have no reason to doubt their projections. The element which has changed and which has been reinforced, as you will have noted also in the monetary policy statement, is the downside risk, particularly downside risk to growth, which is more elaborate in the wording of the monetary policy statement, and I think that that's a way to indicate that, given the uncertainty that we have in abundance, it is also the right approach to beef up the risk measurement.

My questions are on PEPP [Pandemic emergency purchasing programme] and on TPI [Transmission protection instrument]. Now, on PEPP, you will not have any more the flexibility of reinvesting the redemptions coming due at the PEPP portfolio, and you used it to counter risk to the monetary policy transmission mechanism. So, what do you think will be this impact of ending this reinvestment of PEPP, and you will only have now TPI, in a way, to intervene on the monetary policy mechanism. And at the moment, the spreads are not moving much, but I must say that the markets are surprised. For example, on the OAT-Bund spread given such a huge turbulence is not moving, and some traders are wondering whether you have been using TPI. But are we ever going to know if you use TPI? At least we knew you were using the PEPP reinvestments.

You are correct that PEPP is coming to the end of its active life, because we will stop any reinvestment as of the 17th of December. This will be the last reinvestment phase, and it has proven an incredibly efficient tool in order to fight the pandemic. It was also an extraordinary tool in that it was associated with flexibility, with no reference to the capital keys, if you remember, which was also quite a breakthrough and quite an exceptional tool for exceptional circumstances. I think the last time we used the flexibility was in July 2023^[1]. It hasn't been used since that, at all. And yes, there was publication on a regular basis. And I think we will continue to have publications, I think on a monthly basis, actually, as opposed to the bi-monthly, which was every other month in the past, just to indicate what is the maturity of those bonds that are coming to maturity. We did not discuss TPI. And if you're interested in the conditions and the terms and the publication and the modalities, there's a great press release which is out there and which includes all of that.

You said that this greater confidence on the projections that we are seeing with these six [projections] in a row, targeting 2% in 2025, I was wondering if this greater confidence in the projections could lead to assume that even if we remain data dependent, it's correct to assume that the ECB is going to cut for the next meeting, unless this data dependency advised not to, because these projections have a market curve of interest rate that assume that. My other question is, given this already pretty low growth in forecast, if they incorporate this slowing growth rate that we have to expect from the US new administration or not, and if you like, have a say on that.

It's a general question you have on projections, really. So, the uncertainty that I referred to, stemming from the policies that could be decided by the next US administration, is not incorporated in the baseline. Except, I think from memory, the extension of the tax reductions that were, in a way, committed by both candidates to the presidency. I think that portion is included. It has a fiscal dimension to it, but the trade dimension is only incorporated indirectly, as you said, through using the yield curve and other market determined elements, which are only part of the many assumptions or data that are taken into consideration by staff when they do their projections. So, the trade uncertainty is captured in the Risk Assessment section, and we have taken the precaution to add a full sentence at the end of the risk paragraph to relate to the friction in relation to trade. And as I said to your colleague earlier on, it's a risk and of itself it's not good for growth at large. It produces uncertain inflation impact in the euro area, at least - I would not pass judgment on what it impacted would have on the on the US - but it's very tentative and it's very uncertain, and you really have to dig into it to appreciate what the impact will be. I think you should appreciate that we are on a path, currently, that leads us to reach our 2% target medium-term, and that our monetary policy stance, each and every step of the way, at each meeting will be determined by the data that we that we have, by the projection that is proposed by our staff, and will be based on those three criteria that you know well. So, to assume anything in particular at any point in time, I think, is not the right approach, because we are going to continue to be data dependent. We are not pre-committing to a particular path. We simply indicate by removing the reference to restrictiveness that we have come a long way. The situation is very different. We are much closer to a target which we are seeing much more closely now and as a result of that, we want to remain appropriate in our determination of monetary policy. If you want to compare apples and apples, it’s “restrictiveness” goes, “appropriate determination” replaces it, because we are getting closer, but we're not done. Let's face it, when you still have 4.2% domestic inflation and wages of which the growth is slowing down, you have to be very cautious.

Could you please elaborate on whether, as you put it, political instability in certain member states put the reaching of the goal at risk, and how the ECB can react to it?

I don't comment on any particular member states. I was simply referring, and I'll refer again in response to your question, to the uncertainty that is stemming from the lack of budget submission by several member states. If you ask me the list, I will be happy to procure it, but there are at least four of them that are either operating on the basis of an old budget from 2024 or 2023 or that simply do not have it yet. So, uncertainty about budget, which makes the fiscal projection a little bit complicated. Uncertainty about the actual political evolution, depending on elections, appointments or whatever, in several member states. That is self-inflicted uncertainty that we have nothing to do with, but which is caused by the current political situations. Things will, again, probably come to resolution, and we will see better the economic consequences of those decisions. Clearly, there are elections coming up in the first quarter of 2025 and hopefully decisions being made much earlier than that for other member states.

I know that you don't target exchange rates but inflation wise, would it be an extra concern if the euro goes below parity? And the second question, going back to the restrictiveness or not of the monetary policy, it seems that it remains restrictive, but I was wondering if you could point out if it is still very restrictive, or just slightly restrictive, because different members have stated different views in these terms.

You know, on your latter question, I’m off to Vilnius on Sunday night, and I will give a speech on those issues in particular, on Monday. So, I strongly encourage you to look at that speech. I know you do, so I feel very comfortable referring you to that. But it really dissects and in great detail this issue of how restrictive and the sort of the direction forward. On the exchange rate, you gave half the answer by saying that we do not target exchange rate, and I repeat that gladly, and obviously, exchange rate and variations have an impact on inflation, and we are attentive to that, and we will continue to be attentive to that in the next few weeks and months.

My question is not related to the monetary policy direction, but in Germany, a new snap election is planned to be held next February, and the right party, Alternative for Germany, so called AFD, plans to call to leave the EU and the euro currency. The argument is not new, but it seems the support for this party will be strong in this election, and as the ECB is present, who protects the euro system democracy? What can you say now?

Well, the European Union was founded by the founding member states, one of which was Germany, and it came on the step of a horrible period of time when member states, currently sitting at the same table were at each other's throat, and that caused the killing and the dying of many, many, many Europeans, and I would very much hope that this history, which is at the root of the construction, stays very clear on the mind of everyone.

I have one question, also concerning the neutral rate. There were very different views expressed by different members that there's a lot of room still, or no room at all? What's your view on that?

You know, I think this issue of the neutral rate is one that we will probably debate more and further, as we get closer to where it eventually is, and we will probably apply the various tools and methodologies that are suggested by staff in that work that was published about a year ago. I think the conventional wisdom around the table is that it is probably a little higher than where it was before, for multiple reasons, and that we will debate in due course. But it's premature to do that at the moment, and the numbers, if I recall, that were flagged by staff in that report, varied from 1.75 to 2.5 and you know, this is the range that is a result of the calculation and the methodologies that they have suggested. When we get there, I'm sure that we will be debating that.