Monetary policy statement (with Q&A)

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

Athens, 26 October 2023

Jump to the transcript of the questions and answers

Sustainable Development Goals (SDGs)

Good afternoon, the Vice-President and I welcome you to our press conference. I would like to thank Governor Stournaras 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 keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed our previous assessment of the medium-term inflation outlook. Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. Our past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation.

We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive 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 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.

The decisions taken today are set out in a press release available on our website.

Economic activity

The euro area economy remains weak. Recent information suggests that manufacturing output has continued to fall. Subdued foreign demand and tighter financing conditions are increasingly weighing on investment and consumer spending. The services sector is also weakening further. This is mainly because weaker industrial activity is spilling over to other sectors, the impetus from reopening effects is fading and the impact of higher interest rates is broadening. The economy is likely to remain weak for the remainder of this year. But as inflation falls further, household real incomes recover and the demand for euro area exports picks up, the economy should strengthen over the coming years.

Economic activity has so far been supported by the strength of the labour market. The unemployment rate stood at a historical low of 6.4 per cent in August. At the same time, there are signs that the labour market is weakening. Fewer new jobs are being created, including in services, consistent with the cooling economy gradually feeding through to employment.

As the energy crisis fades, governments should continue to roll back the related support measures. This is essential to avoid driving up medium-term inflationary pressures, which would otherwise call for even tighter monetary policy. Fiscal policies should be designed to make our economy more productive and to gradually bring down high public debt. Structural reforms and investments to enhance the euro area’s supply capacity – which would be supported by the full implementation of the Next Generation EU programme – can help reduce price pressures in the medium term, while supporting the green and digital transitions. To that end, the reform of the EU’s economic governance framework should be concluded before the end of this year and progress towards Capital Markets Union and the completion of Banking Union should be accelerated.

Inflation

Inflation dropped to 4.3 per cent in September, almost a full percentage point lower than its August level. In the near term, it is likely to come down further, as the sharp price increases in energy and food recorded in autumn 2022 will drop out of the yearly rates. September’s decline was broad-based. Food price inflation slowed again, although it remains high by historical standards. In annual terms, energy prices fell by 4.6 per cent but, most recently, have risen again and become less predictable in view of the new geopolitical tensions.

Inflation excluding energy and food dropped to 4.5 per cent in September, from 5.3 per cent in August. This fall was supported by improving supply conditions, the pass-through of previous declines in energy prices, and the impact of tighter monetary policy on demand and corporate pricing power. Goods and services inflation rates fell substantially, to 4.1 per cent and 4.7 per cent respectively, with services inflation also being pulled down by pronounced base effects. Price pressures in tourism and travel appear to be moderating.

Most measures of underlying inflation continue to decline. At the same time, domestic price pressures are still strong, reflecting also the growing importance of rising wages. Measures of longer-term inflation expectations mostly stand around 2 per cent. Nonetheless, some indicators remain elevated and need to be monitored closely.

Risk assessment

The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy would also weigh on growth. Russia’s unjustified war against Ukraine and the tragic conflict triggered by the terrorist attacks in Israel are key sources of geopolitical risk. This may result in firms and households becoming less confident and more uncertain about the future, and dampen growth further. Conversely, growth could be higher than expected if the still resilient labour market and rising real incomes mean that people and businesses become more confident and spend more, or the world economy grows more strongly than expected.

Upside risks to inflation could come from higher energy and food costs. The heightened geopolitical tensions could drive up energy prices in the near term, while making the medium-term outlook more uncertain. Extreme weather, and the unfolding climate crisis more broadly, could push food prices up by more than expected. 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. By contrast, weaker demand – for example owing to a stronger transmission of monetary policy or a worsening of the economic environment in the rest of the world amid greater geopolitical risks – would ease price pressures, especially over the medium term.

SDGs, Targets, and Indicators

SDG 8: Decent Work and Economic Growth

– Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 percent gross domestic product growth per annum in the least developed countries

– Indicator 8.1.1: Annual growth rate of real GDP per capita

SDG 10: Reduced Inequalities

– Target 10.4: Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality

– Indicator 10.4.1: Labour share of GDP, comprising wages and social protection transfers

SDG 12: Responsible Consumption and Production

– Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources

– Indicator 12.2.1: Material footprint, material footprint per capita, and material footprint per GDP

SDG 13: Climate Action

– Target 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries

– Indicator 13.1.1: Number of deaths, missing persons, and directly affected persons attributed to disasters per 100,000 population

SDG 16: Peace, Justice, and Strong Institutions

– Target 16.6: Develop effective, accountable and transparent institutions at all levels

– Indicator 16.6.1: Primary government expenditures as a proportion of original approved budget, by sector

SDG 17: Partnerships for the Goals

– Target 17.14: Enhance policy coherence for sustainable development

– Indicator 17.14.1: Number of countries with mechanisms in place to enhance policy coherence of sustainable development

Table: SDGs, Targets, and Indicators

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Source: ecb.europa.eu

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