They Said It - Recent Comments of ECB Governing Council Members
18 October 2023
By David Barwick – FRANKFURT (Econostream) – The following is an overview of recent comments made by European Central Bank Governing Council members. We include only comments made since the Governing Council meeting of 14 September, but earlier comments can still be seen in versions up to that of 11 September.
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Christine Lagarde (ECB)
14 October 2023
‘On the basis of our latest assessment, we consider that our key interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest 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.’
‘Having broadly stagnated over the first half of this year, real GDP is expected to remain subdued in the coming months. Incoming data suggest that activity has been weak in the third quarter, as slower global demand and the impact of tighter financing conditions weigh on growth. Manufacturing continues to suffer, while the services sector, having shown resilience in the first half of the year, has now also started to weaken. Economic momentum should pick up over time, as falling inflation and higher wages will increasingly support real incomes and lead to renewed growth in consumer spending.’
‘Risks to the outlook continue to be tilted to the downside. Growth could be slower if the effects of monetary policy turn out to be more forceful than expected, or if the world economy weakens further and geopolitical risks intensify. On the other hand, growth could also be higher than projected if the strong labour market, rising real incomes and receding uncertainty boost confidence among consumers and businesses and lead them to spend more.’
‘We expect euro area inflation to continue to decrease, owing to easing cost pressures as well as the impact of tighter monetary policy. Wage growth is expected to decline gradually, albeit remaining high over the projection horizon, driven by increases in minimum wages and inflation compensation in a context of tight, though cooling, labour markets. Profit margins, which expanded notably last year, are expected to provide some buffer to the pass-through of labour costs to final prices in the medium term. Inflation is expected to decline to levels close to 2% in 2025. However, the downward path has risks in both directions. Upside risks stem from renewed upward energy and food cost pressures, a de-anchoring of inflation expectations above our target, and higher than anticipated increases in wages or profit margins. The downside risks include weaker demand, due for example to a stronger transmission of monetary policy or to a worsening of the international economic environment.’
‘The key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.’
‘Inflation persists, but it is abating and even steadily declining. That’s good news. I think our efforts have played a part in this, as have some of the economic policies pursued in Europe. At the same time, growth is weakening, which is why the International Monetary Fund has revised down its growth projections worldwide, except for the United States.’
‘We raise rates to make the financing of economic activity more expensive in a manner that dampens demand, and to thus bring about an adjustment between supply and demand, notably through reduced investment and consumption. The goal is obviously not to create a recession, but it does involve enabling this readjustment to reduce inflation and, above all, prevent a dangerous inflationary spiral. We must avoid this at all costs. We want to get inflation back to 2%, and we will achieve that.’
‘We aren’t seeing that [a wage-price spiral] for the moment, but we are monitoring it closely. Wage growth is expected to be around 5.3% in the euro area in 2023, and that figure is projected to be 4.3% in 2024 and 3.8% in 2025. This is consistent with inflation rates returning to 2% over the coming years.’
‘There are three reasons why we are not pessimistic. We expect growth figures to increase next year. Inflation is currently falling significantly. And the employment rate is higher than it’s ever been in Europe, and it’s stabilising at that level. The big question right now concerns businesses. Will they accept absorbing part of the salary increases that will be negotiated this year and next in their margins – which didn’t change much in 2022? This is a key question. In our economic projections, we assume that businesses will behave as they have done during previous crises, in that they will reduce their margins a little in order to absorb part of the salary increases. The fall in demand should point them in that direction. It’s in their interest to do so, as public opinion will put them under pressure, as will the public authorities. The second element that is very important is energy prices. I think we have to get used to the idea that oil prices will remain high. This should spur us to pursue the fight against climate change even more vigorously, and to shift towards an energy mix that is less dependent on fossil fuels and foreign suppliers.’
‘[W]e have made our future decisions contingent on three criteria: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. … Now, based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our medium-term target. Our future decisions will continue to be based on these three criteria and they will ensure that the interest rates will be set at sufficiently restrictive levels for as long as necessary.’
‘For the ECB, the most important contribution we can make is to maintain price stability. For any type of fixed investment, price stability is crucial as it gives firms visibility on how their costs will evolve over time. But for green investments, which often do not provide returns until many years down the line, it is even more important that prices are expected to remain stable. This is especially true because, as our survey shows, a significant share of green investments are financed through retained earnings. Without price stability, these funds will lose their value or be redirected towards inflation-protected investments, both of which would hinder investment in riskier green technologies. But insofar as price stability is assured, we can also act to protect our balance sheet from climate risk and thereby support the green transition – which we are already doing. The measures we have taken include sharpening incentives by tilting our corporate bond purchases towards companies with a better climate performance, limiting the share of assets issued by entities with a high carbon footprint that can be pledged as collateral in our operations, and having stricter disclosure requirements. For 2024 and beyond, we will consider ways to continue addressing climate considerations in our monetary policy.’
‘We remain determined to ensure that inflation returns to our 2% medium-term target in a timely manner. Inflation continues to decline but is still expected to remain too high for too long. To reinforce progress towards our target, we decided to raise our key interest rates by 25bp earlier this month. Based on our latest assessment, we consider that our policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. In any case, our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. We will continue to follow a data-dependent approach, basing our decisions on our assessment of the inflation outlook in the light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.’
‘I repeat, we have not decided, discussed or even pronounced cuts.’
‘What we have decided is actually reflected in that key paragraph, which I have read twice because it is in the body of the text which was released to you earlier and also in the conclusion of the text. And it has caveats: “based on our current assessment”. So, it is based on all the data, the numbers, the analysis, the assessment, the projections and any other information that we have available. We considered that “the key ECB interest rates have reached levels” – note, levels – “that, maintained for a sufficiently long duration” – so there is the time element that comes up – “will make a substantial contribution” – substantial contribution, those are heavy words – “to the timely return of inflation to the target”. And we don't stop here. The whole paragraph is important and needs to be read in symbiosis. So the next sentence says that “our future decisions will ensure that the key ECB interest rates will be set at – one – “sufficiently restrictive levels” – two – “as long as necessary”. Those are really two parameters that are going to guide us very much. Not that we are forgetting about the three components that have guided our reasoning so far. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restrictions. In particular, our interest rate decisions will be based on our assessment – and I repeat there, it's in the in the text – of number 1, inflation outlook in the light of the incoming economic and financial data, number 2, the dynamics of underlying inflation, number 3, the strength of monetary policy transmission. So, that addresses your question and I think that the exercises that no doubt some of you will conduct in relation to “substantial contribution” and how that substantial contribution contributes from “significant level maintained for as long as necessary, based on current assessment”, gives you the answer to your question.’
‘…GDP has been revised significantly. We moved from 0.9% to 0.7% in 2023 and more importantly we moved from 1.5% to 1.0% in 2024. But let me just take a moment to explain to you what seems like the biggest revision, which is 2024. Most of it, actually three quarters of that revision of 0.5, is attributable to carry over from 2023. So we are going through a period of about five quarters of very, very sluggish growth and, based on our projection, we are coming to the end of it. The pickup according to the same calendar, the same quarter calendar that we have had in the June projections, picks up again in 2024. The downgrade from 1.5% to 1%, as I said, is a carry-over from 2023. In 2025, we have a small revision and we move from 1.6% to 1.5%, which is really a minimal revision. In essence, the recovery we had projected for the second half of 2023 is actually pushed out into time for various reasons that I'm happy to expand upon. That is what we are seeing.’
‘We are not saying either that we are now at peak. I think the sentence that I read is really the critical one. With today's decision, we have made sufficient contributions, under current assessment, to returning inflation to target in a timely manner. And as I said, both elements matter, the level sufficiently restrictive and the duration. But it's obvious that the focus is probably going to move a bit more to the duration. But we can't say that now we are at that peak. I know it is complicated, because the “as long as necessary” cannot be actually pinned down and the “substantial contribution” cannot be pinned down either, because we have to conduct an assessment every time against the data, against the analysis, against the various information that we derive from experts, and against the projections and what our staff offers.’
Isabel Schnabel (ECB)
06 October 2023
‘Overall, the recent news on inflation is encouraging. … its [core inflation’s] September print was lower than expected. It is welcome that inflation is coming down swiftly, but it is still well above our target of 2%, which we should aim to reach by 2025 at the latest to keep inflation expectations firmly anchored. Given the persistence of underlying inflation, that “last kilometre” may well prove to be the hardest.’
‘The recent rise in oil prices is telling us that we cannot take it for granted that inflation will only move downwards from now on, because we could have new supply side shocks stemming, for instance, from energy or food prices. This year, we’ve experienced frequent extreme weather events, which may have an impact on harvests and lead to higher food prices next year. In addition, the base effects from energy may eventually reverse, putting upside pressure on inflation. Therefore, we must not be complacent, and we should not declare victory over inflation prematurely.’
‘However, we cannot say that we are at the peak or for how long rates will need to be kept at restrictive levels. This will depend on the data, so we will continue to look at three factors: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. Currently, all of them are moving in the right direction. But I still see upside risks to inflation. There could be new supply side shocks. Moreover, wages could grow more strongly than expected, potentially accompanied by lower-than-expected productivity growth, while firms might not absorb those higher costs through their profit margins. Such risks need to be monitored carefully. If they materialised, further interest rate hikes could be necessary at some point.’
‘Lastly, we are currently discussing the design of our future operational framework for monetary policy implementation. As long as we do not know the role that minimum reserve requirements will play in this new framework, we should be cautious about making any far-reaching decisions. In any case, the reduction of excess liquidity through the shrinking of our balance sheet will continue for some time and, eventually, all our asset purchase programmes will go into full run-off.’
‘All this is pointing to subdued economic developments over the rest of this year. While a technical recession cannot be excluded, there are no indications of a deep or prolonged downturn. One reason is the labour market, which is still quite resilient, resulting in strong nominal wage growth. As inflation falls, real incomes are rising, which supports economic growth going forward. What is clear is that our monetary policy will continue to have a dampening effect on economic growth.’
‘The weakening of the economy, which is partly due to monetary policy transmission, makes it harder for firms to pass through higher wage costs to prices, meaning they may need to absorb higher costs through their profit margins. We see indications that this is happening. How this will play out over time will be one factor determining how persistent inflation, particularly underlying inflation, will be going forward.’
‘Since July last year, we have raised our key policy rate, the deposit facility rate, by 4.50% points – the steepest tightening cycle in the history of the euro area. We are also reducing our balance sheet, as banks are paying back the TLTROs and as we no longer reinvest the proceeds from maturing government bonds under the APP. All these measures are having a material effect on money dynamics, supporting disinflation. Since we started raising interest rates, broad money growth M3 has slowed down sharply and has turned negative on an annual basis in July. Lending to firms and households has essentially stalled. Developments in narrower monetary aggregates are even more striking. The stock of M1 is contracting at a fast pace. In July, it was more than 9% below its level a year ago. This is unprecedented: on an annual basis, M1 had not once declined since records began in the 1970s. These developments have sparked concerns that monetary policy may now be at risk of overtightening. In the past, real CPI-deflated M1 growth has been a reliable leading indicator for all recessions in the euro area. While activity in the euro area economy is clearly moderating, there are two reasons why monetary developments may currently not be a reliable measure of economic activity. The first is that developments in real M1 growth have typically been more informative about future turning points in real GDP growth than about the depth of the downturn. Sharp declines in real M1 growth were often accompanied by relatively moderate declines in the annual growth rate of real GDP. The second reason is that the volume of M1 critically depends on the opportunity cost of holding highly liquid, mostly overnight, deposits. Before the pandemic, these opportunity costs were historically low, as asset purchases and other unconventional monetary policy measures compressed the spread between long-term and short-term interest rates. As a result, the remuneration received by households and firms for holding overnight and time deposits was essentially identical, boosting M1. Historically, M1 accounted for around 40% of M3. By the end of 2021, that share rose to 73%. The sharp rise in interest rates has fundamentally changed this dynamic. Households and firms are actively and rapidly rebalancing their portfolios towards time deposits and other instruments with higher rates of remuneration, contributing to the sharp fall in M1. Portfolio rebalancing has also resulted in “money destruction”, in the sense that depositors are using bank deposits to purchase instruments outside the scope of M3 from non-money-holding institutions. For example, over the past year households have almost doubled their holdings of government bonds, and they have built significant additional exposures to government debt through investment funds. Given the still elevated share of M1 in M3, considerable further declines in M1 can be expected. For example, if the share were to fall back to its pre-global financial crisis level, M1 outflows could amount to around €2 trillion. Similarly, current negative M3 growth is consistent with households and firms bringing their portfolios closer into line with historical regularities. Such rebalancing of portfolios will not in itself affect consumption and savings decisions. Higher interest rates may induce households to save more. But these effects would come on top of the reallocation of the existing stock of savings. Therefore, in the absence of other mechanisms at work, the current magnitude of the decline in real M1 growth says relatively little about the extent of the slowdown in economic activity in the euro area and the future evolution of inflation.’
‘Decline in headline inflation, while underlying inflation proves more stubborn’
‘Inflation expectations in surveys and markets remain elevated or have risen further’
‘New supply-side shocks may pose upside risks to inflation’
‘Dynamics in wage growth remain strong, while labour shortages persist’
Philip Lane (ECB)
16 October 2023
‘The current interest rate of 4% will also do a great deal to bring inflation back down, especially as there’s still more tightening in the pipeline. People with fixed-rate mortgages are not feeling the effects of the higher interest rate yet. And when interest rates on savings finally rise, banks will have to raise interest rates on loans further, too.’
‘What I’ve been emphasising is that we are going to need to watch the labour market for quite a while. Collective wage agreements concluded in 2023 have to be seen in the context of a catch up from the high inflation last year. But to allow inflation to return to 2%, we need to see wage growth slow down in 2024. The unions know that the ability of firms to pay higher wages depends on the economic environment. And given the current, restrictive monetary policy we expect the economy to be pretty stagnant for the rest of this year and to grow modestly next year.’
‘Compared with interest rates, the role of the balance sheet is of secondary importance. The most effective way to tighten policy further, if necessary, is to further increase the interest rate.’
‘Because inflation is too high, we're trying to deliver interest rates that are significantly above the neutral range. We will keep interest rates high for as long as necessary. If we have inflation shocks that are sufficiently large or sufficiently persistent, we have to be open to doing more. We think inflation will return to 2% by 2025. Only when we are sufficiently confident of reaching that target, we can normalise policy. But this is quite some distance from where we are now. I personally will need more information about the wage settlements for 2024, and we will have to wait until spring next year before many countries release that information. So it’s going to be some time before we can have a high degree of confidence that inflation is on its way back to 2%.’
‘So, if you like, the base case is to maintain this level for as long as needed. And then, as we get closer to returning to the target, then we can start to normalise monetary policy. But we think it's a mistake to give you a calendar. A calendar in terms of the timeline would suggest we have more certainty than we have. So rather than say, here's the calendar, what we say is, it depends on the incoming data. And we will have new forecasts in December, next March, next June. One piece of data I’ve emphasised this morning, but also recently, is the wage data. So, wage increases right now are quite high. But we expect them to become lower next year. And for me personally, seeing that wage data come in lower next year is important. We're not going to know this until well into 2024. So, if you'd like, that's an important piece of information that is months away. So, this might help to understand, the calendar will depend on incoming data. But of course, another element of what we say is that it depends on the strength of monetary transmission. ... So, all of that is to say we live under uncertainty. We are clear, if the inflation outlook gets worse, if we see increases in the medium-term inflation outlook that's not consistent with returning to 2%, we will be prepared to raise rates more. But at this point, the, the risk to me is two-sided. We see that upside risk, but we also see downside risk. So, rather than, repeat, give you a calendar, we will say we're going to be data-dependent, and we will be in a data-dependent mode for a long time to come.’
‘And we know, even though the energy dynamic has turned around, what has not turned around is the wage dynamic, yet. So, coming back to what I said earlier on, we do assess that wage inflation will come down. But that's going to be sort of months, it’s going to be, it'll take time. So … what we saw in September is welcome, but we need to see further progress. The second issue is, this is going to take time. The third issue is in addition to wages, we also need to understand the behaviour of profits. So, in some service industries, a lot of tourism, for example, it was not just rising wages. There's also been definitely price hikes because of the very strong consumer demand last year for tourism. So, we need to see the profit dynamic cool off as well. So, for services inflation, I welcome September, but I think we will be looking at the service inflation data for quite a while. And again … regardless of whether it's December, next March, next June, what I said is that there's a lot of uncertainty, and essentially, some of this uncertainty is not something to be resolved by December. So, the wage dynamic, I don't think that by December we'd have a very different view. Our assessment of wages, I think, will be much more advanced next March and next June rather December. So, I would not overly focus on December as a critical decision.’
‘If you go back to our assessment at the end of ’22, it’s more or less on track. So, there was an assessment that this year, energy prices would calm down, food prices will calm down - but that’s happening more slowly than we would have liked – good prices would calm down, and services inflation would be the element that will take a couple of years to play out, because the fact that wages do have to increase this year, it’s natural to have further increases above normal next year and indeed again in ’25. So … it does help to explain why inflation doesn’t just collapse back to 2%. There is a tail. And in that tail of a year or two, there is the issue about, if people … say, “Well, you know, I thought this was going back to 2[%], why is it at 2.7 or 3 or whatever?” … And also … it moves quite slowly next year back towards 2. So next year will be big, I think, communication challenge to explain why progress is not super-fast, but at the same time, you should be confident we will get back to 2%.’
‘So, our whole project this year and facing it for the next couple of years is, is that [demand] environment changing? And this is where monetary policy plays a role. So, essentially now, with the hiking, the demand conditions have changed. People are now thinking twice about consumption. They’re thinking twice about investment. And that’s even more so for people whose incomes are being depleted by bigger payments on their mortgages. So, in that demand environment, the economic incentives facing firms changes. … They may have no choice in some cases to pay higher wages. Please remember, in a lot of Europe there are legislated increases in minimum wages. And so if you’re in a sector where there are a lot of people on a minimum wage, you cannot control that directly. And then the question is, “Can I pass this on to the consumer, or do I have to absorb it in lower profits?” And what we essentially have in our assessment would be a mix. It would be the case that we will still have services inflation above normal for a while, but it’s also the case, having made a lot of money last year, and also by the way hiking prices in anticipation of the fact that their labour costs would probably go up this year, we think there is some room for profits to normalise. … You can go a long way with just thinking about the economic incentives facing firms, and the unique opportunity last year to raise prices.’
‘So, when we say inflation is going to come back down, it’s not just because of the ECB, it’s the fact the Fed is tightening, the Bank of England, the Riksbank. … Where it’s needed, a lot of central banks are tightening. And we see this already in commodity prices, intermediate prices, producer prices. … A lot of these prices have moved quite a bit, and the last kilometre in pricing dynamics is to see this also show up in consumer prices. And, you know, our analysis suggests we should see more of that.’
‘We’re probably in a zig and zag kind of pattern back to 2%.’
‘So, we have a 2% target. If something takes us away from 2%, we will move our monetary policy to bring us back. But right now, the betting is there may well be upside shocks rather than downside shocks. But that’s a kind of point-in-time guess; let’s see how it plays out.’
'We are responsible for price stability. We are not outsourcing our responsibility. But how we get to 2% clearly depends on the fiscal decisions. So, it doesn't say it's an excuse or a reason not to get to 2%. ... There's always lots of interaction. They need to have a clear understanding of us, we need to have a clear understanding of fiscal policy.'
‘We are not at the inflation target yet, and therefore there is still work to be done in terms of bringing inflation down.’
‘It [core inflation] has been coming down for a while now, but these levels are still relatively high.’
‘[T]here remains upward pressure coming from wages. … That [current 5.5% wage growth] is not consistent with 2% inflation. In order to have price stability, we need to see wage increases come in lower than that. … so we still have two more years of fairly large wage increases, but every year less than the year before. And this is crucial…’
‘Based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest 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.’
‘So, we’re really not going to know about 2024 wages I would say until Easter next year. So it’s going to be a long time until we know whether that crucial assumption that wages will grow more slowly next year … is going to hold up or not.’
‘There’s a lot [of monetary tightening] still in the pipeline. … So, even though you might say, “You’ve done a lot, where’s the evidence?”, there’s a lot more will be showing up in the data in the coming months.’
‘Well, I think the way to think about it is we think inflation will come down from low fives in August to low threes by the end of this year. So, last autumn was really the peak of intense inflation pressure. We had very strong gas price increases last year which peaked in August ’22. And essentially, this autumn there will be base effects where that 5% inflation rate comes down into the threes. So, the 4% interest rate, if you like, is there to bring inflation from around 3% at the end of this year back to 2% in ’25. That’s the scale of the, if you like, of the underlying inflation challenge, and this is why this rate of 4% we think is going to do quite a bit in bringing inflation all the way back to our 2% target.’
‘So, I think we have a lot of evidence in the euro area that monetary policy is working. Credit is basically flat now, it’s come down from strong credit growth to where lending to firms and households is pretty muted. The economy is growing at a very low rate. So, all of these signals are there that monetary policy is working. There’s more slack being built up in the economy. And this, we think, will make sure that over the next year or two, price increases and the underlying cost increases such as wages will remain fairly contained. But … this is a point-in-time assessment from last week. I think the overriding message … is high uncertainty. So, we’re emphasising that we do think this 4% rate will do a lot, but also we’re loud and clear saying that number one, this rate has to be held for long enough to make sure inflation is firmly on its way back to 2%. So, there’s a lot of power in the messaging that this needs to be held for sufficiently long. And then second, we’re totally open in adjusting our policy over the next year or two as we see the incoming data. … There’s going to be a lot of data points really not just at the end of this year, but stretching well into next year that we need to see before we would have high confidence that indeed inflation is firmly on its way back to our target.’
‘It’s not a good idea, it’s not productive, it’s unhelpful to kind of commit to a forward guidance where we say these rates are going to be held no matter what. But equally, I mean, I think this message should not be overinterpreted. You would expect a central bank, if we saw the inflation assessment going off track, if we saw … the net signals from the incoming data saying that, that actually more is needed, of course we would do more. But that is purely a process issue. It’s saying in response to kind of sufficient deterioration in the inflation dynamic, we would do more. And that’s just reflective of the uncertainty we’re living in in these conditions.’
‘We do see this year as being fairly muted, you know, an economy that’s not growing very much. And then we do have a pick-up, really from the start of next year. … there’s a lot of reasons this year for the economy to stagnate. But as incomes go up – and remember, you know, basically from this point forward, we do think wages will grow more quickly than inflation - people’s incomes are going to pick up, and this will help consumption. On the investment side, there’s been a big adjustment for a year and a half now… This already started happening in early ’22. And as that adjustment, you know, concludes, we will start to see, I think, investment returning. Let me emphasise is the overall environment remains, if you like, not fragile. The banking system is in good shape. Because of the pandemic, household balance sheets … look in better shape than normal. Same for corporates. So, the kind of toxic mix, if you like, you need in order to kind of trigger a deep recession is not present. So, this monetary tightening, which we need to do to kill inflation, is in a context where we don’t see the fragilities that … happened 15 years ago.’
‘So, this [higher oil prices] is why we did raise the inflation forecast for this year and next. ...will it broaden out, will higher energy costs trigger a new round of price increases across the services sector, across manufacturing? … So, with these restrictive interest rates, with relatively contained demand conditions, you know, a firm might wish to pass on high energy costs to their customers, but they’re much more at risk this year of losing market share if they try to do so.’
‘The inflation outlook remains subject to considerable uncertainty. On one side, upside risks to inflation include potential renewed upward pressures on the costs of energy and food. Adverse weather conditions, 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. On the other side, weaker demand – for example owing to a stronger transmission of monetary policy or a worsening of the external environment – would lead to lower price pressures, especially over the medium term.’
‘Manufacturing output is set to remain weak in view of further moderation in export demand and tight financing conditions, while past support from order backlogs is declining. Services have so far contributed positively to growth, due to the higher demand in contact-intensive sectors, but there have been clear signs of a slowdown since June. In the near term, private consumption is expected to remain weak, while housing and business investment are seen as declining further, also driven by the monetary policy tightening. Over time, the economic momentum should pick up as real incomes are expected to rise, supported by falling inflation, rising wages and a strong labour market, which will underpin consumer spending. However, activity levels will be dampened as the policy tightening and adverse credit supply conditions increasingly feed through to the real economy. The expected gradual withdrawal of fiscal support is also likely to weigh on economic growth in the coming quarters. The labour market has so far remained resilient despite the slowing economy but shows signs of losing momentum. … employers have become more reluctant to hire in the face of deteriorating demand and gloomier prospects for the year ahead. In addition, strong labour demand has begun to moderate, with indicators of job vacancy rates edging down in recent months.’
‘The risks to economic growth are tilted to the downside. Economic growth could be slower if the effects of monetary policy are more forceful than expected or if the world economy weakens owing, for instance, to a further slowdown in China. That said, growth could be higher than projected if the strong labour market, rising real incomes and receding uncertainty mean that people and businesses become more confident and spend more.’
‘In explaining this decision, the incoming data have largely validated our previous assessment of the inflation outlook, while most measures of underlying inflation have started to ease. Furthermore, the evidence indicates that the transmission of our monetary policy to broader financing conditions and the real economy is firmly taking hold. The economic slowdown since the middle of 2022 is set to continue in the near term and the level of GDP will be considerably lower than we had previously expected. The resulting additional slack will further contribute to the disinflation process, while a significant portion of the tightening from our past rate hikes is still in the pipeline.’
‘Based on our current assessment (and cross-checked with external perspectives), our key policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. At the same time, the high level of two-sided uncertainty around the baseline means that we will remain data dependent in determining the appropriate level and duration of restrictiveness in our monetary stance. In assessing the inflation data over the coming months, base effects will play a significant role, making it unusually challenging to extract the underlying component from the reported data.’
‘Among the main open questions that the incoming data will need to answer will be the dynamics of wages and profits in the coming quarters. In particular, the disinflation embedded in the staff projections is built on a deceleration in wage growth, with the rate of increase in compensation per employee dropping from 5.3% in 2023 to 4.3% in 2024 and 3.8% in 2025. These projected rates of wage increases are sufficient to restore the pre-pandemic level of real wages within the projection horizon, with the rates of wage inflation in 2024 and 2025 well ahead of the rates of price inflation. It will be well into the new year before the area-wide 2024 wage trends become fully visible: this fundamental source of uncertainty will not be resolved any time soon. In turn, the next phase in wage adjustment will also depend on the extent to which labour demand is affected by the slowdown in economic activity. In particular, the dampening of activity levels and the increase in financing costs might lower the propensity to hoard labour.’
Luis de Guindos (ECB)
04 October 2023
‘Economic activity broadly stagnated over the first half of the year and is likely to remain subdued in the coming months. … there are signs that labour market momentum is slowing as the economy weakens.’
‘[U]nderlying price pressures remain strong, although most measures of inflation have started to ease thanks to aggregate demand and supply becoming more aligned and lower energy prices in recent months being passed on to other parts of the economy. Labour costs are increasingly contributing to domestic inflation, while the latest data indicate that the contribution of profits fell for the first time since early 2022. Most measures of longer-term inflation expectations currently stand at around 2%, but the increase in some indicators needs to be closely monitored.
‘In summary, while inflation continues to decline, it is still expected to remain too high for too long. The ECB is determined to ensure that inflation returns to our 2% medium-term target in a timely manner.’
‘[T]he key ECB interest rates have now reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. we will continue to follow a data-dependent approach to determining the appropriate level and duration of a restrictive monetary policy stance.’
‘All in all, in my view, the transmission of our policy tightening to financing conditions seems to be well underway.’
‘The transmission of monetary policy tightening to the real economy is proceeding at a slower pace, with a substantial share of the transmission still in the pipeline.’
‘The downward impact of our tightening so far on GDP and inflation is estimated to average around 2 percentage points over the 2023-25 period, with the strongest effect expected on GDP growth this year and on inflation over the next two years.’
‘At the same time, uncertainties regarding transmission remain…’
‘Based on our latest assessment, risks to economic growth in the euro area are tilted to the downside.’
‘On the inflation side, weaker demand owing to the stronger transmission of monetary policy or the worsening of the international economic environment could put stronger downward pressure on prices than currently expected. Conversely, renewed upward pressures on the costs of energy and food – with oil prices having already increased in recent months – and the unfolding climate crisis could push commodity prices up by more than expected.’
‘Wages have been catching up; elevated wage growth is therefore embedded in our projections, albeit at a decelerating pace. But a lasting increase in inflation expectations above our target owing, for instance, to higher-than-anticipated increases in wages or profit margins, could drive inflation higher, including over the medium term. A slower rollback of this fiscal support or an expansionary fiscal policy stance in the coming years would pose significant challenges to taming inflation and bringing it back to our target.’
‘We reckon this level of rates, if maintained over time, will make a substantial contribution to our goal, which is the convergence of inflation toward the 2% target.’
‘In transmission you have two different legs. The first one is from our monetary policy decisions to financial markets and banks. In that first stage, the transmission is almost complete. You can see it. … The second phase is how the impact of the tightening of financing conditions feeds through to the real economy. And here there is much more uncertainty. We have seen a slowdown in economic activity. But there are other factors behind that, for instance the impact of inflation on households’ disposable income and the evolution of exports, which is related to the slowdown in the global economy. The key point that will determine our future decisions is how intense the transmission of our monetary policy will be to the real economy, and indirectly to inflation. That is why we believe that the present level of interest rates, if maintained over time, will give rise to a reduction in inflation towards our definition of price stability.’
‘We do not at all want to create an unnecessarily painful recession. We must bring inflation to our definition of price stability while simultaneously trying to minimise the pain that could create in terms of a slowdown in the economy. This is, at the end of the day, a very delicate balance. If the transmission is incomplete, then we should be a little more patient. If the transmission is much closer to completion, then we should consider the next steps to guarantee that inflation converges to our target.’
‘Yes, it [the recent rise in oil and gas prices, coupled with a weaker euro] makes our task more difficult. I would not say that it is a game changer. But my concern is that the rise in the oil price could have a detrimental impact on inflation expectations for households and corporates.’
‘First of all, progress in a very steady way towards our definition of price stability, i.e. to inflation of 2% along with projections indicating it will remain at that level in a sustainable way. Starting to talk about rate cuts now is premature. We have reduced inflation from more than 10% to 4.3%. Still, I think the last stretch is going to be more difficult. We are on our way towards 2%. That’s clear. But we must monitor that very closely, as the last mile will not be easy. … our predictions indicate that inflation will continue slowing down over the next months. But we need to monitor it very closely because the elements that might torpedo the disinflation process are powerful.’
‘My impression is that after four years without EU fiscal rules, governments may have got used to a little bit of a “whatever it takes” approach with respect to fiscal policy. But that has to change. Having a tightening of monetary policy and, simultaneously, an expansionary fiscal policy would be a very bad policy mix. And being more concrete, what would be detrimental is a fiscal deficit that goes above the level of 2022.’
‘Some of my colleagues in the Governing Council have been quite outspoken with respect to the need for starting the process of quantitative tightening on the PEPP. But in the formal structure of the Council, we have not even started the discussion. It will arrive sooner or later.’
‘Risks to inflation are now balanced.’
‘Underlying inflation’s worst moment has passed and it should moderate.’
‘With this hike, and with the hikes that we have carried out in recent months, we are ultimately reaching a level that over time, we believe will be a very important contribution for inflation to return in the coming quarters to a level consistent with price stability, which is 2%. … But we believe that with the current level, if it is maintained for a while, there is a high possibility that in before too long, inflation will converge to 2%.’
‘It is very soon [to expect rate cuts this year]. I think inflation is going to continue to decline, both headline and core inflation. The markets are betting; the markets can be wrong. They are based on a series of hypotheses that sometimes do not come true, that we will start to lower rates in June '24. Well, it is a bet; it may be right, it may not be right.’
Fabio Panetta (ECB)
20 September 2023
‘As we navigate our way through 2023, the fall in energy prices has created new policy challenges, representing the fourth phase [of interaction between fiscal policy and monetary policy]. During this phase it has become necessary to withdraw fiscal energy support measures in a timely manner. Failure to do so could create a demand impulse that would exacerbate inflationary pressures, which would in turn trigger a monetary policy response. This would be highly inefficient, akin to giving with one hand and taking away with the other.’
‘Fiscal policy should be countercyclical in order to smooth economic fluctuations, while fostering public investment to support potential growth. And for fiscal policies to contribute to both price and macro-financial stability, they need to complement monetary policy when needed. Price stability, in turn, supports fiscal sustainability by keeping government financing costs low over time.’
Frank Elderson (ECB)
27 September 2023
‘We have said it very clearly: we consider that, with the decisions we’ve made and on the basis of our current assessment, the current interest rate levels will make a substantial contribution to us reaching our inflation target in the medium term. Does that mean policy rates have peaked? Not necessarily. There is still a lot of uncertainty. That’s why we take these decisions meeting by meeting, on a data-dependent basis. Making any predictions about what we will do next would not be consistent with that approach.’
‘Of course, there are upward risks to inflation. There could, for example, be upward pressures on food and energy prices – since July we have been alluding in our monetary policy statement to the importance of weather and climate conditions in this respect. Climate change could also lead to a shift in longer-term inflation dynamics, but we need much more granular analysis into how exactly physical and transition risks will ultimately affect inflation.’
‘What we’re seeing is a more protracted period of sluggish growth than we were expecting. Of course, we need to look at the various explanatory factors, such as lower demand for euro area exports, the impact of tighter financing conditions, lower residential and business investment, and the weakening services sector. On the other hand, labour markets are still strong and disposable income is expected to rise, which would have a stabilising effect on overall GDP growth.’
Joachim Nagel (Bundesbank)
17 October 2023
‘The monetary policy measures are working. However, inflation remains high. And the uncertainty also. In the ECB Governing Council, we discuss and evaluate how the economy and the inflation outlook are developing. We make decisions based on the data.’
‘Inflation is now falling again, but the “greedy beast” has not yet been defeated. What is worrying is the continued very high core rate, which excludes volatile energy and food prices. It gives an insightful picture of the underlying inflation trend, and it clearly hasn't broken yet. We in the ECB Council must continue our restrictive stance until we can ensure that inflation returns to our medium-term target of 2%.’
‘Given the Eurosystem's primary objective of ensuring price stability, climate-related financial risks cannot be neglected. In this respect, I think it makes sense to also align the corporate bonds that we currently hold for monetary policy reasons with their climate risks. However, it would be wrong to invest permanently in green securities if monetary policy does not warrant it. We also cannot align interest rates with the goal of supporting climate-friendly investments. Creating favorable financing conditions for socially desirable investments is the task of other state institutions, especially development banks. The most valuable contribution of monetary policy to climate policy is price stability. Inflation affects the steering effect of prices in general and therefore also of CO2 prices in particular. However, these are still the most efficient instrument of climate policy.’
‘Incidentally, the labor shortage can also have an impact on the Eurosystem’s monetary policy. Because it gives the employee side greater bargaining power in wage negotiations. If this results in additional inflationary pressure, monetary policy would have to respond.’
‘In my opinion, there are still many good reasons for not ending the rate hikes at this stage, because inflation is still expected to be too high for too long. While headline inflation has fallen slightly, core inflation has been and remains stubbornly high. However, there are signs of a slowdown in the real economy. This development is also due to the restrictive monetary policy, which is designed to do just that. In order to lower inflation, economic momentum must be slowed down to a certain extent. Exactly how much is something we are currently discussing.’
‘I fundamentally believe that we can end this rate hike cycle with a "soft landing" of the economy, and several factors support this thesis. For example, unemployment is at an all-time low, and this is despite the fact that we have raised key interest rates by 450bp. This is a completely new phenomenon. We should be satisfied with this result, because it says that labour markets are resilient, while inflation can be brought back to 2% through a restrictive monetary policy.’
‘I would rather return to a leaner central bank balance sheet even more quickly. We definitely need to keep an eye on the PEPP.’
‘Inflation remains high despite the weak economic development in Germany. In August the European harmonized inflation rate was 6.4%. Although this is significantly less than the 11.6% at the peak in October 2022, it is still far too high and well above the Eurosystem's 2% target. And for the next two years, we at the Bundesbank are also assuming values well above 2% for Germany, namely 3.1% in the coming year and still 2.7% in 2025 according to our forecast from June. A look at core inflation, which does not take energy and food into account, shows how persistent inflation is in this country. In June we forecast a level of 5.2% for 2023; this would mean that core inflation would be even higher than in the previous year, when it was 3.9%. We only expect core inflation to be noticeably weaker in 2024 and 2025.’
‘The inflation rate in the euro area is also not moving towards 2% at the desired pace. In August it was 5.2%, only slightly below the July figure of 5.3%. We saw a decline in the core rate from 5.5% in July to 5.3% in August. Nevertheless, core inflation remains stubbornly high and is only expected to fall gradually. Because it is increasingly being driven by domestic economic factors.’
‘The ECB Governing Council is therefore facing a stubborn inflationary environment. It therefore stuck to its consistent monetary policy course at its most recent meeting and increased the key interest rates again. This is the tenth interest rate hike in a row since July 2022. The interest rate for the deposit facility, which is crucial for the monetary policy orientation, has now risen to 4%. Was that it with the rise in key interest rates? Have we reached the plateau? This cannot yet be clearly predicted. The inflation rate is still too high. And the forecasts still show only a slow decline towards the target value of 2%. The key interest rates will have to remain at a sufficiently high level for a sufficiently long time. What this means exactly cannot be said yet: it depends on the data. But the goal is clear: That the inflation rate falls to 2% as soon as possible.’
François Villeroy de Galhau (Banque de France)
12 October 2023
‘The level of our ECB policy rate is at present appropriate.’
‘We need to balance the risk of doing too little against the risk of doing too much — I would say these risks are now at least symmetric. In the euro area, monetary patience is now more important than activism.’
‘If we can follow a monetary path which ensures a soft landing toward destination — which means avoiding recession and keeping positive growth — rather than a hard landing, it’s a much better route for our fellow citizens.’
‘The message from the September Council is that from now on, duration counts more than level, given the delays in transmitting our monetary decisions. Since then, we have had good inflation figures. And at the same time a sharp rise in long-term rates: we may consider it excessive, but it actually contributes to tightening the financing conditions of the European economy. So today, I think there is no justification for a further increase in ECB rates.’
‘[T]here has been a lot of debate on the peak of rates: we must now speak rather of a plateau, and we will remain for the necessary time on this plateau.’
‘[W]e are seeing the first signs of a turnaround in underlying inflation, excluding energy and food: this is what monetary policy is targeting.’
‘We are of course attentive, but I do not see a price-wage spiral. There has been a logical acceleration in nominal wages, but according to our estimates we are passing the peak of this acceleration in France. Rather, we expect a deceleration in the coming quarters, following the fall in inflation. This also seems true in countries where there is greater concern about second-round effects, such as Germany or the Netherlands.’
‘The rise in petrol prices therefore does not prevent the fall in overall inflation. That said, we will be vigilant in the face of the risks of contagion on inflation expectations and wage negotiations…’
‘[W]e are not faced with the dark scenario, the “hard landing” that many feared last winter. I believe that our monetary policy can and must now aim for a “soft landing” for the euro zone: we will emerge from inflation, and we will probably do so without a recession.’
‘This morning's INSEE figures show that headline and core inflation are gradually falling across Europe, underlining the effectiveness of the European Central Bank's monetary policy. In France too, we are seeing a marked fall in core inflation, to 3.6%, and particularly in services inflation. This data reinforces our confidence that inflation in the Eurozone and France will return to its 2% target by 2025, confirming that our current key interest rates are appropriate. Recent volatility in the long-term bond market has been somewhat excessive.’
‘Headline inflation has already fallen back from its peak of 10.6% in October last year to 5.2% in August, and strangely enough this criticism contains elements of good news. Firstly, it implies that monetary policy has indeed had a powerful effect on the economy. Not so long ago, there was a debate about whether the IS curve had become fairly flat and our instruments were weak in combatting inflation. Second, it shows, at least in several countries including France, that the inflation psychology has switched, with receding concern over upside inflation risks. Our resolute monetary policy over the past year was indeed intended to break a self-sustaining inflationary psychology. Households’ and firms’ inflation expectations have peaked, supporting this assessment.’
‘However, the criticism that we have done too much misses two points in my opinion. It somewhat overestimates the risks to growth: what we presently see – and forecast – is a slowdown, not a recession; and employment remains at record highs, which is a positive surprise. And it underestimates the persistence of inflation. Headline inflation has indeed come down rapidly. But regarding underlying inflation, the news is less clear-cut. The HICPX rose to 5.7% in March this year but fell back to 5.3% in August. In the Eurosystem, we look at a battery of indicators and those that try to identify instant inflation are lower than this, below 3%; they all point in the right direction. Nevertheless, annual nominal wage growth remains sustained, although showing early signs of peaking: it is forecasted to reach in average 5.3% in the euro area in 2023, and 4.3% and 3.8% respectively in 2024 and 2025. Furthermore, some commentators talk about “the difficulty of the last mile” in the return of inflation back to the 2% target. However, this phrase supposes non-linearities in the Phillips curve, which have not been really identified in the European case. And some suggest that as a result we should accept that “near-enough”, say 3%, is close enough to target rather than set a much tighter policy in the pursuit of 2%. I am not fixated on 2.0% to the nearest decimal place, but I do believe that it would be very counterproductive to change or relax our inflation target, either explicitly or implicitly.’
‘First, we should take into account the very strong and fast transmission of our monetary policy tightening to financing conditions. ... If anything, this transmission has been even faster than we expected. ... However, there is still more transition to come as fixed-rate loans roll off and are renewed at higher rates. This process takes time and we at the Banque de France estimate that there could be still between 40 and 50bp of increase in lending rates to non-financial companies yet to come. A last word on monetary transmission: while its ‘first leg’ (to financial conditions) is obviously quick, we are less clear at this stage about its second leg (from financial conditions to the economy). Second reflection: we clearly have a primary objective, which is our destination, bringing inflation back towards 2% by 2025. There can be no doubt about our determination and commitment. We have growing confidence in achieving this – see our latest forecast about 2025 inflation. And hence, subject to this primary objective, we can now incorporate a secondary one concerning the path: if we can reach the destination with a soft landing rather than a hard one, it’s a much better route, for the economy, for our fellow European citizens, and for the sound conduct of fiscal policies. The risk of doing too much needs to be balanced against the risk of not doing enough. In my judgement, these risks are now at least symmetric. In the latter case, inflation would remain persistently above target and inflation expectations might become de-anchored. This is a manageable risk because we always can do more if the risk materialises. But in the risk of doing too much, with the economy falling into recession and causing a sharp deceleration of inflation, we would then have to rapidly reverse course. Hence, “testing until it breaks” is not a sensible way to calibrate monetary policy. This suggests that we should now focus on the persistence of policy rather than the constant pushing of rates higher – duration rather than level. Patience and persistence in monetary policy does not mean inaction. Our current stance is restrictive – market implied real rates are above our estimates of the neutral rate – so maintaining the current level will bring down inflation. In the same way that there is a risk of doing too much in the future, there is the opposite risk of easing too early. If markets fully incorporate our persistent strategy, they shouldn’t expect rate cuts before a sufficiently long period of time; then markets will endogenously extend the duration of elevated rates, contributing to the appropriate calibration of the stance. In any case, our policy should remain data dependent. In particular, we have to monitor closely the recent rebound in oil prices. At present, it’s far from a general commodity shock like in 2021-22; but we have to monitor its possible effects on inflation expectations and wages: underlying inflation remains our key indicator. A persistent strategy is not a forward guidance that rates will never increase again. It remains a pragmatic strategy: and as a pragmatist, I clearly stress today that “based on our current assessment, we consider that our key ECB interest rates have reached levels that, maintained for a sufficiently long duration”, are broadly consistent with the timely return inflation to our target, that is 2025.’
‘Rates are the remedy, and this remedy is proving highly effective. ... It's like a medicine. You have to be patient and persistent enough to take the medicine. So, we've raised the European Central Bank rates ... to 4%. From today's perspective - there may be shocks, etc. ... but from today's point of view, we're going to keep these rates at 4% for a long enough time. It's an effective remedy.’
‘From today's perspective, we think it's a good level ... barring any new developments, the most important thing now is to be patient, to be tenacious. ... We're at the right dosage... but you have to take the medicine long enough, and we're going to see this deceleration in inflation... We're looking at the evolution of the disease, which is inflation. There are encouraging initial signs, but as the disease diminishes and one day disappears, that is returns to around 2%, then we'll be done with the remedy.... At that point, interest rates may fall again, but we're not there yet.’
‘…today, there are the first successes: we have passed the high point of total inflation, and that on food - which is the most significant for the French. But this is not enough, of course. We are committed to bringing inflation back towards the 2% objective by 2025, in France and in Europe. To cure this disease, we must know how to be tenacious about the remedy that is interest rates: we will therefore maintain those of the ECB at their current level of 4% for as long as it takes.’
‘…there is indeed some encouraging news: headline inflation has passed its peak since the beginning of 2023, and it seems that core inflation is following suit. Indeed, the latter started to recede, to stand at 5.3% in August (down from 5.5% in July and 5.7% in March) in the euro area. Obviously, these inflation rates remain too high: we must and we will bring inflation back towards our 2% target by 2025. I reiterate this morning this clear commitment which is fully consistent with our latest ECB forecasts. Monetary policy is the first line of defence, and the main remedy for this disease. I won’t make comments about yesterday’s Governing Council and monetary decision. But our collective fight against inflation calls for a more appropriate policy mix: the revision of the European economic governance framework provides a major window of opportunity to realign fiscal and monetary policy. Alongside high inflation, public debts have reached historical levels mainly due to unprecedented waves of shocks, but also, for several countries, to legacy debts. Now that these shocks are fading, governments must avoid an overly expansionary stance that would further fuel inflationary pressures. We therefore need a more coordinated and realigned fiscal and monetary stance.
Ignazio Visco (Banca d’Italia)
13 October 2023
‘My impression is that while fiscal prudence is necessary - so I think that for the next years, there is nothing we can do really to increase our fiscal space except in better composition of expenditures - we can grow more, and that is the main reason why I think markets are worried: the ability of the Italian economy to grow.’
‘The differential of the Italian rates with respect to the German is relevant, but it’s far from that [of the debt crisis]. And there are no signs really that it should rise really in a territory which would require us to intervene. But if there was a need, I think we can. It has to do with this PEPP being maintained. We decided really to keep it until the end of 2024. I think that’s a good approach, also to somehow tranquilise the markets. But I don’t think that we should really have all this worry and tension now.’
‘Obviously you need to understand why markets may be worried. I don’t think it is speculation against the country [Italy]. I think it is basically a concern about … the long-term potential growth rate of the economy.’
Pablo Hernández de Cos (Banco de España)
16 October 2023
‘In my view, the recent increase in long-term interest rates is not related to domestic factors, such as changes in market expectations for euro area inflation. Rather, it has been driven by US market dynamics, and mainly by an increase in term premia, and passed through to other international markets due to the dominance of US bond markets. In any event, it has ultimately led to a significant increase in real rates in the euro area, particularly at the long end of the yield curve. The implications may differ from when rates are driven up by, for example, the market suggesting that euro area inflation may be more persistent. This is not the case now.’
‘The incoming inflation data have basically confirmed our expectations for headline and, more importantly, underlying inflation. We have seen real yields rise, long-run inflation expectations decline and stock prices fall. Thus we have observed an additional tightening of financial conditions. And the latest data are indicating weaker growth. Indeed, based on our now-casting models, we cannot fully rule out slightly negative growth in the third quarter, which would be a mildly negative surprise as compared to staff projections. And the new war in the Middle East will certainly not help boost confidence, consumption or investment. So I think our September assessment for our monetary policy going forward is even more valid today. In any event, we should continue to emphasise that uncertainty remains very high, while following a data-dependent approach and remaining fully committed to meeting our target.’
‘I think caution is in order. There is a connection between increasing rates and reducing the balance sheet. We decided to use rates as the main instrument for setting our monetary policy stance. In parallel, we are also reducing our balance sheet, which complements our monetary policy tightening. And our September assessment is based on the combination of both instruments. Indeed, the ECB has reduced its balance sheet far more robustly than other central banks. If at any point we discuss changing the current path of balance sheet reduction, we will have to assess the degree of tightening provided by the combination of these two tools and to what extent such action would be compatible with reaching the inflation target in the medium term. Including of course the fact that, as I have said, financial conditions have tightened further over the last weeks. In other words, we have to be consistent with our framework. And then there is the important issue of PEPP reinvestments standing as the first line of defence against potential fragmentation in the transmission of our monetary policy. Admittedly, over the last year or so such fragmentation has been very limited. But we can’t exactly say how much this owes precisely to the PEPP’s dual role, including its role as the first line of defence against fragmentation. In addition, the slower growth setting and the additional tightening imported from the US has to be factored in. So having this first line of defence is to be welcomed.’
‘In the coming years, the recovery of growth will be supported by various factors, including the improvement in disposable income in real terms due to the increase in nominal wages and the expected decrease in inflation. However, the sharp rise in interest rates will continue to put downward pressure on economic activity. In a context in which high uncertainty prevails, the risks associated with growth projections are mainly downward oriented. In particular, growth could moderate if the transmission of monetary policy effects were stronger than anticipated, or if the global economy weakened due to, for example, a further slowdown in the Chinese economy. Furthermore, the evolution of geopolitical tensions continues to be a great source of uncertainty.’
‘Furthermore, the risks associated with these inflation projections are considered to be balanced. Inflation could be higher than expected if new upward pressures on energy and food costs materialize. Higher-than-expected increases in wages or business margins could also lead to a rebound in inflation, even in the medium term, especially because wage negotiations are taking place in a context of little slack in the labor market, with a historically low unemployment rate and labor shortage, despite intense recent growth in labor participation. Conversely, a weakening of demand, due, in particular, to a more intense transmission of monetary policy than expected or a worsening of the economic environment, in particular due to the materialization of geopolitical risks, would translate into lower growth. and in an attenuation of inflationary pressures. Regarding the transmission of monetary policy, it is proving very strong both in terms of credit interest rates and in terms of the volume of credit and granting standards. The degree of transmission is also higher than initially estimated. It is also estimated that a significant part of this transmission remains pending, which will occur in the coming quarters.’
‘The current level of interest rates, if maintained for a long enough period, would be broadly consistent with achieving our 2% inflation target over the medium term. This is also the current view of most analysts and financial markets. The significant increase in real interest rates, particularly long-term, that has occurred in recent days, as a result mainly of developments in the United States and not so much of the evolution of the euro area, reinforces this assessment. In any case, this is an assessment conditioned by the information currently available. Given the high level of uncertainty that exists, it cannot be ruled out that new disturbances may occur. We will have to respond to them depending on their origin and magnitude. In this regard, our future decisions will ensure that interest rates remain at sufficiently restrictive levels for as long as necessary and we will continue to follow a data-driven approach. This is particularly important to avoid both a tightening of monetary policy that proves insufficient, which would prevent the achievement of our objective, and an excessive tightening that generates unnecessary damage to economic activity and employment.’
‘In any case, uncertainty remains very high and the risks to economic growth projections are tilted to the downside. In particular, growth could be slower if the effects of monetary policy are more forceful than expected, or if the world economy weakens, for instance owing to a further slowdown in China.’
‘Importantly, after two years of very high inflation, the medium-term inflation expectations of consumers, professional forecasters and market participants alike are still well anchored around our 2% target. On longer-term inflation expectations, there is an apparent disconnect between survey-based and market-based metrics, with the former converging to target and the latter remaining somewhat higher. The disconnect, however, essentially disappears if one removes the inflation risk premium embedded in market-based measures. The genuine inflation expectation component incorporated in the observed 5-year 5-year forward inflation compensation derived from inflation swaps is essentially 2%. One would expect the inflation risk premium to increase in times like this, when inflation is still high and growth is subdued and therefore there is still much uncertainty about inflation dynamics.’
‘As in the case of growth, uncertainty surrounding the inflation outlook is high and we will have to continue monitoring the different sources of risk which are, in my view, now broadly balanced.’
‘The above assessment suggests that the current level of the key ECB interest rates, maintained over a sufficiently long duration, would be broadly consistent with achieving our 2% inflation target in the medium term. In other words, this means that, if we keep rates at these levels long enough, there are very good chances that we will be able to reach our 2% target in a timely manner. This is also in line with the view of most analysts and financial markets, which expect a rapid decline in inflation over the course of this year and the next. But let me emphasise that this is a conditional statement. We have come to this conclusion on the basis of today’s information and the level of uncertainty about the future evolution of the economy remains high and subject to geopolitical risks, the course of which is difficult to anticipate. There could be further shocks, and our response to them will depend on their origin and scale and on their impact on the inflation outlook. In this context, our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary and we will continue to follow a data-dependent approach to determining the appropriate level and duration of monetary restriction. This approach is particularly important to avoid both insufficient tightening, which would impede the achievement of our inflation target, and excessive tightening, which would unnecessarily damage economic activity and employment.’
‘In the coming quarters, we are likely to see low growth. This more negative short-term outlook is the main reason behind the ECB experts lowering their projections, and they now expect cumulative growth for the period 2023-2025 to be 1% lower. This is a significant downward revision. And the risks to this projection are tilted to the downside. But the baseline scenario is not a dramatic one, and they do not foresee a recession. As regards inflation, the staff projections for 2023 and 2024 have been revised slightly upwards, but that is mainly because of higher energy prices. For 2025, the projection is now slightly lower, at 2.1%, close to our target. And the risks to inflation are now balanced. In my view, developments since June have strengthened our confidence that the inflation path will move towards 2.0% by 2025. … There are several factors: our monetary policy is being transmitted forcefully and increasingly dampening demand, which is an important factor in bringing inflation back to target. And, indeed, as I mentioned, the growth outlook has been revised downwards and the risks are on the downside. In addition, underlying inflation is now easing, so we seem to have finally turned the corner. Moreover, underlying inflation and wages are performing as expected. There are indeed some catch-up effects in wages, after the strong real wage losses in 2022, and we expect this catch-up to continue in 2024 and 2025 but, if wages behave as expected in the projections, and labour productivity recovers in line with its past procyclical pattern, this should lead to moderate growth in unit labour costs and, therefore, be compatible with inflation gradually falling towards our target. At the same time, having increased significantly in 2022, corporate profit margins are receding. This is compatible with the assumption in the projections that margins will act as a buffer, in a context of higher wages and lower demand. Of course, there are upside risks to inflation, related in particular to potential higher energy prices. But, in the opposite direction, weaker demand is expected to ease price pressures.’
‘We always have to be very vigilant about inflation expectations. But for me a key point is that after two years of very high inflation, the medium-term inflation expectations of consumers, professional forecasters and market participants alike are still well anchored around our 2% target. On longer-term inflation expectations, there is an apparent disconnect between survey-based and market-based metrics, with the former converging to target and the latter remaining somewhat higher. The disconnect, however, essentially disappears if one removes the inflation risk premium embedded in market-based measures. The genuine inflation expectation component incorporated in the observed 5-year, 5-year forward inflation compensation derived from inflation swaps is essentially 2%. One should expect the inflation risk premium to increase in times like this: when inflation is still elevated and growth is subdued.’
‘Based on the information available today and using a range of analytical tools, we can say that the interest rate level we have now reached, if maintained for a sufficiently long time, is broadly consistent with achieving our inflation target in the medium term. But that is a conditional statement. We have come to this conclusion on the basis of today's information. Uncertainty remains high. There could be further shocks, and our response to them will depend on their origin and scale and on their impact on the inflation outlook. … We will remain vigilant and data dependent. Let me give two examples: if the risks to growth materialise and there is a sharper downturn than expected, we will of course respond to that. But equally, we will also respond if inflation turns out to be higher than expected, for example because of stronger profits or wage growth.’
‘That [how long is "long enough"] is a very difficult question and cannot be answered in advance. It depends on whether or not inflation and growth develop in line with their projected paths. But it is certainly too early to talk about interest rate cuts at the moment. … Looking at today's information, we certainly can't rule out cuts. But I do not want to and cannot confirm them [market expectations] either. As I said, uncertainty is still very high.’
‘First of all, the most important thing is that we have not discussed this issue [QT] so far. What is clear is that when we talk about tightening, we are talking about interest rates - the level and duration - and the balance sheet. There is a certain trade-off between these two instruments and both determine the degree of monetary tightening. In this trade-off we decided to use interest rates as the primary tool for our policy. That is important to keep in mind. And, as I said, we have now done a lot very quickly in terms of hiking rates and we are confident that with the steps we have taken so far we will achieve our goal in the medium term. I should also mention that the speed of reduction of the balance sheet so far has been extraordinary compared with other central banks. Since TLTRO borrowing peaked at the end of 2021, the outstanding volume of TLTROs has fallen by €1.65 trillion. This is in addition to the decline in the asset purchase programme portfolio of almost €110 billion since the end of reinvestments in June. When it comes to the PEPP, it is also important to emphasise that PEPP reinvestment is the first line of defence if there are problems in monetary policy transmission. … Indeed, I think we should be very cautious.’
‘That [the active sale of bonds] is not something we are currently considering or will consider in the future.’
‘Uncertainty about the economy and inflation remains high, heavily influenced by factors, such as the war in Ukraine, whose future course is difficult to predict. In any event, on the information currently available, maintaining the present level of interest rates for a sufficiently long time should be broadly consistent with achieving our inflation target of 2% over the medium term. This is also the majority view of financial markets and analysts. What is the basis for this conclusion? First, the strength of the transmission of tighter monetary policy to financial conditions and credit, which appears to be greater than in past episodes. And that transmission is by no means complete. Second, the sluggish economic growth in the euro area in the first part of the year, which has extended into the third quarter and across all economic sectors, even though employment has remained strong. Indeed, the ECB has revised down its economic growth forecasts significantly. GDP at end-2025 is now expected to be 1% lower than estimated just three months ago. And the risks are on the downside. Third, the decline in recent months, in line with our projections, in the indicators of underlying inflation, which is more stubborn than headline inflation. Wages are gradually regaining lost ground and margins, which have slowed after growing sharply in 2022, have also performed in line with forecasts. In addition, medium-term inflation expectations remain anchored around 2%. All of which leads us to believe that inflation may decline as envisaged in the ECB’s projections, reaching 2.1% in 2025, close to our target. Moreover, the risks to inflation are now balanced. A number of factors could drive up inflation more than expected, for instance, renewed inflationary pressures on energy and food prices, or higher than expected growth in wages or margins. But others, such as weaker demand or stronger monetary policy transmission, could accelerate its decline. In this setting, it is essential that future monetary policy decisions are based on a painstaking analysis of the incoming data. This will prevent insufficient tightening, which would stop us from reaching our inflation target, and also excessive tightening that could cause unnecessary damage to activity and employment.’
Klaas Knot (De Nederlandsche Bank)
13 October 2023
‘By now, as we by and large discontinued our TLTRO operations and stopped reinvesting the principal payments from maturing securities under the APP, the Eurosystem’s balance sheet is shrinking at a measurable pace. To date, this “quantitative tightening” has been smooth and well-absorbed by financial markets. The same goes for our international peers, who – in fact – are reducing their balance sheets at a relatively faster pace.’
‘Whether rates are sufficiently restrictive, depends on how much traction our tightening has on spending. Not only now, but also in the months ahead. Luckily, more and more indicators show that the passthrough of our tightening campaign is firmly taking hold. Financing conditions have tightened fast and smooth. Bank funding costs have increased rapidly. And this translates into higher bank lending rates for households and firms, tighter credit standards, and contracting financing volumes in the euro area. Sidenote: this is of course not only due to an increased policy rate, but also to the phasing out of TLTRO.’
‘With 4.3% headline and 4.5% core inflation, September already showed a marked decrease compared to the previous months. And I expect those numbers to fall further in the months ahead, though it probably won’t be a linear process. Currently, the data confirm our projected inflation path. The longer it stays that way, the more confident I become that the current monetary policy stance, with a key policy rate of four percent, will be sufficiently restrictive to bring us back to our inflation target of two percent in the medium term. But we must remain cautious at all times. Today, it is still too early to declare victory over inflation. For instance, wages in the euro area labour market are mostly set in collective wage agreements. And an assumed gradual but steady easing of wage pressure crucially underlies the downward path of core inflation in our inflation projection. Today, wage growth is still at a high level. Partly, this is due to an understandable effort to recoup some of the real wage losses suffered as a result of the high inflation. And one could even argue that the recovering real wages that we are seeing are an important pillar under the soft landing that we foresee in our projections. But now that inflation is coming down, wage growth should align with this gradual downward path, back to a level that is consistent with our aim of price stability. We started the past decade mainly below our target. And in recent years, we found ourselves above. It has been a wild ride. We have made important progress in regaining control over inflation, but we are not quite there, yet. To continue this progress, and reach our target, restrictive policies will likely remain needed for some time to come. All in all, current policy is in the right place. If, nevertheless, the disinflation process were to stall, central banks will stand ready to, once again, adjust their interest rates.’
12 October 2023
‘in order to bring inflation back to target, we need. In general, I believe that global monetary policy is in a relatively good place … in the sense that there’s still a lot of transmission in the pipeline. Sluggish growth.
And we now expect services to come down, but of course, the development of wages will be quite instrumental. … That we will have to monitor.’
‘Rising interest rates have made it more expensive for households and businesses in the Netherlands to borrow money. These tighter financial conditions are becoming increasingly evident in the economy, and they are a necessity if we are to bring inflation back down to our 2% target. As a result, we see economic growth in the Netherlands slowing down. At the same time, the labour market is expected to remain tight in the coming years, keeping unemployment low. This persistent tightness is contributing to higher wage growth and the gradual pace at which inflation is normalising.’
‘I think I’m comfortable with the current stance of policy as it stands. That’s not to say that there will not be new shocks.’
‘I think interest rates are currently at the right level for us and I don't think we need to change them in the very short term.’
Pierre Wunsch (Belgian National Bank)
16 October 2023
‘When you’ve announced a commitment [forward guidance], there is a cost to changing that. But my point is that if there’s any reason to invest [under the PEPP] until 2024, then that commitment would be the only reason. Whether that reason is strong enough deserves to be the subject of discussion, which is probably my way of telling you that although, there is indeed a cost conceptually to reneging on forward guidance, we've done it before, and I think in this case the cost would be relatively low.’
‘The timing of the discussion [of the PEPP] is the prerogative of the president. I'm pleading for not waiting too long before we have that discussion. If it's in October, fine; if it's a bit later, I’m fine with that as well. I don't see it as a pressing issue. I think of it more as a consistency issue: we’ve hiked interest rates a lot and are now in restrictive territory. Of course, there is some uncertainty about how restrictive, but we stopped APP reinvestments, so it naturally feels like one of our instruments is out of sync with the rest and we need to indicate an intention of making it consistent with the others.’
‘I would express it as follows: the markets will have to learn to live without us buying and being present in the market. There is some uncertainty about the impact we're going to have. We don’t want to rock the boat. When we stopped APP reinvestment, we did it progressively so that we could see whether at some point we were generating some movements in the market that we didn't like and that could justify corrective action by us. And my assumption would be that we're also going to be cautious about what we do with the PEPP.’
‘When you’ve been surprised so much over two years, the question is whether a surprise is really a surprise. Honestly, when I see that the UK, the US and Canada have all paused and then had to hike again, I think the chances that we would have to do the same are far from marginal. Though the base case is that we don't have to hike anymore, and I take some comfort from the fact that core inflation developments have been in line with our forecast over the last three-four months, which had not been the case for a long time. Our projections were revised 1% every time, so we could not use them as an anchor. Now I think you could start using them as an anchor. So, we expect to reach 2% in 2025. It's in our projection, essentially with the interest rate level we have now. So, the way I look at it is quite simple. We have that anchor. If inflation developments go above that - not marginally, I'm not a fetishist, so it doesn’t have to be exactly 2.0 - but if they go meaningfully above that, then we need to do more. And we're going to have to signal that by hiking. I don't think we can rely on some form of forward guidance where we just say we’re going to keep rates where they are for longer. If we have inflation developments substantially in excess of what we’ve projected - not just by 10bp but more - then we will have to hike again. That we now have time and can pause and collect data and wait until December or January to take stock of the situation – I’m completely fine with that.’
‘The likelihood that we're going to be faced with some [inflation] resistance around 3% or 3.5% is real, considering wage developments.’
‘And with oil prices going up, I think the momentum in headline inflation has gone up again. It's over 4%, maybe even close to 5% now, depending on the measure you use. Every month where you have headline inflation around 5%, it's going to feed through wage developments. I'm not saying suddenly that core inflation is going in the right direction, so I'm going to look at headline inflation to find an excuse to be hawkish. Core developments are going in the right direction. But we are faced with higher oil prices. And I don't know if it's the end of it, given the Middle East situation. Assuming there won't be any shocks from now to the end of ’25 is a risky assumption, and shocks can go both ways. That’s a long story to say there is a lot of uncertainty, and so I don't know if we’ve reached the terminal rate.’
‘We have a projection showing a return to 2% at the end of ‘25, which is already relatively far away. What I'm going to look at now is whether inflation developments are in line with the projection. If they are, then we’re at the terminal rate, we don't have to do more and that’s fine with me. If we project 1.7% in ’26, I don't even care. That projection is going to be revised again and again before we get there. So, we have a path going to 2%. Are we on the path or not? If we are, fine. If we are not, then a little asymmetry is justified in the sense that even if inflation developments were to be on the low side compared to the path, the end of ‘25 is still far away, so I wouldn't jump to cut rates because we have two or three readings below the projection. On the other hand, if we have two or three readings significantly above the projection, then I think we need to do more.’
‘The risk that we would have to do more is significant. I'm not sure we should put a number on it, but it's certainly more than 10% and I think it's not that far from 50%.’
‘I don't see any strong argument for using movements in the reserve requirements when we still have this huge portfolio that we can reduce.’
‘We need to remain cautious, but honestly, to be clear, I don't think there are any arguments now for keeping [PEPP reinvestments] until 2024, except the fact that we have announced’ that we would.
‘I'm a bit concerned that in the future, if you would want to do some more QE, the markets would say okay, but if it turns sour and they make losses, they are going to want to recoup the losses.’
‘Uncertainty remains too high to be able to announce that this is the last rate increase.’
‘If we no longer have to increase rates, so much the better. We are at 4% and I do not exclude that it is sufficient, but we have seen in Canada, the United States and elsewhere, that pauses were sometimes followed by a new period of increases because the uncertainty is very large. So, we may have reached the peak, but I would say we are far from sure. But I don't expect rates to be raised in October. We are clearly in a phase where we can afford to wait a little to see what developments in inflation will be in the coming months. This will depend in particular on developments on the wage front. It will also be necessary to see whether the slowdown in growth in Europe will be relatively temporary and followed by a rebound in 2024 or whether it will be more profound; it will also be necessary to check whether the current increase in oil prices will be lasting or not.’
‘The uncertainty therefore remains high and prevents us from concluding, today, that we have reached the "terminal rate". On the other hand, I am personally entirely in favour of us now giving ourselves a little time and waiting until we have, perhaps, two or three inflation figures before possibly considering an additional increase.’
‘For the first time in a long time, we are not seeing a big gap in our underlying inflation forecasts, even though we have had, on several occasions, very unpleasant surprises in this area. So I believe that from now on we can use, more than in the past, the forecast of the trajectory of inflation by 2025 as a reference point.’
‘In our forecasts, inflation returns to around 2% in 2025: this would still make four years of inflation above our objective. If, in the coming months, inflation falls at the rate predicted in our projections, so much the better: it will mean that we will probably not have to do anything more. If inflation were to fall less quickly than expected, then I think we will have to have a new discussion to see if we should not do more, because that would then bring us to a return to 2% which would be very far in the future.’
‘We do not control the duration very well, unless we return to very specific forward guidance. If, at some point, we have to signal something, we will probably have to do it by increasing rates further. But obviously, if the markets themselves expect rates to remain high for longer, that contributes to the fact that we could possibly do less in terms of levels. But what we control best is the rate itself. Duration is largely a market equilibrium that we have less control over.’
‘We are no longer in a Covid crisis. I think that a fairly large number of my colleagues believe, like me, that at some point we should have this discussion again to see if we really want to reinvest until 2024. Is this very urgent? No. But I believe we will do it in due time.‘
Mārtiņš Kazāks (Latvijas Banka)
11 October 2023
‘For the time being, I’m quite comfortable, given the macroeconomic situation and inflationary dynamic, that the current level of rates is appropriate. Unless something happens, we may not need to hike further, but we should always leave the door open for further hikes, given high uncertainty.’
‘Point one, I think the current level of interest rates is appropriate and quite likely to bring us back to 2% inflation in the second half of 2025, so it’s now more a question of duration. But given the high uncertainty, nobody can say it was the last hike. If there is no surprise, then we may stick with the current level. But uncertainty is very high.’
‘There is still a risk of core inflation remaining resilient, so it needs to be very closely monitored, and that is the main reason why we can’t say for sure we’re done.’
‘Every day brings us more certainty about past risks, but can also open up new risks. Multiple scenarios point in both directions, but the most likely scenario at the moment – the baseline scenario - is that of a soft landing, and if we stick with this, then the idea that rate cuts would follow quickly isn’t consistent.’
‘Rates will need to be cut in my view when we see that the inflation outlook from a year and a half down the road is consistently undershooting 2%. The outlook for core inflation would have to be consistent with this to ensure headline inflation isn’t pulled back up.’
‘We should now take a pause and see how the hikes that we have already done will transmit through the pipeline.’
‘I’m very happy that the latest inflation reading shows a relatively sharp decrease due to base effects. Many of the underlying measures of inflation are coming down, and that is very encouraging.’
‘The developments over the last days [in the Middle East] have not pushed me in the direction of an immediate need to do anything.’
‘Every instrument always comes with due notice. When we don’t see its use as appropriate anymore, then we can change it. And that goes for the PEPP. So I don’t subscribe to the view that terminating PEPP reinvestments earlier would be a blow to ECB credibility. The ECB has to explain itself and its reaction function carefully, but that doesn’t mean that we stick to our actions for unnecessarily long. No instrument is a sacred cow. You change it when it becomes necessary. If we can explain why, it’s a gain in credibility.’
‘There is some rise in market volatility, but it is not such as to cause a major increase in concerns about stability.’
‘If we have time, then discussing further [balance sheet] steps in October is an opportunity that should not be missed.’
‘The phase of rapid rate hikes is already behind us’
‘Can currently count on the fact that we may pause’
‘So, any future rate hikes would be relatively small’
‘Over the course of the year [2024], the European economy will also start growing faster, which will benefit our exporters.’
‘The recent oil price increase in my view is not a temporary or transitory, it's very much a structural issue. This does create upside risks in my view for inflation.’
‘quite satisfied where rates stand now’
‘Rates will need to remain restrictive for quite a while.’
‘Given the current outlook, mid-2024 rate cut expectations are too early.’
‘Need to start cutting rates when inflation forecast consistently undershooting target.’
APP sales, end of PEPP reinvestments should be discussed before rate cuts.
‘The market shouldn’t expect that we would jump too early to cut rates, We’ll start cutting rates when we see that we consistently and significantly start to undershoot our target, and what I can say clearly is that expectations of a rate cut in spring or early summer in my view are not really consistent with the macro scenario that we have.’
‘While I’m comfortable with where rates are at the moment, if necessary we will take the right decisions. To say we’re at the peak — I don’t think we can do that.’
‘I'm comfortable with the current level of rates and I think we're on track to reach 2% in the second half of 2025. But if the data tells us that we need another hike, we'll do it.’
‘Markets have to take a position but [an April rate cut] is inconsistent with our macro scenario. We've clearly said we'll stay in restrictive territory for as long as necessary to get inflation to 2%.’
‘There is excess liquidity that has to be removed and we'll have to discuss it. It has to happen before rates are cut.’
Tuomas Välimäki (Bank of Finland)
03 October 2023
‘Based on our current assessment, we in the ECB Governing Council consider that the key policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. But taking into account the risks surrounding the inflation path, this does not necessarily mean there will be no more interest rate increases. Because inflation is staying above the target for this long, any additional delay in achieving the target cannot be considered acceptable. We will assess the inflation outlook also in the light of the dynamics of underlying inflation and the strength of monetary policy transmission.’
Madis Müller (Eesti Pank)
26 September 2023
Duration ‘will depend on how the euro-area economy develops over the year and how the slowing of inflation plays out. Right now, we see that the economic situation is relatively weak in the euro area as a whole. Looking forward, it could start improving slightly. If the recovery is slower, then that means smaller pressures in terms of inflation.’
‘We should have a discussion soon about how to proceed with PEPP reinvestments and for how long. There’s a strong argument in favor of stopping PEPP reinvestments sooner than the end of next year. That would be consistent with our interest-rate policy.’
‘There’s a good chance that we don’t have to lift rates any higher, but of course that can change if inflation doesn’t come down as quickly as expected.’
‘Of course we don’t want to cause a recession, but that’s not what we have in the cards now. It’s a difficult period for the euro area economy but we should still expect a gradual recovery toward the end of the year.’
‘At yesterday's European Central Bank Council meeting, we decided to raise interest rates by another 0.25%, but we also made it clear that, to the best of our knowledge, no further interest rate hikes are expected in the coming months. Interest rates have already reached high enough to be expected to bring inflation back to close to 2% in the euro area over the next two years, slowing credit growth and cooling the momentum of the eurozone economy. This, of course, does not rule out the possibility that if the rapid price increase recedes more persistently than expected, interest rates will still have to be increased in the future.’
Boštjan Vasle (Banka Slovenije)
12 October 2023
‘I’m in favor of starting debate on next steps regarding QT. There are several options, which must be put on the table.’
‘The current situation in the bond market is a reminder that PEPP, and the flexible reinvestment policy that comes with it, is important.’
‘The advantages and disadvantages of a faster reduction of the [APP] programme must be carefully evaluated.’
‘[Market] participants are realizing that the ECB is more or less done with interest rates increases, and expectations for a longer period of higher interest rates is starting to be reflected.’
‘On the upside they [inflation risks] include geopolitical tensions and their consequences on energy prices, still strong labour markets and fiscal policy. At the same time, there’s a risk that inflation comes down faster than we currently expect, especially if our economies slow down faster and transmission works faster.’
‘Growth rates are going down, but we are still well in the positive domain and I think these are all reasons we can be in camp positive on this one.’
‘There are encouraging signs regarding the future trend of inflation but there are also warning signs in terms of what might go wrong. … The fact is that headline inflation is on the right track… It’s also true that core inflation declined a bit…’
Previous rate hikes are ‘providing a significant amount of restrictiveness … The question is how these … are transmitted to the real economy. We are seeing transmission in the banking sector, which is getting very strong, stronger than in previous inflation episodes, but what is not known at the moment is how the second part of transmission… These are important questions which will determine … the duration of restrictiveness we are providing at the moment.’
‘Now what we are seeing … is moderation of growth…but we are still expecting positive growth in the euro area … so we are not talking about recession, we are talking about lower growth but still positive growth.’
‘At the moment, it seems that we are doing quite well, we are seeing some signs of inflation going down, also some first signs of sustainability of this trend, but on the other hand, there are still many uncertainties.
‘So, it’s probably the case that we are done with interest rate increases, but we are now in the second phase, the duration phase...’
‘I wouldn’t exclude that further hikes might be necessary. What we’ll be doing in the future depends crucially on new information we’ll receive.’
‘At the December meeting, we’ll have an additional set of new information and also new forecasts. We’ll have three more readings of inflation, we’ll have more information on what’s going on with growth dynamics. I believe this will add to the significance of this meeting.’
‘Core inflation is still relatively high. Yesterday’s rate increase will importantly contribute to bringing inflation down.’
‘The recent increases and especially the current level of interest rates will open more space for deliberations on other segments of monetary policy, especially QT.’
‘In the light of the latest forecasts and the fact that inflation remains high despite the slowdown, the members of the Governing Council have decided to raise key interest rates again by 25bp. Based on our current assessment, we believe that with this hike, the ECB's key interest rates have reached levels that, if maintained for a sufficiently long period, will make a significant contribution to returning inflation to the target level. I would like to underline that, as has been the case so far, the next steps will depend on the current situation, in particular economic and financial data, the evolution of underlying inflation and the strength of the impact of our actions. Accordingly, our future decisions will continue to ensure that interest rate levels remain sufficiently restrictive for as long as it takes for inflation to return to our 2% target in time.’
Yannis Stournaras (Bank of Greece)
18 October 2023
‘If you have a new source of uncertainty in the Middle East, where it is totally unknown what is going to happen — we are in the dark — it is better to keep all of our options open and be careful to retain the resilience of the European economy. … Taking into account the fact that the Eurozone continues to be a large net energy importer, it is likely to have a stagflationary impact if it becomes a problem.’
The euro area is at ‘a critical point where if we continue to raise interest rates we run the risk of something being broken. There is a lot of progress where inflation reduction is concerned, we are almost stagnant in Eurozone activity and we have experienced a reduction of lending by banks.’
‘If inflation in the middle of next year … falls close to 3%, that is perhaps the time to start thinking about a rate cut.’
‘First of all, it's [the conflict in the Middle East] a reminder that we should take the geopolitical uncertainty in our calculations. Of course it's very early to say what is going to be the impact, it will depend on the duration, it will depend on whether it's going to be extended or it's going to be local. So it's still very early to say what's going to be the impact, but usually, the impact of such conflicts is mostly stagflationary. … Yes, the first impact was rising oil prices and then the prices fell. But as I said, it's very early to say that this is going to be a medium-term effect. We see no second-round effects from the energy crisis which emerged after the unjustified invasion of Russia into Ukraine. So, up to now, second round effects are limited. So I hope that second round effects will remain limited even in this new geopolitical turmoil. And in any case, the European economy is much different now, as far as energy is concerned, compared to the situation in the '70s. So it's less dependent on energy. I mean, the energy intensity of our GDP is much less now compared to the '70s. But of course, there is an impact, yes.’
‘The rise in bond yields means that financial conditions are even tighter Than before given monetary policy decisions. There are many reasons why this happened. One reason is that the markets now are convinced that interest rates will remain in the tightening territory for a number of months. The second is about the fiscal situation in many jurisdictions worldwide. The third is a reaction to the supply and demand of bonds and in particular government bonds as a consequence of increasing deficits on the supply side, and as a consequence of quantitative tightening by central banks, which reduces demand for government bonds. So, it's a combination of factors but at the end of the day, it's correct what you said it means we have even tighter financial conditions.’
‘I don't think we have a red alert in Europe regarding fragmentation, but that [the rise in Italian bond yields] is a reminder that member states in the Eurozone should abide by the agreements they have with the European Commission. I'm saying the agreements because the new Stability and Growth Pact is not yet in place, so what is going to be important are the bilateral agreements between member states and the European Commission. But definitely the situation in Italy does not raise any particular worries at the moment, but provided that the Italian government will consult with the European Commission and reassure investors that it will continue to abide by the agreement that the government has with the European Commission on the budget deficit.’
‘PEPP flexibility is here to stay. The implementation has to be discussed in the Governing Council of the ECB who have not discussed it yet. There is no change. So the rules we have decided they still apply. It is a first line of defence. But as I said, there is no urgency, we have no concerns at the moment regarding Italy or any other member state.’
‘Officially we have not discussed the situation in Italy in the Governing Council of the ECB. But as I said, I see no reason for concern. I'm sure that the Italian government will abide by the rules and the agreement they have with the European Commission.’
‘No, I see no value in bringing it [the end of PEPP reinvestments] forward especially now under the new uncertainty we have because of the events in Israel and Palestine. So we need to keep our flexibility and act if necessary by using the PEPP flexibility and it's very early to talk about using the TPI.’
‘I think we should act only based on monetary policy reasons and justifications. And for the moment I see no reason why we should tighten monetary policy now because increasing the minimum requirements will imply monetary policy tightening. I see no reason for that. Still, there are decisions which will impact the economy with a lag as you know, monetary policy decisions act with an 18 months or a two year lag on the real economy, on the financial conditions. So, we have a pipeline of monetary policy tightening which has been decided in the past. So I see really no reason why we should take a new decision which will tighten monetary policy even more in the face of a weak European economy in particular. … Well I see more negative than positive points here. I mean, first of all, increasing the minimum reserve requirement is contrary to what other central banks are doing. So it's rather outdated measure. We have to take this into account but in any case, we have not discussed it yet in the in the Governing Council. So, we should not preempt to announce any kind of decisions which have not been taken or any kind of ideas which have not been discussed or have not been discussed extensively at least.’
‘Yes, I think we have reached the interest rate peak. That is my feeling and my understanding. … Monetary policy is not an exact science. But our impression is that the interest rate level we have reached now, if we maintain it for some time, will lead to inflation being back at our target level of 2.0% by the end of 2025. Maybe it will even be a little earlier.’
‘I would also have preferred to leave the key interest rates unchanged. The clear decline in inflation, the stagnating economy, the tightening so far - in my view, that would have justified not raising rates. But there were good arguments on both sides and that's why I can live with the decision. However, one should not overdo it with the restrictive monetary policy. Otherwise there are also risks for financial stability. I am very worried about the "snowball effects" [in which interest costs exceed nominal economic growth and the debt ratio rises]. … Many people think that this is only relevant for states and public finances. But it also applies to private households and companies. We can quickly get into big problems there. So far we have been lucky that nominal growth has been much higher than interest costs. But that can now turn around. It is therefore all the more important that everyone else makes their contribution. That is why we are appealing in particular to fiscal policy and made this very clear at the most recent meeting of the informal Ecofin in Spain.’
‘It is still too early to say when the key interest rates can be lowered again. We first have to keep them at the current level for some time. We have also communicated that. … It is difficult to say [what “sufficiently long” means]. In any case, we are talking about a few months. We will have to decide how many, depending on the data. … The uncertainty is great and there are risks. But as things stand, I assume that our next step will be an interest rate cut.’
‘We have to be very careful about that [speeding up QT]. For now, we have tightened monetary policy enough. We are already reducing the balance sheet very strongly because we have ended the reinvestments in the APP. If we were to increase the pace significantly now, there could be an outcry in the markets and turbulences. We should not take any unnecessary risks. This is all the more true because PEPP gives us the necessary flexibility to act if there are problems with the transmission of monetary policy. … Such a move [active sales] would be very risky. By the way, there is a second argument. If we were to sell bonds, we as central banks would realise losses on those bonds that are so far purely theoretical and will not become reality if we hold the securities to maturity. Why would we do that?’
‘The increase [in expectations recently] is relatively small and, all in all, inflation expectations are still very well anchored. And the increase is more than compensated for by the decline in growth expectations. That, at least, is not a cause for too much concern.’
‘Euro area growth this and next year is expected to be modest. The moderation in energy prices, the easing of supply bottlenecks and a resilient labour market will support growth. However, the lagged effects of monetary policy tightening over the past 21 months will continue to feed through to the real economy. Together with the gradual withdrawal of fiscal support, these factors will weigh on growth and keep it modest. Regarding headline inflation, there has been a substantial decline in the course of 2023, largely due to declining energy and food inflation. This is good news, as the impact of the shocks that caused inflation to rise steeply in the first place is unwinding. Headline inflation will continue to decrease further towards its target in 2025. Underlying inflation will also ease as the indirect effects from past energy and food price shocks fade. While wage growth is catching up to restore the purchasing power of households, profits should provide a buffer against the pass-through of higher labour costs to prices.’
‘Monetary policy has done its part to fight inflation. Now it’s up to fiscal policy to take out some of the heat.’
‘A more restrictive fiscal stance wouldn’t only be a welcome strategic complement to ECB policy but also help improve the credibility of public debt and loosen the nexus with banks. There are synergies that should be reaped.’
‘I would have preferred to hold rates last week. But there were arguments in favor of both outcomes — hiking and holding — so I’m fine with the decision we took.’
‘As monetary tightening has caused a general increase in interest rates and weaker growth, there is no room for complacency in fiscal policy. In this context it is imperative that the fiscal stance remains restrictive, and the new fiscal rules (which are more flexible and avoid the procyclicality of the previous ones) are in place in the Eurozone from the beginning of 2024. The increase in ECB interest rates and the curtailment of its balance sheet (through TLTRO repayments and APP pause of reinvestments) have up to now been beneficial for commercial bank profitability via an increase in their interest rate margins (because they reprice lending rates immediately but deposit rates with a substantial lag). However, this is not expected to continue due to the gradual increase in deposit interest rates, funding costs from money markets and the reduction of loan demand. Hence, commercial banks should be prepared for a more difficult banking and macroeconomic environment, due to monetary policy tightening. The non-bank financial sector (money market funds, hedge funds, private equity funds, asset management companies, insurance companies, pension funds, etc.) has in general behaved rather well despite the multiplicity of shocks in recent years. However higher interest rates, low growth, demanding market valuations provide reasons for concern, the more so due to the various kinds of exposures of banks to non-banks.’
Peter Kažimír (National Bank of Slovakia)
14 October 2023
‘Our focus is now on maintaining rates at a plateau. It could be a year before we’ll consider cuts.’
‘I don’t expect changes to PEPP before the summer. We first have to be sure to be done with rate hikes. The logic order of our toolbox is important.’
‘Going back to 2% on reserve requirements would be OK for me, but I wouldn’t want to do more at the moment. We need to be careful not to cause additional volatility in markets.’
‘I will be waiting for the December and March forecasts.’
‘I strongly believe that our rate hike at the last meeting was the last one. We’ll need to wait for the December and March forecasts. Only real data can persuade us that we’re at the peak. Only then can we start to focus on other monetary-policy tools.’
‘We’re ready for debate [on the PEPP], but we shouldn’t touch the buttons of reducing the balance sheet at a different pace. We’ll come to this topic only after we’re sure we won’t have to raise rates further.’
‘We see the overall inflation and also core inflation on a downward trend, though this is lasting a bit longer that we’d wanted.’
‘The past rate hikes have an increasingly significant impact on the real economy.’
‘Financing conditions are tightening and are weakening demand for investments, in production and affecting overall economic growth. From this point of view, it’s important to succeed in the fight against inflation as soon as possible.’
‘I wish last week’s interest rate hike was the last one. Nevertheless, common sense dictates, “Never say never.” We now must wait for the next inflation and economic growth forecasts due in December and March next year. Only the March forecast can confirm that we are heading unequivocally and steadily towards our inflation goal. That is why I cannot rule out the possibility of further rate increases today. Should the September hike be the last one, we have the answer as to how high it will be necessary to go with rates. This is clearly good news for all the people and all those who plan to borrow money from a bank. It remains open and unanswered how long it will be necessary to stay with rates at peak levels. The most sincere answer would be: “As long as we are not sure that inflation is undoubtedly heading towards the target despite the ever-present risks.” It is, therefore, premature to place market bets on when the first interest rate cuts will occur. I understand that this is precisely what the markets are analyzing and betting on today. Assume we’re (already) at the top. If so, we may have to stay camping here for quite some time and spend the winter, spring and summer here. We will see. At the same time, the end of interest rate hikes opens a debate on whether, and if so, how to adjust our plans with the PEPP and APP purchase programmes. On this one, I would wait to touch the control buttons for the coming six months. As soon as incoming economic data and analyses confirm that further tightening is unnecessary, I see room for a debate about adjusting the pace of our quantitative tightening. In other words, how quickly will we reduce our bond portfolio accumulated in recent years. Short and sweet, the next stop is December!’
Mário Centeno (Banco de Portugal)
12 October 2023
‘We've been in a cycle of monetary policy that reached a very important moment in September when the ECB stated that with the current level of interest rates, we will be making a substantial contribution to the 2% objective. And I think we will get there. We will get there. We did, we did, continuing this and monetary policy stance, holding on for a while until we are totally sure that inflation is coming down.’
‘We need to monitor it [oil prices]. We need to remain data-dependent. We need to make sure that we don't overshoot in our policies, because if we do something that derailed the economy more than - we don't grow for five consecutive quarters, according to our forecast - zero growth quarter on quarter. This is very important to keep in mind and we need to continuously monitor the situation so that we can act. And by acting I mean really adjusting the rates according to, to what is needed.’
‘Barring additional shocks, that we don’t see coming, of course, we will be done. That’s my interpretation of the decision in September.’
‘I don’t see that [rise in oil prices] really materialising right now at a level that will imply a change in this’ interest rate level.
‘We see monetary policy transmission, I mean, much stronger today than we expected five, six months ago.’
‘So, if we start discussing these other instruments because they are in our toolkit and we need to of course adjust them over time, that would be very good news for all of us, because it means that we think inflation is in a good path towards our aim. And so, at that point - but to me, honestly, it will be only at that point - we should and we need to start debating the other instruments and adjusting them so that we create space in our balance sheet. We need to reduce the balance sheet, that’s for sure. When and by how much, it will depend on our evaluation on the success that we are having in terms of inflation…’
‘We need to take all these decisions [on measures other than interest rates] in due time and not rush and jump from objective to objective.’
‘We did not want to take the risk that financial instability or any fragmentation would jeopardise our main job, which is price stability. So, if at this stage we jump into different domains of our policies … this risks harming transmission and our message that we are focused on fighting inflation.’
‘It is only in September that we introduced the sentence that we think rates are compatible with achieving the inflation target. This was less than a month ago, so we need more data to get more confident that we have been successful.’
‘We are observing quite a significant transmission of monetary policy to the economy. … we need to continue really monitoring what is going on in the economy in terms of transmission of monetary policy.’
‘In this context, monetary policies, particularly in the euro area, should continue to serve price stability, certain that the costs of inflation are more unequal and regressive than the measures used to combat it. Prudence is also essential to avoid reacting excessively and without giving time for the transmission process to materialize. An overreaction could result in an unnecessary economic slowdown and intensify risks in the financial system. This is a difficult but crucial balance. It is necessary to monitor and act on the data and understand the delays in transmission mechanisms. Only in this way can we preserve the effectiveness and credibility of our decisions.’
‘It can be expected that the cycle of interest-rate rises has been, for now and with the present economic conditions, concluded. These interest rates are compatible with bringing down inflation to the medium-term objective.’
‘Real interest rates will continue increasing because inflation is falling, which means financial tightening hasn’t been completed. So we have to have some caution with decisions in the near future.’
‘Rate increases in the next meetings is a matter, as you know, that the ECB decided to analyse on a meeting-by-meeting basis. But the message that came out in September is quite clear for the expectations we set for the next meetings.’
‘We still don’t have the complete effect of monetary-policy transmission on financing conditions.’
‘As for the banks, it’s required that at this time they take care of the loans that they granted and take advantage of this moment to create financial cushions to be able to face the uncertainties and evolution of the monetary cycle.’
‘A persistently high inflation may have disruptive effects on households and businesses. The recent ECB Governing Council decisions reflect this concern. High inflation introduces uncertainty into real incomes, requires a firm monetary policy to generate a more predictable economic environment. … For loans or mortgages with variable interest rates or short maturities, the sudden increase in short-term interest rates, driven by monetary policy, places a heavy burden. The current interest rates cycle with the largest increase in the shortest time – 450bp in little more than a year – has been demanding.’
‘We believe that, if we keep them at this level, we will do something decisive so that inflation can converge to 2%, which is our target. The most important thing at this point was to provide some predictability so that we can adapt to what is expected in the coming months. The risk of doing too much is always present in monetary policy, it happened in 2008 and 2011 when the ECB had to backtrack because raising rates was not compatible with price, financial and economic stability. That risk is real and we have to be vigilant.’
‘The decision has been made, we are all involved in it, beyond personal opinions. We now have the challenge of ensuring that the predictability we added to the Council's message comes to fruition. We must lower inflation and guarantee that the economic mechanisms are up to the task. We cannot deviate from this path because inflation is more regressive and socially unfair than the measures we use to combat it, which are often harsh and damage the economy. The problem is that inflation does it too. We in the Governing Council try to manage this difficult balance.’
Gabriel Makhlouf (Central Bank of Ireland)
12 October 2023
‘What’s happening in Italy is both about the market views of domestic tail risk of policy, and also a relative view of Italy against other countries. It’s absolutely something that we, the ECB, will be very focused on.’
‘Part of our job is to make sure that monetary policy is transmitted across the whole of the euro area. If something gets in the way of that, you know, we’re concerned about it.’
‘My sense is that the markets are worried that the [Italian] government’s spending too much. I think the markets have been spooked by the windfall bank tax because that came out of nowhere.’
‘In recent months, disinflation has slowed and core inflation – that is, excluding food and energy prices – has fluctuated in a tight range around 5.5% throughout 2023 (Figure 1b). There is clearly more work to do in order to return inflation sustainably to our 2% target, and in a timely manner. The calibration of our monetary policy will be increasingly focused on domestic drivers of inflation. This is where the labour market, and wage developments in particular, play a significant role in our deliberations.’
‘…it is this third aspect of resilience that is the decisive one for the current monetary policy outlook, namely the current strong demand for workers, despite the growth slowdown in recent quarters and the sharp tightening of monetary policy over the last year. This is contributing to historically tight labour markets, although we may have passed “peak tightness”, as seen through the recent decline in job openings in some countries, and weaker forward-looking employment indicators.’
‘If wage growth turns out to be weaker, then we may see a faster decline in core inflation than currently envisaged. If it turns out to be stronger, then the core inflation will prove stickier. How is it that core inflation is projected to decline, even in the face of historically high wage growth? The answer is that other factors are expected to exert downward pressure on core inflation over the projection horizon, falling input costs from non-labour factors as supply chains normalise, lower profit margins and rising labour productivity. To conclude, I want to outline what I see as the key risk factors around these wage projections. On the upside, I see two potential upside risks. One is a more resilient labour demand. And to monitor this I will be closely following both employment growth and job vacancy statistics. The second is inflation expectations – not something I have paid attention to in my speech today, but nonetheless important. The experience of the 1970s taught us the importance of inflation expectations for wage and price dynamics. In the euro area, expectations increased with the recent surge in inflation, although recent data points to a gradual return to our 2% target for short-term consumer inflation expectations, and medium-term expectations remaining anchored around our 2% target. The anchoring of medium-term expectations plays an important role in our projected disinflation path. On the downside risks to wage growth, I primarily see one: downside risks to economic growth itself. As we saw in the historical analysis of vacancy-unemployment dynamics, a longer and deeper slowdown could lead to a bigger increase in the unemployment rate, which will put downward pressure on wages. To monitor this, I will be paying close attention to monthly unemployment dynamics, softer indicators such as PMI employment expectations, and wage trackers, such as that developed at the Central Bank of Ireland in collaboration with Indeed. I will also be listening closely to what companies in Ireland and the euro are tell us as part of our regular market intelligence gathering exercises. As you can see, there are many factors that go into our monetary policy decisions. At each of our six-weekly meetings, the Governing Council assesses what the available evidence tells us about the path for underlying inflation and the transmission of our monetary policy to-date. This is the essence of what ‘data dependent’ means, and it brings me to my final point. One aspect of our recent decision that has received some attention was the statement that “key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”. Substantial does not mean complete and this should not be interpreted as an unconditional commitment that we have reached the so-called ‘peak rate’ in this hiking cycle. It is the Governing Council’s current view of the monetary policy path based on what we are seeing in the data right now, and our recent projections, a view that could change if some of the risk factors that I have highlighted materialise. This is the essence of our “data-dependent approach to determining the appropriate level and duration of restriction”. As our statements have made clear for some time: “interest rate decisions will be based on [the Governing Council’s] 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.”’
‘…our measures are necessary to ensure that inflation returns back to our 2% target over the medium term. If inflation becomes entrenched across the economy, the overall costs to society – including of subsequent actions to bring inflation back to target – will be much larger.’
‘We consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.’
‘The Governing Council of the ECB is taking the necessary decisions to get inflation back to target but of course, monetary policy is set for the euro area as a whole, whereas fiscal policy remains a national competence. So, as we come up to the Budget, it is important that fiscal policy doesn’t add to our own domestic inflation problem. It would be counter-productive for domestic policy to stimulate demand and result in in a period of higher and more prolonged inflation in Ireland than currently expected. It would damage the competitiveness of the Irish economy and potentially undermine its ability to deliver sustainable growth in living standards.’
‘It will take time for the full impact of rising rates to be felt fully by households and businesses. Given historical patterns, we expect the banking channel to strengthen in the months ahead. People should be prepared to continue to see increases in both their deposit and lending rates over the coming months. Firms will make their own commercial decisions, but the transmission of monetary policy measures is critical to ensure that inflation returns back to our target of 2%.’
‘The outlook for the remainder of 2023 and into 2024 will continue to be characterised by high uncertainty, as the battle against high inflation continues.’
‘My view at the moment is that March is probably too early [for easing] and certainly people should not be planning on the basis that March will be the start of this.’
‘I’m not saying that at our next meeting we’re going to hold.’
Gediminas Šimkus (Bank of Lithuania)
13 October 2023
‘We need to discuss [the PEPP] because the situation has changed — it’s very obvious. There are all the preconditions to consider stopping it earlier.’
‘I don’t see a risk from the perspective of fragmentation.’
‘Inflation has many heads and we need to chop off all.’
‘Despite recent positive news on the inflation front, celebrating victory would be way too early.’
‘The macroeconomic environment is far from stable, as Russian aggression continues on European soil.’
‘In short, inflation is on the way down, but it still faces many important lines of resistance.’
Situation ‘calls for a consistent and strategic patience.’
‘We need to start talking about the programme sooner rather than later. We have an environment that’s changed completely from the point when the decision [on PEPP forward guidance] was made.’
‘Any decision on PEPP must be carefully assessed before it’s taken. But this doesn’t mean we can’t start talking about this now.’
‘From the information that’s available now, we’re on track with this monetary policy to see inflation returning to levels of 2% by the end of 2025.’
‘I want to hope this is the last dose of medicine - the raise of 25bp.’
Robert Holzmann (Austrian National Bank)
17 October 2023
‘With regards to inflation, here we’re not yet out of the woods. If and as a further shock provides further pressure on the price level, we may need to have a further increase, whether we like it or not.’
‘Remunerating only 90% of banks’ deposits at the ECB would incentivise banks to use some of the deposits in a more productive way and could mean that excess liquidity will decline faster. That would allow us to return to a corridor framework more quickly. It would also help us to keep QE losses at bay.’
‘We can’t exclude that we won’t be able to recoup our losses on the balance sheet before the next crisis strikes and asset purchases will move back onto the agenda.’
‘I’m a fan of a wider corridor and would like to see us returning to our old and well-proven arrangement.’
‘We have to be really careful with any comments that rates are already at their peak. Price pressures might well turn out stronger than we currently think.’
‘We don't know that [what’s next for monetary policy] yet. But we know that the rate hike in September was absolutely necessary. The probability that inflation will rise again is very high. That's what people hate the most. Stopping now would not have been a good idea - despite the risk of recession, which we take very, very seriously. … If necessary, there will certainly be further interest rate increases, even if they are not popular.’
‘Several factors speak for this [a renewed rise of inflation]. Energy prices will continue to rise. We also need to keep an eye on food shortages. We also have to be vigilant because we see second-round effects for Germany and Austria.’
‘In the current situation, we need to think about ending our crisis-era measures more quickly. We are already having initial successes, as we are now no longer purchasing anything at all in the Asset Purchase Program and are allowing the existing bonds to expire. That was a huge step. What usually goes unnoticed is that when it comes to targeted bank loans, only the last 500 million are outstanding, which will be repaid in the coming year. The loans had a total volume of over €2,000 billion. However, with the pandemic emergency purchase program, we have decided not to stop replacing expiring bonds with new ones until the end of 2024. We should discuss ending replacement purchases sooner. This is a very, very important point. … We haven't talked about it yet, it's still completely open. … This will be part of the discussions at the next Council meetings.’
‘I suggest that the banks deposit more money with us as minimum reserves without interest, as was the case in the past. I am thinking of 5 to 10%.’
‘I suspect that one or two people sympathise with my point of view.’
‘Should we be forced to take similar [non-stamdard monetary policy] measures again in the future, we will need reserves in our balance sheet to do so.’
‘There are shocks out there which may force us to go higher. Inflation needs to be kept under control and that’s what we’re here for.’
‘We definitely can’t say that this was the final hike. The likelihood isn’t big, but there is a risk more tightening might be needed.’
‘Looking at some of the reactions to our decision, one could think we agreed on a dovish hike. I don’t agree with such an interpretation, especially given that inflation risks haven’t receded of late.’
Boris Vujčić (Croatian National Bank)
12 October 2023
‘We cannot expect the rates to come down before we are firmly convinced that the inflation rate is on the way down to our medium-term target, which will not happen very soon.’
‘I would say that what we can expect now and we have been expecting already for the latest reading of the data from September was that the inflation rate will come down, among other things, because of the base effects, but also because of the tightening of the financial conditions, slowing down of the economy. Actually, the economy is stagnating at the moment, that’s probably the best description. And we can expect that trend to continue also in the next months. However, at some point, when the inflation reaches a level, I would guess somewhere close to 3, 3.5%, there is an uncertainty whether the, given the strength of the labour markets and the wage pressures, we will have a further convergence toward our medium-term target in a way that it has been projected at the moment. If that does not happen, then there is a risk that we would have to do more.’
‘…I expect the inflation rate to continue to come down, and we are at a level of the interest rates where we can afford to wait and see how the inflation will develop in the next months. But then some time, I would guess spring next year, when we see also how the economy is doing and particularly how the labour market is doing, what the wage pressures are at that moment, we would have a better picture of what we can expect going forward.’
‘I wouldn’t think that December is when we will be able to say mission accomplished — we have to be more patient. More interesting for me will be to see how the data come in in spring of next year, when we’ll have more clarity on labour market pressures, and particularly wage growth developments.’
‘When you’re in a situation with huge excess liquidity that was created through unconventional monetary policy, then it might be a useful, and more conventional, tool to use to temporarily sterilise a part of that liquidity.’
‘The spreads are widening, but not too much. If you look at the change of [Italian] budget projections, it’s something that could have been expected.’
‘I can see three, six months maybe with relative certainty what’s going to happen, and then let’s see.’
If projections don’t hold up, ‘then there is always a possibility both for hikes or for cuts. We are data dependent, so we can go both ways, depending on where the data will be.’
‘Economy has thus far proved more resilient than feared but short-term expectations are worsening
‘The most recent vintages of business and consumer surveys point to sharp softening of economic activity’
‘Headline inflation is coming down as expected, but underlying pressures still present’
‘External price pressures are gradually easing but remain elevated’
‘Domestic price pressures are also abating’
‘There are signs of softening in the labour market … But it remains very strong and adds to inflationary pressures’
‘Still significant uncertainty about ... Growth outlook, Inflation outlook, Financial stability’
‘Hopefully … we are able to get inflation back to target without causing a recession. This is what we project now…’
‘I’m quite confident that we will see now in the next few months a decline in the inflation rate.’
‘This is a risk of the disinflation process in an environment of a soft landing and strong labour markets and significant wage growth. So, you might get into a situation where the inflation rate, the disinflation process, stops at a level which is not your target, and then it’s challenging for monetary policy, because it has to do something more … to bring it all the way down to 2%.’
‘So, there are lots of uncertainties ahead of us and we have to be very careful.’
‘If things develop in accordance with our expectations, if we have a continued fall of inflation as we’re expecting, then it won’t be necessary to raise interest rates further.’
‘I think that in the next three months we’ll see a further reduction of the inflation rate. But what it will look like next year is difficult to say. Possible shocks could come from energy, food prices, climate change, and politics.’
‘As the inflation rate eases, the level of 4% will become more restrictive. If we see a faster fall of inflation, I think it is easier to lower the rate, than to raise it.’
‘We now have a liquidity surplus in deposits on which banks earn interest. A way to sterilize that is to raise minimum reserve requirements.’
‘Existing risks for further prospects of inflation, either positive or negative, still require a vigilant monitoring of trends and data so that the measures of monetary policy can continue to respond to the challenges in a timely manner.’
Gaston Reinesch (Central Bank of Luxembourg)
09.10.2023
‘In order to support directionally the current monetary policy stance, it would … not be entirely groundless to bring forward the end of PEPP investments. Such a decision ideally, in the absence of adverse surprises, would be taken in December at the latest and provide markets with sufficient lead-time before the start of a gradual reduction in reinvestment.’
‘[I]t would certainly be premature to give an all-clear on the inflation front and to exclude the possibility of a need for a further rate hike.’
‘It will be particularly important for our comprehensive monetary policy assessment to thoroughly analyse, on the basis of our December projections, whether by 2025 and over the remaining forecast horizon, inflation will have settled persistently and robustly around 2%.’
‘Let me first recall that in December 2011, the Governing Council had decided to reduce the minimum reserve ratio to 1% from 2%. The decision was part of a package of measures to support bank lending and liquidity in the euro area money market. Thus, raising the reserve ratio from currently 1%, per se, would certainly not be incoherent with the current monetary policy stance. But this said, it might be preferable to consider the question of an appropriate minimum reserve ratio in the context of the holistic review of the operational framework.’
Constantinos Herodotou (Central Bank of Cyprus)
11 October 2023
‘Well, at least based on the most recent data, economic growth for this year is going to be subdued, but we are avoiding a recession or any prolonged downturn. And then for next year, we’re going to see better growth in the euro area.’
‘And then on the other side, in terms of downward risks [to inflation], we need to see whether – because there’s still a lot of transmission of our monetary policy in the pipeline, on the basis of the existing decisions that have been made already – whether the demand would be impacted further, what’s going to happen with China, the geopolitical situation that is still just starting now, and we need to see how that unfolds. So, a lot of uncertainty around. … Energy prices of course are a major risk. We need to see how long this spike might continue or not, and I think this depends on the geopolitical developments and the military situation that’s happening now in the Middle East. … Currently it doesn’t look like it’s going to be a sustained shock, but this is only how things are unfolding as we speak today.’
‘[E]conomic activity is expected to regain momentum at the beginning of 2024. This will be fuelled by projected increases in real income due to decreasing inflation, growing wages, a robust European labour market and recovering foreign demand.’
‘So the numbers and trends indicate that the ECB monetary policy transmission is indeed taking place and it is working to tame inflation with the aim to bring it back to target.’
‘In its most recent assessment, the Governing Council considers that the key ECB interest rates have now reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. However, material uncertainty continues to persist in the euro area. For instance, the recent increase in energy prices could transmit again to the rest of the economy and have an upward pressure on prices. Furthermore, the elevated wages and profit margins, the profiteering, observed in the euro area last year and part of this year, need to be monitored closely, even though they are currently expected to normalise. The liquidity conditions in the euro area banking system is another area to monitor, since it plays a role for transmitting monetary policy and, consequently, affects inflation. These uncertainties are the reason why I believe the ECB Governing Council approach to be data-dependent in its interest rate decisions, is indeed the right one. In other words, determine the appropriate level and duration of its tightening policy stance, based on incoming economic and financial data and the consequent projections.’
‘It is important that governments employ only targeted fiscal measures, supporting the most vulnerable in society. Any horizontal measures should be avoided or rolled back to prevent an escalation in medium-term inflationary trends. Such horizontal measures risk extending the duration of high inflation, and consequently would force the extension of the duration of high interest rates in order to tame inflation and bring it back to the 2% target.’
‘The cost of leaving inflation untamed, is much higher to households, businesses and the entire economy, whereas tightening monetary policy should eventually revert down to neutral, when the 2% inflation target in the medium term is deemed sustainable.’
‘The recent data on inflation affirms that monetary policy transmission is effective and having an impact on inflation. In addition, the ECB has managed to keep inflation expectations anchored, as most measures of longer-term inflation expectations currently stand at around 2%, which is the inflation target rate. As I mentioned earlier, this is important in order to avoid a wage-price spiral. Although inflation has been reduced relative to 2022, it’s still above the 2% target, but some of the transmission of monetary policy decisions that have been made, still remains in progress. … Despite the lower inflation readings that I just mentioned, material uncertainty continues to persist for the Eurozone. For instance, the recent spike in energy prices could transmit to the rest of the economy again, and have an upward pressure on prices. Furthermore, the elevated wages and profit margins observed in the euro area last year, need to be monitored closely, even though they are currently expected to normalize. Also the liquidity conditions in the euro area banking system can play an important role in the transmission of monetary policy and therefore inflation.’
Edward Scicluna (Central Bank of Malta)
13 October 2023
‘So, if things are moving in the same direction down for inflation, I don’t think there would be any other rate hikes, you know. But again, as I said, unless there are surprises.’
‘I think we intend to [reduce the balance sheet] - we’ve started it already - but we intend to have a programme for that, and I fully agree: we have to be careful things won’t happen like in the UK, for example, where pensions were affected and so on. So, you get collateral damage, you have to watch for that. But otherwise, I think it’s the time to start mopping up in a serious way, without upsetting the market.’