They Said It - Recent Comments of ECB Governing Council Members
1 December 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 26 October, but earlier comments can still be seen in versions up to that of 25 October.
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Christine Lagarde (ECB)
27 November 2023
‘We started announcing that we would gradually reduce the reinvestment, that we would then stop the reinvestment in net asset purchases under the asset purchase programme (APP), and we have done so. We are, as a result of this stop of the net asset purchase programme and letting the securities that we have on a run-off basis, the balance sheet of the ECB is reducing by about 23 billion, an average of 23 billion per month, and that continues to be the case. In terms of other purchase programmes that we have undertaken particularly as a result of the pandemic, we have indicated that we would continue reinvesting until at least ’24. This is a matter which will come probably for discussion and consideration withing the Governing Council in the not-too-distant future and we would re-examine possibly this proposal [to accelerate QT].’
‘Euro area activity has stagnated in recent quarters and is likely to remain weak for the rest of the year. … While the short-term outlook remains subdued, the economy is set to strengthen again over the coming years as inflation falls further, household real incomes recover and the demand for euro area exports picks up. Let me now turn to inflation, which fell further to 2.9% in October. This fall reflected a general decline in inflation but was also helped by what we call base effects. … At the same time, the ECB’s indicator of domestic inflation – which excludes items with a high import content – has not come down by much, reflecting the fact that inflation is now driven more by domestic sources than by external sources. Wage pressures, meanwhile, remain strong. Our current assessment is that this mainly reflects “catch-up” effects related to past inflation rather than a self-fulfilling dynamic. And we expect wages to continue to be a key factor driving domestic inflation. At the same time, the contribution of profits – which accounted for much of the strong domestic price pressures seen recently – is now weakening. Looking ahead, we expect the weakening of inflationary pressures to continue, even though headline inflation may rise again slightly in the coming months, mainly owing to some base effects. However, the medium-term outlook for inflation remains surrounded by considerable uncertainty.’
‘In October we decided to keep the key ECB interest rates unchanged, and we expect that maintaining interest rates at current levels for a sufficiently long duration will make a substantial contribution to restoring price stability. Our future decisions will ensure that policy rates are set at sufficiently restrictive levels for as long as necessary. The appropriate level and duration of restriction will continue to be determined in a data-dependent manner, assessing the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council will reassess its monetary policy stance in mid-December, informed by new data and updated projections, including for 2026.’
‘The battle is not over and we’re certainly not declaring victory, but if you look at the progress that has been made and if you look back to the highest reading of inflation that we had a year ago in October, in the euro area, not specifically in Germany, but in the euro area, it was 10.6[%], we are now down at 2.9[%].’
‘And I’m talking here about headline inflation, so I think this is progress. We have started that fight against inflation… we have deployed a lot of ammunition because we have increased interest rates by 450bp. So I think we have already done a lot and I think that at the point where we are, given the amount of ammunition that we have used, we can observe very attentively the components of our lives like salaries, like profits, like fiscal, like geopolitical developments and certainly, the way in which our ammunitions are impacting economic life to decide how long we have to stay there and what decisions we need to make upper down. But we will win this battle, I can assure you.’
‘…we are in a phase of our policy cycle which I would characterise as being “attentive and focused”. We need to be attentive to the different forces affecting inflation: the unwinding of past energy shocks, the strength of monetary policy transmission, the dynamics of wages and the evolution of inflation expectations. And we need to remain focused on bringing inflation back to our target, and not rush to premature conclusions based on short-term developments.’
‘We expect headline inflation to rise again slightly in the coming months, mainly owing to some base effects. This reflects the sizeable drops in energy costs observed around the turn of last year, and the reversal of some of the fiscal measures that were put in place to fight the energy crisis. But we should see a further weakening of overall inflationary pressures.’
‘And this policy adjustment has fed quickly into financing conditions. But its peak impact on inflation will only materialise with a lag – and given the unprecedented scale and speed of our tightening, there is some uncertainty about how strong this effect will be. So, we need to be attentive to how these forces are working through the economy. But given the scale of our policy adjustment, we can now allow some time for them to unfold.’
‘But this is not the time to start declaring victory. The nature of the inflation process in the euro area means that we will need to remain attentive to the risks of persistent inflation as well.’
‘For now, our assessment is that strong wage growth mainly reflects “catch-up” effects related to past inflation, rather than a self-fulfilling dynamic where people expect higher inflation in the future. But to assess how wages are evolving and whether they pose a risk to price stability, we will be closely monitoring a number of developments. First, whether firms absorb rising wages in their profit margins, which would allow real wages to recover some of their past losses without the increase being fully passed through to inflation. Second, whether there is some easing of labour market tightness, which would prevent excess demand for labour from becoming a driver of persistently high wage demands. And third, that inflation expectations remain anchored, which ensures that, when the current shock passes, wage and price-setting will be guided by our 2% inflation target. In other words, we will need to remain attentive until we have firm evidence that the conditions are in place for inflation to return sustainably to our goal. That is why we have said our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. And we have made those future decisions conditional on the incoming data, meaning that we can act again if we see rising risks of missing our inflation target.’
‘To date, Europe’s financial system has avoided the worst-case scenario of severe systemic risks materialising at the same time. But policymakers need to remain proactive and alert to financial stability risks as and when they arise.’
‘[T]he level where we are at the moment, if we sustain it for long enough – and we can debate that of course – will make a significant contribution to bringing inflation back to our 2% target in the medium term. Now this is of course the loaded language that we have negotiated amongst ourselves and which tries to express that given our baseline, given what we expect of the economy developments going forward, we are at a level where we believe that if kept long enough - and this “long enough” is not trivial - will take us to the 2% medium-term target. Now two additional components maybe. Number one, this is really the baseline that we have produced in our latest projection in September, and they’re predicated on no major shocks coming up. If major shocks come up, depending on the nature of the shocks, we will have to revisit that statement. The second thing is “sustained for long enough”. And for that we are going to be data-dependent. I know that there are lots of questions around, and predictions around, as to how long will be long enough, how much time will be required for that to be sustainable, as we have called it. And it must be data-dependent. That’s really what we are committed to. What I can tell you, though – and I’m not, you know, contradicting what I just said – is that long enough is long enough. And it’s not something that is, you know, in the next couple of quarters we’ll be seeing a change. It seems to us, given the three criterias that we look at, which is the inflation outlook, which is underlying inflations and which is the strength of monetary policy transmission, “long enough” has to be long enough.’
‘We should not assume this 2.9% respectable headline rate [in October] can be taken for granted. Even if energy prices were to remain where they are, there will be a resurgence of probably higher numbers going forward and we should be expecting that.’
‘We are determined to bring inflation down to 2%. According to our projections we will get there in 2025.’
‘Is the price of food going to be higher in the future? That’s a possibility if you look at the impact of climate change, for example. Droughts, floods, higher temperatures and rising sea levels will most likely have an impact on food prices going forward.’
‘The incoming information has broadly confirmed our previous assessment of the medium-term inflation outlook. Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. Our past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation. We are determined to ensure that inflation returns to our 2% medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.’
‘The euro area economy remains weak. Recent information suggests that manufacturing output has continued to fall. Subdued foreign demand and tighter financing conditions are increasingly weighing on investment and consumer spending. The services sector is also weakening further. … The economy is likely to remain weak for the remainder of this year. But as inflation falls further, household real incomes recover and the demand for euro area exports picks up, the economy should strengthen over the coming years. Economic activity has so far been supported by the strength of the labour market. T… At the same time, there are signs that the labour market is weakening. Fewer new jobs are being created, including in services, consistent with the cooling economy gradually feeding through to employment.’
‘In the near term, it [inflation] is likely to come down further, as the sharp price increases in energy and food recorded in autumn 2022 will drop out of the yearly rates. … Most measures of underlying inflation continue to decline. At the same time, domestic price pressures are still strong, reflecting also the growing importance of rising wages. Measures of longer-term inflation expectations mostly stand around 2%. Nonetheless, some indicators remain elevated and need to be monitored closely.’
‘The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy would also weigh on growth. Russia’s unjustified war against Ukraine and the tragic conflict triggered by the terrorist attacks in Israel are key sources of geopolitical risk. This may result in firms and households becoming less confident and more uncertain about the future, and dampen growth further. Conversely, growth could be higher than expected if the still resilient labour market and rising real incomes mean that people and businesses become more confident and spend more, or the world economy grows more strongly than expected. Upside risks to inflation could come from higher energy and food costs. The heightened geopolitical tensions could drive up energy prices in the near term, while making the medium-term outlook more uncertain. Extreme weather, and the unfolding climate crisis more broadly, could push food prices up by more than expected. A lasting rise in inflation expectations above our target, or higher than anticipated increases in wages or profit margins, could also drive inflation higher, including over the medium term. By contrast, weaker demand – for example owing to a stronger transmission of monetary policy or a worsening of the economic environment in the rest of the world amid greater geopolitical risks – would ease price pressures, especially over the medium term.’
‘…neither the PEPP, nor the remuneration of required reserves have been discussed at this meeting.’
‘So how long is “sufficiently long”? Obviously, we refer to “timely manner”, “sufficiently long”, but in the same breath I say we shall be data dependent. At this point of our fight against inflation and after ten successive hikes, now is not the time for forward guidance. Now is the time to really stick to our data dependency ‘knitting’ if I may say and we shall do so. We have acknowledged on the occasion of this meeting that our assessment is confirmed, the assessment that we had in September. All numbers, if anything, have reinforced our assessment of the situation. We have applied the three criteria that you all know well; the inflation outlook, duly informed by any information that we have, the underlying inflation in all its compositions and the strength of the transmission of monetary policy. So, we will continue to be data dependent. Your second question was essentially when and at what level do you cut? This was not discussed at all, and the debate would be absolutely premature. We have acknowledged in our review of the macroeconomic situation back in September and yet again this time around, and we all know, and you know, that labour cost, wages, profit units – the analysis of that – is critically important to determine the inflation outlook. And we will continue to accumulate data. On labour, for instance, we are going to have a wealth of numbers and data, and intelligence, when collective bargaining agreements and annual negotiations in 2024 will be completed. That is way into 2024. That is only a “for instance.” Even having a discussion on a cut is totally premature. For the moment, what we are saying is that we have to be steady, we have to hold. This is the decision of today. We are holding.’
Isabel Schnabel (ECB)
23 November 2023
‘Our current restrictive monetary policy remains appropriate until we can be really confident that inflation returns sustainably to our 2% target.’
‘It took us around one year to get from 10.6% to 2.9%, but our projections say it’s going to take us two more years to get from 2.9% to 2%. One reason for the slowdown in the disinflation process is the very unusual situation of the labour markets. What now really matters for what is going to happen to inflation going forward is going to depend on how firms respond to this increase in their wage costs.’
‘And what we call the anchoring of inflation expectations is crucial, because if you think about it, if people believe us, if business and households believe us that inflation is going to come back to 2%, this will have an impact on rate setting behaviour, in price setting behaviour and this helps us in the end to bring inflation down to 2%.’
‘[M]onetary policy needs to be perseverant and needs to be vigilant to see if there are signs in the economy that give us reasons to believe that we need to move away from our baseline.’
Inflation has declined on the back of large base effects related to energy and food
Disinflation process is projected to slow with inflation moving towards 2% by end-2025
Labour hoarding weakens monetary transmission as labour shortages persist
Strong wage growth and falling productivity put upward pressure on unit labour costs
Euro area economy could be hit by new supply-side shocks in future
Energy explains higher inflation momentum, while El Niño effects on food may still come
Longer-term inflation expectations continue to signal some upside risks
‘Our estimates suggest that, should energy prices over the coming months increase in line with their historical mean, energy is estimated to add nearly 1.9 percentage points to euro area headline inflation by July 2024. This primarily reflects the strong decline in oil and gas prices observed since November 2022. A rise in energy prices over and above the historical mean would further amplify such base effects. The extraordinarily sharp rise in food prices in 2022 and early 2023 implies that similar dynamics for headline inflation may occur, at some point, for the food component of the HICP.’
‘Our indicators, especially those tracking recently signed wage agreements, point to continued strong wage growth at a time when inflation is already falling. These are the slow-moving second-round effects of the adverse supply-side shocks that hit the euro area economy in previous years. Meagre productivity growth is putting additional pressure on firm’s unit labour costs, which have been rising sharply since the beginning of 2022. The distribution of price changes illustrates these rigidities. In September, around 45% of services prices, weighted according to their share in the HICP basket, were still increasing at a rate above 5%, with this share declining only very slowly. In the goods sector, the share of products seeing particularly strong price increases started to decline earlier. But even in this sector, still nearly 40% of products are currently rising at a rate above 5%. Given these rigidities, disinflation will slow down appreciably. For core inflation to evolve in line with ECB staff projections, two key conditions need to be met. One is that the growth in unit labour costs eventually falls back to levels that are broadly consistent with 2% medium-term inflation. The second is that firms will use their profit margins as a buffer to limit the pass-through of the current strong wage increases to consumer prices. The last mile is about ensuring that these two conditions materialise in a timely manner. That process faces two key challenges. The first is the appropriate calibration and transmission of monetary policy. The second is the potential occurrence of new supply-side shocks.’
‘It is unclear how long the transmission through the labour market will remain muted. It is reasonable to assume that the longer economic activity stagnates, the harder it will be for firms, most notably small and medium-sized firms, to hoard labour. And indeed, we are seeing first signs that the labour market is softening and demand for labour slowing. But the more slowly this process unfolds and the weaker it is, the higher the risks that persistent labour market tightness will challenge the assumptions underlying the projected decline in core inflation. In particular, unit labour costs may grow more strongly than projected as labour hoarding continues to weigh on productivity growth and labour shortages support favourable wage bargaining conditions at a time when workers are still trying to make up for the substantial losses in their purchasing power. Higher unit labour costs, in turn, raise the risk that firms pass a larger part of their cost increases on to final consumer prices, which could lay the ground for a wage-price spiral.’
‘Although our determined monetary policy decisions have secured the broad anchoring of long-term inflation expectations, surveys and financial market prices continue to point to concerns that inflation may stay elevated. For example, the distribution of longer-term inflation expectations in our survey of professional forecasters, while remaining broadly anchored around our target, has shifted visibly to the right compared with the periods before and during the pandemic, with risks to the inflation outlook being tilted to the upside. Similarly, risk premia in the swap market for inflation far into the future remain elevated.’
‘Perseverance is needed to avoid declaring victory too early. With our current monetary policy stance, we expect inflation to return to our target by 2025. The progress on inflation that we have seen so far is encouraging and in line with our projections. We therefore decided to leave our key policy rates unchanged at last week’s monetary policy meeting. However, the disinflation process during the last mile will be more uncertain, slower and bumpier. Continued vigilance is therefore needed. After a long period of high inflation, inflation expectations are fragile and renewed supply-side shocks can destabilise them, threatening medium-term price stability. This also means that we cannot close the door to further rate hikes. If we stay vigilant, we will be able to spot early on any risks to the inflation outlook that are materialising, just as the runner listens to the signals from her body. This means that we need to carefully monitor all incoming data and continuously verify whether they are consistent with the assumptions underlying our projections. Data dependence ensures that our monetary policy is at all times calibrated in accordance with the circumstances we are facing. The inflation target is now within reach, but let’s celebrate only once we have truly tackled the last mile.’
Philip Lane (ECB)
09 November 2023
‘In particular, the appropriate level of central bank reserves can be expected to remain much higher and be more volatile in this new steady state compared to the relatively low levels that prevailed before the global financial crisis (GFC). Amongst other factors, the extraordinary macro-financial risk episodes (the GFC, the euro area sovereign debt crisis, the pandemic) in the last 15 years have underlined the importance of financial institutions maintaining significant liquidity levels.’
‘In the coming years, the ongoing reduction in the footprint of the ECB in the bond market and the repayment of TLTRO funds can be expected to continue to put upward pressure on term premia and contribute to lower credit creation. In turn, these contractionary forces lower the projected paths for GDP and inflation and thereby reduce the level of the policy rate required to stabilise inflation at the medium-term target (compared to a counterfactual in which monetary policy tightening was not accompanied by balance sheet reduction).’
The inflation drop so far ‘is not something we should take a lot of comfort from’.
‘Over the next year, inflation will probably still be around 3%, high 2s, low3s … and it’s only in 2025 … that we will see a return to 2%. … the overall message here is that inflation will come back to 2%.’
To get to that, ‘there’s a lot of distance still to cover. … Next year we need to see wages still grow more than normal, but to decelerate. We need to see some of those wage increases absorbed by profits…’
‘[N]ext year the economy will grow in a kind of normal way’, he said. The ECB sees the economy ‘really kind of turning around from early 2024 onwards.’
‘We need to see the deficits in Europe narrow. Not dramatically, but in a significant way.’
‘Having inflation coming back from 10% to 3% was more supply policy than monetary policy.’
‘If the transmission is weaker, the injection of interest rates has to be stronger.’
Luis de Guindos (ECB)
29 November 2023
‘We have indeed set the remuneration of banks’ minimum reserves to 0%. The levels of those reserves have so far not been changed or discussed. I know some central bank governors are in favour of increasing them. We have limited the remuneration on the minimum reserve requirement, which is equivalent to approximately 1% of banks’ liabilities. I understand that remuneration of reserves is important for some banks, but monetary policy shouldn’t be driven by the financial position of banks or the profits of the central banks. Our objective is to bring inflation back to our target.’
‘What is happening [in the real estate sector] is part of our monetary policy. The sharp rise in interest rates is starting to dampen real estate prices. This is more apparent in some countries than others, but a moderation in price trends can be seen everywhere. On average, house prices are stabilising. The decline in commercial property prices is much more pronounced.’
‘The outlook that markets are taking with respect to the evolution of the economy, I would say it is a little bit sanguine and optimistic. There is a little bit of wishful thinking.’
‘I’m not going to discuss market bets, but I what can tell you is that our strategy is very clear in terms of communication: Data dependency and meeting by meeting and we’ll see how things evolve. I think that talk about rate cuts is a little bit premature.’
‘While risks to financial stability may appear less acute, they remain elevated.’
‘So, the monetary policy stance now is what it is, we have raised rates, we are keeping rates on hold, we are starting to reduce our balance sheet. I think the operational framework will have to adapt to that situation, but that adaptation has to take place with flexibility. Flexibility in terms of using the different toolkits that we have available.’
‘It is likely that the euro area economy will remain subdued in the near term. However, it looks set to strengthen again over the medium term, as inflation falls further, household real incomes recover and the demand for euro area exports picks up. … We expect a temporary rebound in inflation in the coming months as the base effects from the sharp increase in energy and food prices in autumn 2022 drop out of the year on year calculation. But we see the general disinflationary process continuing over the medium term. Energy prices remain a major source of uncertainty amid heightened geopolitical tensions and the impact of fiscal measures. The same is true for food prices, which may also come under upward pressure owing to adverse weather events and the unfolding climate crisis more broadly. …domestic price pressures are still strong and are being increasingly driven by wage pressures and the evolution of profit margins. While most measures of longer-term inflation expectations stand around 2 %, some indicators remain elevated and need to be monitored closely. The resilience of the labour market has been a bright spot for the euro area economy, but there are signs that the labour market is beginning to weaken.’
‘The incoming information has broadly confirmed our previous assessment of the medium-term inflation outlook. Our past interest rate increases continue to be transmitted forcefully into financial and monetary conditions. Banks’ funding costs have continued to rise and are being passed on to businesses and households. The combination of higher borrowing rates and weakening activity led to a further sharp drop in credit demand in the third quarter of this year. And credit standards have tightened again. We are also seeing increasing signs of the impact of our policy decisions on the real economy. Further tightening is still in the pipeline from the current policy stance, and it is set to further dampen demand and help push down inflation. We are determined to ensure that inflation returns to our 2% medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.’
‘[W]e are maintaining interest rates at their current level, and we believe that this will substantially contribute to bringing inflation back down to the 2% level we define as price stability. The evolution of inflation has been positive overall: it was above 10% only one year ago and it has now fallen to 2.9%. At the same time, core inflation has also been moderating. But we have to be prudent and cautious, as there are some risks around the outlook for inflation over the next few months. We will continue taking a meeting-by-meeting and data-dependent approach to interest rate decisions.’
‘We expect that growth will stagnate in the second half of the year and that the fourth quarter will not differ much from the third. Our most recent projections indicated some downside risks to growth; some of these risks have now started to materialise and this will have an impact on inflation.’
‘It might be premature to say it, but leading indicators point to the growth outlook being somewhat more negative than we previously projected. As regards inflation, the evolution may not be very different from what we projected in September.’
‘Recent data on headline inflation figures have been quite positive, and we are glad to see that underlying inflation is coming down, as one of our main concerns in the past was how sticky core inflation was.’
‘Any discussion about lowering interest rates is clearly premature.’
‘It is essential to focus on core inflation, for which there are several risks. First, there may be another energy shock that would eventually affect both headline and core inflation. Second, there is the evolution of the euro exchange rate, which we do not target but which nonetheless plays a role in inflation. And finally, there are unit labour costs. Rising labour costs result from two factors. The first one is wage developments, with wage growth in the euro area now at just over 5%. The second is productivity, which is very low and has been declining because employment growth has been outpacing output growth. It is true that profit margins grew even faster than unit labour costs last year. This year, however, we are seeing a moderation in profit margins, while labour costs are on the rise. Our expectation is that part of the increase in labour costs will be absorbed via profit margins, meaning that not all of this increase will be passed through to final prices.’
‘We have seen a quarterly rate of -0.1%, I wouldn't read too much into it either, +0.1% or -0.1%, but it's pretty much a stagnant situation, we think it's going to continue in the fourth quarter.’
‘[I]nflation is expected to continue to slow down in the next months.’
‘In the last Governing Council meeting, we decided to stop rising interest rates. The message here is that if we keep rates at this level, inflation will eventually converge to our price stability definition of 2%.’
‘The euro area economy remains weak. Foreign demand is subdued and tighter financing conditions are increasingly weighing on investment and consumer spending. The services sector is also losing steam, with weaker industrial activity spilling over to other sectors, and the impact of higher interest rates is broadening. Recent indicators point to continued weakness in the near term. The labour market has been a bright spot supporting the euro area economy and has, so far, remained resilient to the slowdown in growth. But there are signs that it is turning. While unemployment stood at 6.4% in August, the lowest level recorded since the start of the euro, fewer new jobs are being created, including in services, which suggests that the cooling of the economy is gradually feeding through to employment. Moreover, the risks to the growth outlook are tilted to the downside. Growth could be lower if the effects of monetary policy transmission turn out stronger than expected, or if the world economy weakens further. Furthermore, major geopolitical risks have intensified and are clouding the outlook. This may result in firms and households becoming less confident and more uncertain about the future, and dampen growth further. At the same time, while remaining significantly above our medium-term target of 2%, recent inflation data have been in line with our expectations, confirming that our monetary policy is working. Inflation dropped sharply to 4.3% in September and the fall was visible in all its major components. Food price inflation decreased again, but – at 8.8% – remains high by historical standards. Energy prices fell by 4.6%, but have risen again more recently, and have become less predictable in view of the new geopolitical tensions. Inflation excluding energy and food also dropped to 4.5% in September, and we see continued declines in measures of underlying inflation. However, domestic inflation remains strong owing to the growing importance of wage pressures. The inflation outlook remains surrounded by significant uncertainty. In particular, heightened geopolitical tensions could drive up energy prices and higher than anticipated increases in wages could drive inflation higher. By contrast, a stronger transmission of monetary policy or a worsening of the global economic environment would ease price pressures.’
‘The incoming information has broadly confirmed our previous assessment of the medium-term inflation outlook. Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September and most measures of underlying inflation have continued to ease. Past interest rate increases continue to be transmitted forcefully into financing conditions, which is helping to push down inflation. We consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our 2% medium-term target. Our future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary. By the December meeting, we will have GDP growth data for the third quarter of the year, the inflation figures for October and November, and a new round of projections. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. As the energy crisis fades, governments should continue to roll back the related support measures. This is essential to avoid driving up medium-term inflationary pressures, which would otherwise call for even tighter monetary policy.’
Piero Cipollone (ECB)
NO UPDATE
Frank Elderson (ECB)
22 November 2023
‘Given the prevailing inflation outlook and the need for us to continue to implement a sufficiently restrictive monetary policy to bring inflation sustainably back to our 2% target, we do not expect to expand our balance sheet again anytime soon. However, that doesn’t mean that we don’t need to continue re-evaluating the fitness of the instruments we have in our toolkit in case policy adjustments are required. Moreover, in proceeding with the rundown of our balance sheet, we need to think about which features we would like to maintain in a steady state.’
‘In my view, when there is no clear monetary policy rationale for preferring domestic sovereign bonds, we should contemplate increasing the share of EU supranational bonds in our total bond holdings to avoid potential climate and nature-related risks and to better align our balance sheet with the general economic policies in the EU.’
Joachim Nagel (Bundesbank)
30 November 2023
‘The development of the past few months is encouraging: price increases slowed significantly in September and October - both in Germany and in the euro area.’
‘With the decline in inflation since November 2022, the short-term inflation expectations of private individuals in Germany and the euro area have developed in the desired direction. Like surveys from the Bundesbank, ECB and the European Commission unanimously show, a downward trend began after the highs in the second half of 2022. Since this summer, however, private individuals' inflation expectations have tended to trend sideways or even upwards again, although at the same time inflation rates have continued to fall. There is still a high level of uncertainty about longer-term price developments on the financial markets. The markets are pricing in a further decline in inflation over the coming months. However, long-term market expectations are still well away from 2 percent. Market players continue to hedge against the risk of excessive inflation in the long term. And the Middle East war has given new fuel to inflation risks. The Eurosystem's 2% target acts as an anchor for inflation expectations. However, monetary policy cannot yet be satisfied with what has been achieved.’
‘In my opinion, the rate of [balance sheet] reduction can therefore increase.’
‘What happens next with interest rates? I leave this question open: Because it is currently necessary to make decisions from session to session depending on the data. In my opinion, the inflation risks are on the upside - not least due to the current geopolitical situation. That's why I don't rule out a further interest rate hike. At the same time, it seems to me to be far too early to even think about a possible reduction in key interest rates. And for the coming year, I assure you: we will remain stubborn in the fight against inflation. Citizens should have one less thing to worry about. You should be able to sleep more soundly again and be able to rely on price stability. To achieve this, key interest rates must remain at a sufficiently high level for as long as necessary.’
‘In my view, a slimmer central bank balance sheet is desirable, especially because it gives more space. The market mechanism is then given more leeway so that resources can flow to where they are used productively. And monetary policy is regaining more room for manoeuvre so that we can continue to take all monetary policy measures that are necessary in view of the primary goal of price stability. We have to put together a coherent overall package of the individual parts of the operational framework. For example, there are different ways to control the monetary policy course via short-term interest rates. In other words: the framework for implementing monetary policy and the monetary policy course are two pairs of shoes! The monetary policy course is also independent of foreseeable losses in the central bank's balance sheet. This topic is likely to come back into focus by the end of winter at the latest, when the Bundesbank presents its 2023 annual financial statements. The Bundesbank has to bear financial burdens from the extraordinarily expansionary monetary policy of recent years and the subsequent extraordinarily strong rise in interest rates. But central banks neither strive to maximize profits nor can they go bankrupt like commercial banks. If the Bundesbank's financial buffers are no longer sufficient in the coming years, we will report a loss carryforward. And even in the event of a loss carried forward, the Bundesbank's balance sheet is solid. In addition to the financial buffers, the Bundesbank has significant assets. In addition, a loss carryforward would be nothing new for the Bundesbank and would in no way prevent it from fulfilling its monetary policy mandate within the Eurosystem.’
‘Inflation rates are expected to decrease over the next two years. This is encouraging. Nevertheless, inflation has remained too high for too long. It is thus too early to declare victory over inflation. Monetary policy has to stay the course.’
‘Now, the stock of APP assets is shrinking by roughly 25 billion euros each month. Nevertheless, it is clear to me that the large balance sheet will have to shrink further significantly. It goes without saying that setting interest rates is and remains our most important tool with which to combat high inflation. In this regard, we on the Governing Council currently consider them to be at levels that will make a substantial contribution to inflation returning to target in a timely manner. But these levels need to be maintained for a sufficiently long period. Moreover, that does not necessarily mean that the current hike cycle is now over. Of course, it could be that, if the inflation outlook worsened, we might have to raise rates again. The opposite case – inflation returning much faster to 2% – seems much less probable to me. Therefore, it would be premature to lower interest rates soon or to speculate about such steps. After all, it is not just the level of interest rates that matters for the stance, but also expectations about the future path of interest rates. The main effect of the policy tightening on inflation is yet to unfold. While headline inflation has fallen significantly over the last months, we cannot take it for granted that this decline will continue. The disinflationary effects of fallen energy prices have dissipated and we are still a considerable distance away from our target level. And we expect a bumpy road ahead, with ups and downs in inflation over the near future. In October, the inflation rate was slightly below 3% for the first time since July 2021. But we will see a return of numbers with a three before the decimal point. This is largely the result of a base effect. For example, in December 2022, the German government paid the regular gas bills of households, which resulted in a very sharp decline of the price level. Meanwhile, indicators of underlying inflation such as the core rate, which strips out volatile energy and food prices, show that inflation dynamics continue to be strong. In October, core inflation stood at 4.2%. A timely return of inflation to 2% will be important for keeping inflation expectations in check. If we failed, medium-to-long-term inflation expectations could lose their firm anchoring at levels consistent with price stability. If that happened, we would expect an impact on price-setting or wage-setting behaviour. Ultimately, this would require an even stronger monetary policy response. Of course, we take note of concerns that the current monetary policy stance might be too restrictive for the economy. Some argue that lower interest rates would enable us to increase economic growth without jeopardising price stability. But I fail to be convinced by that reasoning. First of all, I am confident that we can avoid a “hard landing”. The tight labour market, low corporate and household debt levels and brisk investment activity suggest that the conditions for a “soft landing” are in place. And secondly, it could do more harm to the economy if we were to loosen too early and then have to tighten again and even more strongly. Seen from a risk management approach, I would prefer to err on the side of caution and ensure a timely return to price stability. At our next Governing Council meeting in December, new staff projections will provide important information for our decision-making. Our future decisions will continue to be based on three pillars: our assessment of the medium-term inflation outlook in light of the incoming data, the dynamics of underlying inflation, and our assessment regarding the strength of the monetary policy transmission. As regards the transmission, I do not see an overtightening. The transmission across financial markets is currently working well. And the transmission to the real economy and to inflation is making progress.’
‘We see that the goal is gradually coming into view: inflation is falling. But we also know that it has not yet been reached and that inflation can quickly rise again. As in the last mile, it's now about gritting your teeth and not giving up.’
‘Falling inflation shows that our monetary policy is working. But inflation has not been defeated. The fact that it is now decreasing so significantly also has to do with lower energy prices and base effects. … This mathematical effect will soon evaporate. The inflation rate could therefore rise slightly again in the next few months.’
‘There is great uncertainty about further developments. At the moment we cannot be sure whether we have actually reached the peak in interest rates. It is too early to speculate about lower interest rates.’
‘It is understandable that these real wage losses should be made up for. But I don't see a self-reinforcing spiral at the moment. It is important to keep inflation expectations anchored. Because if everyone is convinced that prices will remain stable, that would be best for the collective bargaining partners.’
‘The energy markets play an important role in inflation, but at the moment they are actually slowing it down. Price pressure on other goods and services has now become established. We see that interest rate increases help to reduce inflation. Because they dampen demand because they make loans more expensive and savings more attractive. Typically, the effect on demand comes before the effect on prices. In 2024, I am confident that the interest rate increases will push inflation down even more.’
‘In order to defeat high inflation, interest rates must first remain high. But I believe that we will have overcome the current dip in growth in 2024, provided the Middle East conflict does not escalate. I don't see a hard landing or recession impacting the job market.’
‘…it will still take many years for the balance sheet to return to a size which is appropriate for normal times. With regard to key interest rates, the ECB Governing Council currently considers them to be at levels that will make a substantial contribution to inflation returning to our target in a timely manner, provided that these levels are maintained for a sufficiently long period. However, it is not yet clear whether this hiking cycle is now over.’
‘With regard to monetary policy, we will continue to follow our data-dependent approach and make our decisions on a meeting-by-meeting basis. This means that our future decisions will continue to be based on the following: the assessment of the overall inflation outlook in light of the incoming data; the dynamics of underlying inflation; and the strength of the monetary policy transmission mechanism. At our next meeting, the December Eurosystem staff projections for inflation and economic output will be available. We will also update our risk assessment. Even now, it seems clear that the recent events in the Middle East – terrible events – have increased the uncertainty of the medium-term outlook. Overall, during the last few months, inflation in the euro area has fallen significantly. In October, the headline inflation rate slowed to 2.9%. This is encouraging. Nevertheless, while the inflation curve currently looks a bit like the Matterhorn – or, as it is called in Italy, Monte Cervino – I do not expect this steep decline to continue over the coming months. Statistical effects, particularly base effects, are currently exerting a strong influence on the monthly data. Events that happened twelve months ago are having an impact on the year-on-year rate of inflation. Even if energy prices remain where they are, I expect the inflation rate to rise again somewhat. For some months to come, the road ahead will probably be a bumpy one with many ups and downs. Indicators of underlying inflation show that its dynamic is still quite strong. For example, in October, core inflation stood at 4.2%. This is the inflation rate excluding energy and food. In other words, now that the disinflationary effect of lower energy prices has faded away, we are faced with the most difficult part of our journey forward. That is to say, our job is not done yet. In particular, it would be a mistake to loosen our monetary policy stance too early. Premature easing would jeopardise the timely return of inflation to our target of 2%. And this timely return is important for keeping medium-to-long-term inflation expectations anchored at levels consistent with price stability. If our actions raise doubts about our determination, economic agents will increasingly expect inflation rates to persist above target and will adapt their behaviour accordingly. Their price-setting behaviour or their wage demands, for example. Now we need the patience to wait for the full effect of policy tightening on inflation to materialise. We expect the main effect on inflation to take hold in 2024. This is due to the time lag of monetary policy transmission. In any case, we must maintain our current restrictive policy stance until we are certain that price stability will return on a lasting basis.’
‘Have we seen the peak in interest rates? That is not clear yet. Currently, with a headline rate of 2.9% and a core rate of 4.2% in October 2023, inflation is still too high. The Governing Council is committed to bringing inflation back to our 2% medium-term target in a timely manner. Based on our current assessment, we consider that key ECB interest rates are at levels that will make a substantial contribution to achieving this goal. Provided they are held at these levels for a sufficient period of time. Our future decisions will continue to be based on our assessment of the medium-term inflation outlook in light of the incoming data, the dynamics of underlying inflation, and our assessment regarding the strength of monetary policy transmission. As regards the inflation outlook and the dynamics of underlying inflation, the September staff projections do not see inflation rates returning to about 2% before late 2025. But those numbers were published before the terrible events in the Middle East. The associated geopolitical tensions make the medium-term outlook more uncertain. Incoming data and the December projections will provide important information for our decision-making at the next Governing Council meeting.’
‘All in all, though, we can conclude that transmission across financial markets is currently working well. There can be no talk of overtightening. Having said that, it is clear that financial transmission is only the first stage of the process. The second stage is transmitting the impulse to the real economy, and ultimately to prices. If monetary tightening is supposed to reduce price pressure, a dampening of aggregate demand is inevitable. From this perspective, it is encouraging that the monetary tightening is affecting the real economy. Nevertheless, dampening aggregate demand does not necessarily mean inducing a recession. I am optimistic that we can avoid a hard landing of the economy, because several factors are moderating transmission: unusually stable, and also tight labour markets, favourable indebtedness levels among firms and households, and strong investment activity. According to Bundesbank model estimates, the tightening can be expected to have its maximum impact on economic activity in 2023 already, and on inflation only in 2024. In other words, much of the inflation-dampening effect induced by monetary tightening is yet to materialise. But we need it to materialise. And it will only materialise in full if we let it work. Against this backdrop, it would be unwise to start cutting interest rates too soon. … Now we need to be patient and stay the course to reap the benefits of the tightening in terms of disinflation. Key interest rates will therefore have to remain at a high level for a sufficient period. While it is impossible to predict exactly how long this period will be, it is highly improbable that it will end anytime soon.’
‘Let's start … with the current inflation environment. We can see that things are moving in the right direction. … But the inflation rate is still too high. The forecasts show only a slow decline towards the target value of 2%. And the uncertainty remains high. In the Governing Council of the ECB, we are determined to achieve price stability, i.e. to bring the inflation rate back down to 2% soon. To achieve this, the key interest rates will have to remain at a sufficiently high level for a sufficiently long time.’
‘I understand that slowing down the economy to tame inflation is unpopular. But, to achieve price stability, supply and demand have to be re-aligned. And this meant, and still means, that aggregate demand must be restricted.’
‘Our tightening of monetary policy has contributed to the dampening of economic activity. And, in lockstep, profits have already made a significantly smaller contribution to domestic inflation in the second quarter of 2023 than in the quarters before. I am therefore expecting firms’ profits to moderate in the coming quarters and absorb some of the recent strong increases in wages. If profits were to rise strongly instead, high inflation would be more persistent. And this would call the Eurosystem to action.’
‘…if real wage growth exceeds the economy’s growth potential for an extended period of time, firms would pass at least some of these cost increases on to consumers. And this, of course, could mean higher inflation. This would again prompt a response from the Eurosystem. Currently, we are expecting wage increases to have some effects on prices. But we do not see any evidence of a self-reinforcing spiral. We will continue to carefully monitor whether the price and wage-setting behaviour will normalise and align more closely with our inflation target. Otherwise – as you may have guessed by now – the Eurosystem will be called to action.’
‘First, in the current environment of high inflation, fiscal policy needs to be restrictive. Expansionary fiscal policy could spur aggregate demand and increase existing inflationary pressures. So I’m happy to see deficit ratios declining in the euro area. In many cases, this is related to the phase-out of the crisis response measures. I see the risk of an underlying expansionary trend gaining traction.’
‘We will continue to follow a data-dependent approach. At our next meeting in December, we will have more hard data, and, most importantly, new Eurosystem staff forecasts. We will then decide how to proceed on that basis. Ladies and gentlemen, given the visible economic slowdown, the “last mile” before we reach our inflation target may well be the hardest. In this situation, it is helpful to recall the sequence of monetary policy transmission. Monetary policy tightening is first transmitted to broader financing conditions. Tighter financing conditions then slow down the real economy. This is where we are right now. And, with another time lag, the slowdown of economic activity puts downward pressure on inflation. Monetary policy has already started to dampen inflation. And it will continue to do so in 2024 and 2025. We will stay the course. I am firmly convinced and personally committed: The Eurosystem will ensure that inflation returns to our 2% target. We will achieve price stability.’
‘At its last meeting in October, the ECB Governing Council opted to stay the course and leave rates unchanged. This appears justified, as we have achieved a reasonable degree of tightening, and inflation pressures have subsided somewhat in the past months. Nevertheless, inflation rates in the euro area are still too high. And they have been too high for too long. Inflation is still forecast to remain above target for the entire horizon of the latest ECB staff projection. Lively wage growth combined with a decreasing labour supply will keep the pressure up. It is imperative to remain vigilant. As we know, monetary policy measures take time before their full effect becomes visible. There is a lot of uncertainty surrounding the outlook, and we still face risks that the inflation outlook could turn out higher than expected. The Governing Council will continue to follow a data-dependent approach. And it will continue to be guided by a clear objective: we will maintain a sufficiently high level of the monetary policy rate for as long as necessary to ensure that inflation returns to 2%.’
‘But one thing is clear: uncertainty in this form [Middle East violence] is usually not good for economic processes and is therefore also relatively bad for growth prospects. But as I said, it is still too early to ultimately make a final economic judgment. … Of course, as monetary policymakers and central banks, we look at things like this and think about how we could react if necessary. But I can tell you one thing: If it were necessary, we are positioned to respond to it.’
‘The important message first is that inflation is falling. This means that monetary policy is working, and that is a good message. If you can still remember: last year we still had double-digit inflation rates. The inflation rate has now fallen to just under 4%. The important core inflation rate - i.e. adjusted for energy and food prices - is still above 4%. We are still a long way from our 2% target, but the direction is right. Monetary policy will continue to be firm about really getting inflation to 2%.’
‘We have decided to make new decisions from meeting to meeting, based on new data. And that is certainly the right approach in the current situation, which is characterised by a lot of uncertainty.’
‘Last week we left interest rates unchanged for the first time since July 2022. Given the current inflation outlook and the tightening of monetary policy that has already been achieved, I believe this is correct. Our tight monetary policy is working, but we must not let up too soon. Rather, the key interest rates will have to remain at a sufficiently high level for a sufficiently long time. It is not yet possible to say whether interest rates have already reached their peak: we remain strictly dependent on data. There are several upside risks to inflation. Geopolitical tensions in the Middle East could drive up energy prices and make the medium-term outlook more uncertain. Our monetary policy stance must ensure that inflation returns to 2%. Inflation has proven stubborn and has not yet been defeated. The people of the euro area rightly expect us to do our job and ensure price stability. That is my top priority.’
‘Inflation is still way off our target rate of 2%. But our tight monetary policy is yielding results. We on the ECB Governing Council are therefore staying our course and have left interest rates unchanged. We will continue to take decisions on the use of our monetary policy instruments on a meeting-by-meeting basis.’
François Villeroy de Galhau (Banque de France)
01 December 2023
'Disinflation is even faster than expected, particularly in services. There may be a pause for few months, but this supports our forecast of a return of inflation towards 2% by 2025 at the latest, barring an exogenous shock.'
'Concerning monetary policy, barring any shock, the increase in rates is now over. The question of a cut may arise when the time comes in 2024, but not now: when a treatment is effective, you have to be patient enough over its duration.'
‘After the Covid crisis and the Ukrainian crisis, the situation in the Middle East is indeed just as dramatic. We are particularly vigilant about the price of oil but it is clear, for the moment, that market reactions remain measured: we are today around the price level of last October 7. A point of attention remains on an always possible extension of the conflict, the consequences of which would then be completely different. … Yes [this crisis is different from the Ukrainian crisis]: economically, this time it is not accompanied by a generalised shock on the prices of other energies or even the raw materials that our economy needs. For this reason, we maintain our forecast for inflation to return to around 2% by 2025. And we anticipate a slowdown in growth but not a recession. … On average in the area, yes [this applies to the Eurozone also]. Which does not mean that this or that country cannot experience a period of technical recession. We know that certain economies of the Union, such as Germany, are more strongly impacted than ours... But we should escape the dark scenario feared a year ago.’
‘For a good treatment, it is necessary to combine the dose and the duration: regarding the dose, unless there is another shock, it is over, there will be no further increase. On the other hand, it takes time for the remedy to work: the cut in rates will come in due time.’
‘Regarding balance sheet policies, we will have to discontinue our PEPP reinvestments in due time – and possibly earlier than end 2024. But I see no reason today to tie our hands on a specific order of sequencing between our future first rate cut and the end of the PEPP full reinvestments. As long as our rates are in restrictive territory – which will clearly remain the case – , withdrawing past balance sheet expansion can be consistent with our overall monetary stance.’
‘We, the ECB, will bring inflation back towards 2% by 2025. This includes some judgment: I am not fixated on 2.0% to the nearest decimal place and I am not obsessed by the alleged challenge of “the last mile”. That said, changing our inflation target, as suggested by some economists, would risk blurring expectations, and fail to fulfil our mandate. And there can be no doubt about our determination to reach our target: we have already made significant progress, reducing in one year headline inflation from 10.6% to 2.9%, and in six months core inflation from 5.7% to 4.2%. There could be some ups and downs in the next months, but the disinflationary trend is solid and somewhat quicker than expected on both sides of the Atlantic: look especially at the encouraging figures for services (estimated at 4.6% in October in the euro area, down from a peak at 5.6% in July). The latest developments in Israel and the oil market shouldn’t significantly change this trend: each day we are moving further from a general commodity shock like in 2021-22. As we are confident on our target, we can be patient on our instrument. “Intelligent patience”, so to speak, which is quite different from stubborn obstinacy: we’ll adapt to data, including on economic activity – and I still think we should and can avoid recession, preferring a soft landing path. But the question too quickly shifted from “when will you stop hiking?” to “when will you start cutting?”. Well, in a mountainous environment, there aren't just peaks and descents: there are also plateaus, where you can experience the effects of altitude and appreciate the view. That's what we'll probably be doing for at least the next several meetings and the next few quarters. I said as early as last January that we would probably finish raising rates "by summer 2023" - and we have done so; today I won't give a date for the first rate cut. Rather than a calendar, I do believe that there is one key criterion for getting through this future "navigation lock": a return to an inflation outlook that is compatible with our 2% target, firmly and durably. Firmly in the sense of being supported by actual data on headline inflation, as well as on underlying inflation and wages. Durably in the sense of forecasting 2% sufficiently ahead of the end of our projection horizon, and including a decline towards 2% of households’ and businesses’ inflation expectations.’
‘Standing at 2.9% last month, inflation has come down considerably. Energy prices are certainly contributing to this, but core inflation (i.e. excluding energy and food) is also continuing to fall: it now stands at 4.2% in the euro area and is even lower in France (3.5%), and has clearly come down from its spring peak. This proves the effectiveness of monetary policy and fully justifies the decision taken by the Governing Council on 26 October to put an end to the series of interest rate hikes. Our monetary policy must now be guided by confidence and patience: confidence that we are making steady progress in bringing inflation down towards 2% by 2025; and patience that interest rates will remain stable at their current level for the time still needed to pass them on in full.’
‘Faced with the surge in inflation during 2022, the ECB notably raised its key rates accordingly: the remedy is not always pleasant, but it is effective; inflation is now falling, to 2.9% in October, and we are confident that we will return it to the 2% target by 2025.’
‘I believe we’re really going on a good direction with inflation. … There can be slight volatilities, but regarding the long-term, the tendency is very clearly falling. There are other elements that could surprise, such as petrol prices, because of the conflict in the Middle East.’
‘It’s too early to talk about cuts, but rate cuts will come when everyone is convinced that inflation will come back to 2%.’
‘The provisional figures for October show a marked deceleration in inflation in France, as in the Eurozone: at 2.9%, it has been considerably reduced over the last year (10.6% in October 2022). Energy prices are certainly contributing to this, but core inflation (excluding energy and food) is also continuing to fall: at 4.2% in the Eurozone and even lower in France, it has clearly passed its spring peak. This is a strong sign of the effectiveness of monetary policy. At the same time, the French economy, although slowing, showed a degree of resilience in the third quarter, with clear growth in consumption and investment. This state of the economy fully justifies the halt to the rate hike sequence decided by the Governing Council last Thursday. Our monetary policy must now be guided by confidence and patience: confidence that we are making firm progress towards bringing inflation down to 2% by 2025; and patience that interest rates will remain at their current level for as long as is necessary for them to be fully effective.’
Fabio Panetta (Banca d’Italia)
30 November 2023
‘Output declined somewhat in the third quarter of this year and will remain weak in the fourth quarter. Risks to economic growth are tilted to the downside, partly due to the uncertainty stemming from acute geopolitical tensions.’
‘In the coming months we might witness a temporary increase in inflation owing to base effects, especially for energy prices. However, this development is not due to a pick-up in inflationary pressures: beyond these purely statistical effects, inflation – especially core inflation – is expected to decline in 2024.’
‘According to the projections published by the ECB in September and the data that have become available since then, the current level of policy rates is sufficient to bring inflation back to our 2% target over the medium term. Monetary conditions need to remain tight for as long as necessary to consolidate disinflation. The duration of this phase will depend on development in macroeconomic variables; it could be short if continued weakness in economic activity accelerates the decline in inflation. We need to avoid unnecessary damage to economic activity and risks to financial stability, which would ultimately jeopardise price stability. In this respect, the pass-through of monetary policy impulses into financing conditions is proving to be stronger than expected. The cost of bank credit has increased considerably. The growth rates of monetary and credit aggregates have fallen sharply to levels similar to or below those recorded in the aftermath of the global financial crisis and the sovereign debt crisis in the euro area. Moreover, the ECB's monetary tightening has so far only produced some of its effects and – based on past experience – is likely to continue to dampen demand in the future. For example, a large amount of medium- and long-term fixed-rate debt incurred by households and firms during the low-inflation period will mature in the coming months. Roll-overs will be at higher interest rates, which will have a negative impact on consumption and investment. In addition, the current monetary tightening is different from previous ones. Its effect is not only due to traditional increases in policy rates, but also to a contraction of the Eurosystem’s balance sheet, which reduces the supply of liquidity. On the one hand, the reduction in the stock of securities held by central banks will push up medium- and long-term yields, with further tightening effects. On the other hand, the reduced supply of liquidity will affect credit market conditions. The decline in bank reserves will increase competition in the deposit market, leading to a further increase in banks’ funding costs and hence higher lending rates to firms and households. Empirical evidence also suggests that a decline in banks’ excess reserves reduces the supply of credit.10 In turn, firms’ reduced cash holdings will make their investment decisions more sensitive to higher interest rates. For these reasons, we need the to proceed cautiously with the normalisation of the Eurosystem’s balance sheet. Having raised our policy interest rates to a level that would restore price stability, a sharp reduction in the Eurosystem’s balance sheet, after the rapid reduction of recent months, could have a contractionary effect on the economy that would not be justified by the inflation outlook.’
Pablo Hernández de Cos (Banco de España)
01 December 2023
‘On the one hand, the aforementioned geopolitical factors are a source of upward risks to inflation. Climatic factors also generate risks in the same direction on the evolution of energy and food prices. And a greater-than-expected increase in wages and business margins could generate higher inflation than projected in the central scenario. On the other hand, a materialisation of downside risks to growth or a more intense transmission of monetary policy could lead to lower inflation. In this context, the Governing Council of the ECB assesses that current interest rate levels, sustained for a sufficiently long period, will contribute substantially to achieving the medium-term inflation target level of 2%. In any case, we reiterate that we will continue to adjust our monetary policy based on incoming data to ensure price stability.’
‘…our current assessment is that the current level of interest rates, if maintained for sufficiently long duration, might be sufficient to reach our target of 2% in the medium run. And this is an important statement, because in my view, it contains the three main elements of how we see, or at least how I see, the situation in the euro area.’
‘And these energy prices and food prices have declined in a significant manner, and this is of course being transmitted and is expected to be transmitted to underlying inflation also in the following quarters. Of course, demand is weakening, not only because, of course, the recovery after the pandemic has vanished, but also because of monetary policy transmission is affecting demand, as expected, and is expected also to affect demand in the future. Fiscal policy, our expectation is that it might turn restrictive in 2024 and 2025…’
‘I think it’s also important to emphasise that we’ve also gained a lot of confidence in our forecasts. …in the last three quarters, inflation has behaved in a very similar manner as the staff was projecting initially, and indeed even for core inflation, core inflation has evolved even better, in terms of being lower than initially expected by the forecasts.’
‘…behind these inflation projections are the financial conditions that were prevalent in September, when the forecast was produced, and financial conditions today are not very different today to those that were present in September, meaning that the market is indeed expecting us to be persistent in our current level of rates. So, our statement, several members of the Governing Council saying that it is too premature to talk about rate cuts, is of course also the view of the market. But at the same time, of course, at some point there is also some inversion … of the rate increases in the expectation of the market. But to me, this is also a confidence given by the market that at some point we might be reaching our target and of course, given that, our current level of rates is in restrictive territory. We might come back at some point, we should come back at some point also to a neutral level. But of course, this is not to be anticipated … in the short run.’
‘Demand is weakening. … We cannot even exclude the possibility of having negative numbers also for Q4 in the euro area.’
Very weak growth is expected for the second half of 2023.
Headline and core inflation slowdown is in line with expectations.
RISKS:
• ACTIVITY: TILTED TO THE DOWNSIDE
• DOWNSIDE: Stronger-than-expected effects of monetary policy, further weakness in the global economy, and geopolitical risks (Ukraine, Middle East)
• UPSIDE: tighter labour markets and real income increase
• INFLATION: BALANCED
• UPSIDE: energy commodity price increase mainly in the short-run due to the geopolitical crisis in the Middle East, wage increases and higher-than-expected margins
• DOWNSIDE: more intense transmission of monetary policy, greater weakness of the economy also on account of new geopolitical crisis
Since our Monetary Policy meeting in September, we have observed:
• A materialization of the downside risks to economic growth in the euro area.
• Risks for the future remain on the downside.
• The evolution of inflation has been in line with expectations, with a further decline in headline and core inflation.
• Risks to inflation remain balanced.
• A further tightening of financial conditions, higher than expected, confirming a very strong pass-through of our monetary policy.
• Moreover, a significant part of the pass-through of monetary policy tightening is still pending.
• Based on this assessment, the ECB’s GC decided to keep the three key ECB interest rates unchanged and it considered that those levels, maintained for a sufficiently long duration, will make a substantial contribution to return inflation to its 2% target over the medium term.
• The high level of uncertainty requires to keep our data-dependent approach.
• In any case, the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to ensure that inflation returns to its 2% medium-term target in a timely manner.
• For the moment, it is too early to talk about interest rates decreases.
• Geopolitical risks, in particular the potential extension of the war in the Middle East, remain the main determinant of economic developments and inflation in the euro area.
• Should this risk materialise, it could have a large negative effect on confidence and financial markets and, in particular, generate a significant increase in energy commodity prices, which would constitute a new negative supply shock.
• The monetary policy reaction to the eventual materialization of such new supply shock could be different from that which arose as a result of the war in Ukraine, given that, although in the short term it would generate an increase in inflation, from the perspective of medium-term inflation - which is relevant for the ECB - its effects could be much lower, given that:
• Monetary policy now maintains a clearly restrictive stance. As an illustration, the interest rate on the deposit facility is 4% compared to -0.5% before the start of the war in Ukraine.
• Euro area activity is now very weak, compared to the strong rebound it experienced after COVID and that accompanied the start of the Ukrainian war.
• In order for monetary policy to have such a different reaction to the eventual materialization of this new negative supply shock, it would be crucial: (i) inflation expectations in the medium term to remain anchored at 2%; and (ii) second-round effects on wages and inflation to be limited.
‘It is absolutely premature to start talking about interest rate cuts.’
‘It [the Middle East conflict] adds additional downside risk to euro area economic growth and upside risk to inflation. However, from the perspective of monetary policy, if this risk materialises, the relevant thing will be to analyse its implications for inflation in the medium term, which is the relevant guidance for the ECB. In this sense, it is important to emphasise that this new negative supply shock would be occurring in a very different macroeconomic context than that which prevailed in March 2022 when the war in Ukraine began. … Now, demand in the euro area is very weak, both in the consumption and investment components and affects all sectors of the economy. And the orientation of monetary policy is clearly restrictive, after the accumulated increase of 450bp in interest rates that we have made in recent quarters. The downward effect on economic growth could, therefore, be greater and, in turn, this could reduce the upward impact on inflation in the medium term. Provided, obviously, that the second-round effects on business margins and salaries were limited and that inflation expectations remained anchored in our 2% objective. In this case, the monetary policy reaction should also be different.’
‘…if we keep rates at these levels for long enough, it is very likely that we will be able to achieve our 2% inflation target in that medium-term horizon. But I would like to emphasise that this statement is conditional. We have reached this conclusion on the basis of the information available to us when we made monetary policy decisions. The level of uncertainty regarding the future dynamics of the economy remains high and is subject to geopolitical risks, among other factors, the evolution of which is difficult to anticipate. Additional shocks could occur, and our response to them will depend on their origin and magnitude and their impact on the inflation outlook.’
‘Overall, therefore, since our September meeting, we have observed:
- A materialisation of downside risks to economic growth in the euro area. Risks for the future remain, moreover, on the downside.
- Similar developments as expected with regard to inflation, with headline and core inflation declining further. Risks to inflation going forward remain balanced.
- A further, stronger than expected, tightening of financial conditions confirms a very strong transmission of our monetary policy. Moreover, a significant part of the pass-through of monetary policy tightening is still outstanding.
On the basis of this assessment, last week the GC of the ECB maintained interest rates and considered that they are at levels that, maintained for a sufficiently long period of time, will contribute substantially to bringing inflation back to its 2% objective.
- The high level of uncertainty requires maintaining the data-dependent approach.
- In any case, policy rates will be set at sufficiently restrictive levels for as long as necessary to achieve our objective.
- For the time being, it is absolutely premature to talk about interest rate cuts.
Geopolitical risks, in particular the possible extension of the war in the Middle East, remain the main driver of economic and inflationary developments in the euro area.
- Should this risk materialise, it could have a large negative impact on confidence and financial markets and, in particular, lead to a significant increase in energy commodity prices, which would constitute a further negative supply shock.
The monetary policy reaction to a possible materialisation of this new supply shock could be different from the one that emerged as a result of the war in Ukraine, given that, while in the short term it would generate an increase in inflation, from the perspective of medium-term inflation, which is the relevant one for the ECB, its effects could be much smaller, given that:
- Monetary policy now maintains a clearly restrictive stance. As an illustration, the interest rate on the deposit facility stands at 4% compared to -0.5% before the outbreak of the war in Ukraine.
- Euro area activity is now very weak, compared to the strong rebound after COVID that accompanied the start of the Ukrainian war.
For monetary policy to have this different reaction to the eventual materialisation of such a new negative supply shock, it would be crucial for medium-term inflation expectations to remain anchored at 2% and for second-round effects on wages and inflation to be limited.’
‘After the last interest rate increase that took place ... last September, the most important thing from the point of view of the communication of the European Central Bank has been that we think that with the information that we have at the moment - and this is very important to underline - interest rates at their current level, if they are maintained for a sufficiently long time, could be sufficient to reach our inflation target... What was relevant at yesterday's meeting was precisely ... to assess the extent to which what had happened in the last few weeks confirmed or did not confirm that assertion. The analysis we made, the assessment we made ... is that it is indeed still valid, and that is why we made the decision this time not to increase interest rates. But let me ... underline as always two things. First, for that statement to be valid, we continue think that interest rates will have to remain at current levels for a sufficiently long time. And secondly, that such a statement depends on economic circumstances. We have suffered a lot of shocks over the last few years, over the last few quarters. There are many risks. The level of uncertainty is still very high, and therefore we have to be cautious. And as we always say, any decision going forward is going to depend precisely on the data.’
‘First of all, on economic growth, what we have seen in recent weeks is very weak growth in the case of the euro area, and we cannot even rule out a recession, which in principle could be a mild recession, a recession of a technical nature. And furthermore, we still think that the risks are on the downside ... and in particular, because of the argument that I underlined: we have a new conflict, in this case in the Middle East, which will certainly have negative consequences on confidence, we will see. If it were to spread, it could also have very negative effects on financial markets and also on energy markets. On inflation, indeed, what we have seen is a significant reduction in both headline and core inflation. This is good news. Moreover, the forecast errors we have made in recent months have been very small or virtually non-existent, which gives us confidence about the forecasts we have going forward that inflation will indeed progressively decrease towards our 2% target. And then, very importantly ... the transmission of our monetary policy is very strong.’
‘...we do not know at this moment how long it will be necessary to maintain interest rates to achieve this 2% objective. ...The current level of uncertainty is so high that we cannot make those types of [forward guidance] statements. What we do know is that of course it is absolutely premature right now to talk about interest rate cuts, and that we think that interest rates are going to have to remain at this current level for a long enough time to achieve this objective of 2%.’
Klaas Knot (De Nederlandsche Bank)
16 November 2023
‘At the same time, there is limited fiscal space in many countries. This is the consequence of elevated public debt, alongside a higher interest rate environment. And, of course, until inflation is returned to target, monetary policy space is similarly constrained. Thus, the scope to lean against an economic downturn is more limited than in the past. For this reason, financial policy makers need to be especially vigilant.’
‘Today, we see risks of the opposite, with a still accommodative fiscal policy counteracting the efforts of a more restrictive monetary policy.’
‘Sound public finances are another prerequisite for the stability of a monetary union. Threats to fiscal sustainability could weaken the central bank’s ability to maintain price stability, could spill over from one member state to others, and could trigger financial stability risks. Today, in some member states, we observe very high government debt-to-GDP ratios, which naturally fuel concerns about fiscal sustainability.’
‘The role of budget constraints to discipline fiscal policy is particularly relevant today, as inflation is still too high and government spending keeps adding to inflationary pressures. If we do not act, the policy mix may become more unbalanced, making it more difficult to ensure price and macroeconomic stability.’
‘Restrictive policies will likely remain needed for some time to come to get inflation back down to target. Personally, and conditional on incoming data confirming the latest projections from September, I see the current level of our policy rates as a good ‘cruising altitude’ where they can remain for some time.’
‘the effects of the policy tightening on the real economy - think about investment, GDP, unemployment – will only be felt in about one year’s time. Hence, we should be a little patient and not raise rates too much to prevent choking off the economy. Second, even though inflation numbers have started to decrease, the risk still remains that high inflation may become entrenched if second round effects persist or inflation expectations de-anchor. Therefore, we need the incoming data to continue to confirm our projections – which have not been the best in an environment of major shocks – if we are to have confidence in them.’
‘To date, this ‘quantitative tightening’ has been smooth and well-absorbed by financial markets. This is similar to what we see from our international peers, who – in fact – are reducing their balance sheet at a relatively faster pace. That brings me to the challenge. While, clearly, the current balance sheet has to shrink, our future balance sheet size may need to be larger than it was before the Global Financial crisis. The reason is that structural changes in financial markets, including a higher demand for liquidity, will call for a larger central bank reserves in the future. In my view, refinancing operations represent the most efficient tool to provide such a level of reserves down the road.’
Pierre Wunsch (Belgian National Bank)
20 November 2023
‘Is it a problem if everybody believes we’re going to cut? Then we have a less restrictive monetary policy. And I’m not sure that then it’s going to be restrictive enough. So it increases the risk that you have to correct in the other direction.’
‘I think markets are relatively optimistic today that they exclude the possibility that we have to do more or that we have to remain at 4% for longer.’
‘If we arrive at the conclusion that inflation is not going down fast enough, we’ll communicate it through our projection and through our communication. If the markets don’t infer from this that it’ll be high for longer, then we’ll have to use our rate instruments and hike to get where we want to go.’
‘That moves the question to the next uncertainty: are we going to see some inflation resistance at some point at 3% or something like that because of wages? That is something we’re not going to know by December or January.’
‘What I would focus on in terms of monetary policy, I think the question would be if there is some significant increase in oil prices, do we look through or do we not look through? My bet would be that we cannot take the risk to look through if there is no shock. We are in a weak form of stagflation today, with inflation going down, hopefully a pick-up in growth in ’24, so we hope to get out of that. But we know stagflation is the most difficult one to deal with in terms of monetary policy.’
‘We do our best, we’re aiming for a soft landing like the Fed did. There’s always the possibility that we err on the side of being too cautious. So I think what we want, as Joachim [Nagel] said, is to be comfortable that we’re going to 2% before we start cutting, and there’s always then then a possibility that we’re too late. I would say 50%. As such, I don’t think that’s a big issue, we know this is not perfect times, we might be a little bit late here and going too fast there, but at the end of the day we can correct that, so I don’t think it’s a big issue. Specially because we see labour markets remaining very resilient, so we’re far from a situation where we would have to ask ourselves difficult questions about the pain we’re creating in the economy.’
‘Because we have announced we would, it’s the only argument I can see to [keep reinvesting under the PEPP]. I think it’s a commitment that has no value today, we should reopen the discussion. It’s a major issue? We are going to stop reinvestments anyway relatively soon. So, I would plead for reopening the discussion and maybe accelerating it a little bit.’
‘Here we can choose and we have the feeling that it was more efficient and more effective, also in terms of risks for the adverse movements in the market. We didn’t want to take any risks on that front, so we used interest rates as the main instrument. But of course, there is no reason any more for the balance sheets to… for us to keep reinvesting. So, I think we should stop that as soon as possible.’
‘On the minimum reserves, I think the fact that we reduced the remuneration to zero was polluting the debate. We need to make it clear: is it about the size of balance sheet? And then I would say the PEPP is a really low-hanging fruit. So, let’s open the discussion first. If it’s about something else besides the balance sheets, profits, then we need to discuss the rules of engagement.’
‘Getting to 2% in 2025 is still a long way, so let’s not get excited. Of course, if we would have bad news on the upside, we would have to do more, but that has become less likely again, unless we have a shock on the energy front.’
Growth risks are ‘tilted to the downside’, inflation risks ‘toward higher inflation’.
The Eurozone is ‘entering some weak form of stagflation — we’re probably in it right now.’
Mārtiņš Kazāks (Latvijas Banka)
13 November 2023
‘There are lots of parts of the picture that we still need before discussing rate cuts, and one of these parts is wage growth. There is a real risk of wage growth spilling over into inflation. We understand of course that there should be some compensation for the inflation shock’s negative impact on real wages. But our forecast of 2% headline inflation in the second half of 2025 depends on how much compensation there is. There has been some tentative softening of corporate profit margins, which is necessary to make wage increases less inflationary. As to wage increases, no clear peak of wage growth has been seen yet. This in the context of a lot of uncertainty. Also, most of the decrease in the last month in the headline inflation was due to base effects, while core inflation is still high. At the same time, the economy is not in an outright recession and labour markets are relatively strong. So, there has to be some patience at this stage while we wait to make sure that wage increases don’t spill over. In due time we will discuss the issues of cutting, but the proper moment for such a discussion depends on the data, and it’s currently still premature to say that we’ve reached the terminal rate or that we’re near cutting.’
‘The PEPP of course is the instrument that is very valuable in terms of the flexibility it gives us. But in general, the balance sheet story is part of the bigger issue of our operational framework, and the president said that a decision about the framework will be communicated in the spring of next year. Given that, there is still some time to discuss the issue of QT and the PEPP.’
‘…the PEPP’s flexibility could be one of the elements that has been providing some comfort to the financial markets, so one reason why they have not been very jumpy lately. But it’s clear that markets have been relatively stable, and market reactions are also very much the story of what happens with specific countries, and of what happens in terms of the U.S. spillovers. So, there’s a whole set of variables at work here, and I would not agree with the suggestion that financial markets have been stable only because the PEPP is there in the background. And we’ll get to the discussion of the PEPP, but not yet.’
‘If you take a look at inflation, it’s coming down quite sharply. … I think the important thing is that it come down sustainably. That’s why holding interest rates at their present level is currently our best option. But yes, the economy is weak, and as we’ve pointed out, the largest source of inflation was supply side shocks, and these inevitably drop out eventually. And now, ensuring that inflation really comes back to our 2% target and doesn’t increase again depends very much on monetary policy and the demand side being weakened. Why? Because we also want wage increases to be absorbed by softer profit margins. That’s the mechanism that we would like to see, but we are still waiting.’
‘…I would say that the main story has not changed: we expected inflation to come down and the economy to be relatively weak. This is all subject to some volatility, and the expected slowing of inflation doesn’t mean it will drop like a stone. It’s more likely to be a bumpy road. We see that growth is weak, and yes, it is a tad weaker than expected. But overall it is still the same story, one of weakness rather than outright recession. So, we are still within approximately the same storyline.’
‘We reached the point where we could put interest rates on hold, meaning not “skip” or “pause” or something like that. They are on hold at the moment, and the next step will be whatever the data tell us it needs to be. There is no automaticity about the next move. In September, there was still the feeling that we needed to hike again and make financial conditions tighter. At the moment, it still seems to me that the decision in October to put rates on hold was the right one, but what the next decisions will be, we will see. I don’t think anyone can say all the rate increases have happened, because we are reacting to incoming data, so the door for rate increases should not be shut. Let’s see what the data tell us. Overall, though, with some caveats, I could share the view that further tightening seems to have become less necessary.’
‘This decision right now to keep rates at current levels is to be really convinced inflation won’t rise again.’
‘We have to be convinced that inflation has been beaten — then we can step by step lower rates.’
‘One thing is to push inflation lower; another is to be convinced inflation won’t rise again. That’s why there’s this cautiousness.’
‘Of course, it’s not over yet. That’s the reason why we are holding onto the rates at the current level, given the uncertainty … We cannot exclude the possibility that further rate increases might be necessary. But we simply don’t know … so we will do the best we can … we will not hold the rates at very high levels a minute longer than necessary.’
‘We are committed to our target of 2% and we shall deliver it. Our current outlook forecasts that we will achieve it in the second half of 2025.’
‘But if fiscal and structural policies are at odds with monetary policy, it will take longer to achieve our price stability target and the path to it may be more volatile, neither of which is good for businesses and households.’
Cutting rates would take a ‘very dramatic turnaround’ of the economy.
‘There’s no need to discuss rate cuts.’
A rate cut in 1H 2024 ‘would be, in my view, inconsistent with the current macro outlook — but uncertainty, of course, remains high.’
‘Yes, we’ve seen a sharp decrease in inflation rates, but they’re still way above 2%. The risks of inflation becoming persistent at higher levels than we’ve seen in the past, but not at 2%, are of course still there.’
‘The door should be always open if we see it necessary for rates to go up. We’ll decide it from meeting to meeting.’
Tuomas Välimäki (Bank of Finland)
NO UPDATE
Madis Müller (Eesti Pank)
24 November 2023
‘Probably we don’t need to increase rates anymore. The next decisions will depend on how the euro area economy is doing and how persistently we see that inflation is slowing.’
‘Certainly interest rates will slow down consumption. We have definitely reached a level where interest rates are restrictive for economic activity and debt activity.’
‘We found that, according to current knowledge, interest rates are already high enough to allow the price increase in the euro area to slow down permanently to the 2% target set by the central bank within a reasonable period of time. The question now is primarily how long it is necessary to keep interest rates so high. The answer will be given by the economic development of the coming months and quarters. We are pleased to note that the price increase is clearly on a downward trend in the euro area. … However, the rate of price increase is still too fast. One of the important reasons for this is the relatively fast wage growth in the euro area, close to 5%. It is quite understandable that people expect a wage increase to restore as much as possible the purchasing power damaged by rapid inflation. For this, favourable conditions are created by the labour market, which is still in good condition, where the level of unemployment has remained at a record low for the euro area. … Although the euro area is currently showing the first signs of a slowdown in wage growth, sustained wage growth over a longer period of time may mean that general price growth will take longer to slow down. When talking about price increases, we can't ignore the once again high energy prices due to geopolitical tensions. The conflict in the Middle East and its possible expansion is one of the most important risks that, through rising oil and gas prices, can prevent a slowdown in price growth in the euro area. The latest news concerning the situation of the European economy and the near-term outlook is rather more pessimistic. Industrial production will probably continue to decline in October, credit growth has slowed down, and investments in both housing and companies to expand their business activities are quite modest. While industrial companies in particular have been in a relatively more difficult situation over the past year, in recent months companies in the service sector have also become more pessimistic, especially on the business services side. So far, companies offering tourism and travel services have fared better. ... In general, however, the decrease in loan volumes and investments as well as the relative weakening of general economic activity is to be expected, considering the sharp rise in interest rates over the past year. If we evaluate the outlook for the economic recovery of the euro area, on the positive side, the US economy is in a relatively better condition, supporting the export opportunities of European companies. Also, China's economic growth indicator for the last quarter turned out to be better than expected, although problems in the real estate sector there seem to continue. In summary, when describing the economic situation in the euro area, it is more correct to speak of stagnation and sluggish recovery, and not of a deep economic crisis. Getting inflation under control does not necessarily require the central bank to trigger a deep recession with high interest rates. It is still likely that the euro area economy will gradually recover next year. This is supported by the recovery of people's purchasing power, as price increases are expected to be lower than average wage increases.’
Boštjan Vasle (Banka Slovenije)
27 October 2023
‘Economic activity in the euro zone is slowing down, while inflation is gradually decreasing, but it remains above the European Central Bank's target. The latter reinforces market participants' expectations of a longer period of high levels of key central bank interest rates. In these circumstances, the members of the ECB Council have decided to keep the ECB's key interest rates unchanged this time after ten consecutive sessions in which we decided to raise interest rates, totaling 4.5 percentage points. At the same time, we emphasise that our further steps will continue to depend on the current situation. The latest data indicate that the cooling of economic activity in the euro area continued in the third quarter as well. With a decline in new orders, a reduction in inventories and stricter financing conditions, the situation remains the most challenging in manufacturing activities, while survey data have also been pointing to a slowdown in services for several months. The labour market remains resilient to the slowdown in economic activity, with the unemployment rate hitting a new low of 6.4% in August. Inflation in the euro area decreased to 4.3% in September, reflecting lower growth in food and energy prices and the moderation of core inflation. Despite this, the risks for a possible higher price increase remain significant and arise mainly from the high tightness of the labour market and the possible effects of geopolitical instability on the movement of energy prices. Previous increases in key interest rates continue to be intensively transmitted to financing conditions. The outbreak of war in the Middle East has so far had a limited impact on financial markets. The risks of worsening geopolitical conditions were most reflected in higher prices of energy products. Movements in the remaining segments of the financial markets were mainly shaped by market participants' expectations that in order to achieve the inflation target, it will be necessary to maintain key interest rates at high levels for a longer period of time. As a result, the required yields on government bonds at the global level have risen more visibly, especially for longer maturities. The associated higher borrowing costs had an impact on the increase in risk premiums, which was reflected in the drop in share prices and higher credit premiums in riskier financial segments. On the basis of this data, the members of the ECB Council have decided to keep the ECB's key interest rates unchanged this time after ten consecutive sessions in which we decided to raise interest rates, totaling 4.5 percentage points. We estimate that the latter have reached levels which, if maintained long enough, will significantly contribute to the timely return of inflation to the target level. Our further steps will continue to depend on the current situation, that is, on economic and financial data, the movement of core inflation and the effectiveness of our measures. Accordingly, our decisions on a meeting-by-meeting basis will ensure that interest rate levels are sufficiently restrictive for as long as necessary to return inflation to our 2% target in a timely manner.’
Yannis Stournaras (Bank of Greece)
29 November 2023
‘The current numbers betting on April [for a first rate cut] seem a bit optimistic.’ The first cut will be ‘in the middle of next year’ if inflation then is slightly below 3% and a sustained decline to 2% is expected.
‘She [Lagarde] said we cannot reduce interest rates in the next two quarters.’ This ‘means in the beginning of the third quarter of next year, we might. That’s how I read it.’
Changing PEPP forward guidance ‘would break a commitment — that could affect our credibility and, therefore, the effectiveness of our policies.’
‘The bad scenarios of a year and a half ago have not been realised. The numbers are not impressive as far as growth is concerned but … inflation is falling, inflation expectations are anchored around 2% and so far, signs of second-round effects are contained. So far, so good.’
‘Inflation would be a big risk if it went up. But now we think we have tightened monetary policy sufficiently, the economy is weak in Europe. This year we will probably close at 0.5%, maybe 0%, it is not certain, there is a very large source of uncertainty still from the unjustified war, the invasion of Russia in Ukraine and the tragic conflict that we now have in the Middle East. So, we have very big geopolitical uncertainties. So, we decided that the best thing for us, for the European Central Bank, is to wait and see.’
‘Of course it is my personal opinion, I repeat, it has not been discussed at the European Central Bank, but I think that if … if in the middle of next year, around August, inflation falls below 3% … on a permanent basis and we have a way of understanding what is permanent, look at what we say, base inflation, core inflation, look at expectations, look mainly at the labour market, let's see if businesses are finally starting to absorb the increases. Because we've had big increases, we've had increases in business profit rates. So, if all this is normalised, then by the middle of next year, I think we can start to think of a small reduction in the base rate.’
‘So far, the path of disinflation meets our expectations. But the economy is much weaker than we thought in September. This is the main difference compared to the last meeting. Financial conditions are also slightly tighter than expected.’
The role played in the discussion at the last Council meeting by the violence in the Middle East was ‘[a]n important one. The level of uncertainty in the supply side is very high. It added up to the decision of becoming more cautious. … We have seen a reaction in financial markets and the energy market, but not a dramatic one. The problem is that we don’t know what’s going to happen, how many countries will be involved. I have seen and experienced the consequences of many crises in my life to know: At this moment, the markets are just waiting. They pause. For us, the Governing Council of the ECB, this is a source of high uncertainty. … Of course. We know that a major Middle East crisis with involvement of oil producing countries will have a large impact on energy markets, which might be inflationary in the short term. But there is the risk of stagnation in the medium term, not to mention refugee influxes to Europe. That is a really dangerous situation.’
‘I can tell you my personal view: Yes, we have [reached the terminal rate]. I don’t know whether it’s a majority view in the Governing Council of the ECB, because we have not discussed this issue yet. This may be discussed in subsequent meetings in 2024. … With the additional uncertainty in the Middle East, it is even more difficult to say [when rates can go down]. Personally, again, I would start thinking about reducing interest rates, if inflation in the middle of 2024 passed the threshold of the 3% to the south in a permanent, sustainable way.’
‘If I am not mistaken, the pace of reduction of the Eurosystem balance sheet is the strongest among the major central banks in the world. And it continues in this direction, through TLTRO and APP redemptions. Why should we increase it even more given that economic uncertainty worldwide has increased?’
‘While significant progress is being made, the battle to fight inflation has not yet been won. At the same time, for as long as monetary policy tightening to stabilise prices lasts, the fiscal stance should be restrictive so as not to create excess demand that could feed back into current inflationary pressures.’
Peter Kažimír (National Bank of Slovakia)
30 October 2023
‘A large chunk of our past decisions still needs to transpire into the real economy. All those voices coining this as the end of the cycle should hold their horses. It’s too soon to declare victory and say the job’s done. As much as I would like this to be the end of the path, upside inflation risks have yet to dissipate entirely. We must stay vigilant. Long story short, additional tightening could come, if incoming data force us to take such a step. Therefore, I will eagerly await the December update of our inflation forecast to get a clearer picture, confirmation, that the decline in inflation is sustained. I hope that renewed upside inflation risks from the escalating tragic conflict in the Middle East will not materialise. The Eurozone’s economy, already exposed to a combination of growth-slowing factors, struggles to regain momentum. December forecasts are one of two key milestones needed to pass. March is the latter. By then, it should have become clearer how wage negotiations for the whole year turned out and whether the risks of a spiral of high prices and high wages were off the table. Only then will we be able to say the tightening cycle is completed and move on to the subsequent – monitoring – phase. As I have said several times, we will have to stay at the peak for the next few quarters. Bets on rate cuts happening already in the first half of next year are entirely misplaced. The December meeting is going to be a very interesting one.’
Mário Centeno (Banco de Portugal)
22 November 2023
‘We have a decision principle at the moment that we apply in a very precise and rigorous way, which is to decide in each meeting based on the data that is available. What we have done is compatible with maintaining rates at the current level until all signs about the trajectory of inflation are consistent with its convergence to 2%. … In this final phase of convergence, it is natural for it to be slower. In mathematical terms... we would be in an overaction scenario, and the inflation rate would be far from 2%, not an excess, but a shortfall. And this management of expectations is crucial for the success of monetary policy and must continue to be carried out.’
‘When we look to the future, there is one dimension that particularly interests us, which is the anchoring of expectations. And in recent months we have seen how these expectations remain strongly anchored around 2%, and if anything has happened in the last few weeks, it has actually been the reinforcement of this result.’
‘For [market expectations] to be confirmed, we need to ensure that inflation continues to decline. And that's what seems to be happening. This reading now allows all economic agents to make predictions about the future with a degree of certainty that unfortunately did not exist before the September meeting.’
‘Although the nominal interest rate of the ECB's decision has stabilised, for now, inflation falls while the real interest rate increases. And it is the real interest rate that is effectively the one we want to consider in our consumption and investment analyses. That's why I said a while ago that we have to be careful and not be complacent with our decisions because in reality the financial tightening will continue for some time, even with the key interest rates at a stable level.’
It is a slow convergence; one should not expect a fast convergence for this rate (2%). And until it happens, in fact, we will have this phenomenon regarding the real interest rates and we will continue to have financial constraints.
16 November 2023
Interest rates will come down eventually but won’t return to zero; labour market has shown signs of resilience.
‘The numbers have not been great, zero, 0.1, -0.1 quarter-on quarter for five quarters in a row creates a little bit of anxiety over will this be a soft landing. I’m not worried about a recession, but I am concerned that downside risks may materialise. This stagnation of the euro area is of course a source of concern for all. It will help bringing inflation down, that’s for sure.’
‘November, we still expect a very good number for inflation, but then there will be what I’d call resistance. We know the sources of this: there is a little uptick of inflation coming from energy.’
‘Real wages since the beginning of the inflationary process fell by 6% cumulative in the euro area. This is expected to recover a bit but that doesn’t mean that second-round effects will be materializing. The labour market in Europe is very strong and is showing signs of flexibility and adaptation that were not known in the past.’
‘Recent October inflation figures for Portugal and for the euro area prove the convergence towards the medium-term objective of 2%, which is good news for the conduct of monetary policy.’
‘The slowdown in external production and more restrictive financing conditions are affecting and conditioning consumption and investment decisions and obviously have an impact on growth.’
Gabriel Makhlouf (Central Bank of Ireland)
23 November 2023
‘Our assessment of the financial stability outlook continues to be shaped by the ongoing adjustment of the global economy to higher interest rates. Since our last Review in June, inflation has fallen in many economies, but we remain some way from our target. We have not yet seen the full extent of the lagged effect of monetary policy actions on borrower finances or economic demand. In a setting where long-term interest rates have risen since June, despite some moderation in recent weeks, global financial markets remain vulnerable to bouts of volatility. The global economy also remains vulnerable to further shocks. We have already seen a pandemic and a war in Europe. Humility is therefore a prerequisite to good policymaking. Geopolitical tensions, signs of fragmentation of the global economy and extreme weather events are three potential sources of future shocks with consequences for policy. Against this backdrop, it is imperative that we maintain resilience while we have scope to do so.’
‘The domestic economy has continued to expand, albeit at a slower pace, as monetary policy is taking hold, domestically and globally. Early signals of the impact of inflation and monetary tightening on borrower resilience are becoming visible among Tracker mortgages, personal loans and certain corporate lending segments. We are seeing vulnerabilities in Commercial Real Estate (CRE), but the labour market remains robust and the broad macro picture shows there is resilience in the economy and financial system. Having said that there is huge uncertainty as to what lies ahead. A large part of monetary tightening has yet to be passed through to the financial system and to the economy; and while some risks are fading, new risks are emerging.’
‘[Last week], we decided to keep the three key ECB interest rates unchanged. The incoming information broadly confirmed our previous assessment of the medium-term inflation outlook with inflation still expected to stay too high for too long, and domestic price pressures remaining strong. Our past rate increases continue to be transmitted forcefully into financing conditions and are increasingly dampening demand, thereby helping to push down inflation. Our assessment remains that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our 2% medium term target.’
‘To repeat, the central bank’s balance sheet is a policy tool. Our task is not to make profits but to ensure price stability. We have always known that, at some point, monetary policy actions to achieve price stability could result in losses on our balance sheet. We identified these risks a number of years ago and have been taking prudent actions to prepare for such an eventuality.’
‘I expect us to report losses in the years ahead as a result of the monetary policy measures taken in the pursuit of price stability over the past decade, coupled with the current level of interest rates to return inflation to our target. But that is one of the consequences of having our balance sheet as a policy tool and our overriding commitment to deliver price stability.’
Gediminas Šimkus (Bank of Lithuania)
21 November 2023
‘Today, we estimate that interest rates have already reached a level that, if sustained long enough, will bring annual inflation in the euro area back to 2% in the medium term.’
‘It’s very important to put the genie back into the bottle and to securely seal it — therefore expectations that we’ll have interest-rate cuts in a few months are too optimistic in my view.’
‘[T]here’s also no reason to speak about further increase in rates this December.’
‘In my view, if there’s no new staggering data, current restrictive levels are sufficient.’
‘There is and there was no need to raise rates at this point. Will we need this in the future? We still have to wait and see. I’m hopeful this won’t be needed.’
‘Data-based decisions is a fundamental principle for each meeting.’
‘Uncertainty and inflationary pressures remain high.’
‘Inflation is still high, too high. Any talk about cuts is premature. We need strategic patience to keep rates at restrictive levels. I’d be highly surprised to see a rate cut in the first half. I don’t think so.’
Robert Holzmann (Austrian National Bank)
24 November 2023
‘For me, the probability that interest rates will go up again is no less likely than that they will go down. The reason for this is that we still have high inflation rates. After all, the declines in inflation rates in recent months are strongly linked to base effects. Twelve months ago, we simply had much stronger price rises. And there are also other risks - on the one hand, energy prices due to the political situation in the Middle East and, on the other, food prices due to the severe drought in Brazil as a result of El Niño.’
‘The latest decision to pause interest rates was supported by all members - including me. However, there are differences in the expectation of what can still happen. To a certain extent, this is influenced by how high the inflation rate is in the respective countries. Countries where inflation has fallen more sharply than ours will probably have a different view in the medium term.’
‘We would like to avoid having financial markets take positions where they think there won’t be a further rate hike.’
‘We are trying to warn the markets’ not to get ahead of themselves, as they might ‘get burned’.
‘The last kilometers are the most difficult’ in the effort to restore price stability.
As for an ECB rate cut in 2Q of 2024, ‘here, I would say, that’s a bit soon.’
‘We are trying to communicate, “Please don’t believe that’s the end”’. We all hope it is … but we are also ready to step on the brakes again’.
If core inflation doen’t subside, ‘[t]hen we probably have to consider another hike’.
‘We can't say too early that we have won, but rather must be careful and wait and be very vigilant and look very closely at where the inflation is coming from before we say, “Yes, we can start moving interest rates down."’
‘We still have a way to go, and this can be seen above all in the fact that core inflation has risen this year compared to the previous year... This then suggests that headline inflation, where the variable elements are included, is not a very good indicator, but rather we have to look at core inflation...’
‘But what we have succeeded in doing, which is very good, is that we have now initiated a decline in inflation that is not associated with a recession, but rather with stagnation, and this stagnation will last for a few more months, half a year perhaps, but it is no recession, and that is a very big success.’
‘Please don’t think that this is the last rate hike and there won’t be any more. Please note that there may still be another rate hike if there are new disruptions... And if the [inflation shocks] come and we analyse them, we may yet be forced to raise rates further, in order to dampen the effects on price developments.’
‘There are discussions which take formally place, and then you had many opportunities [in Athens] to … talk in the background, to have over many lunches and dinners, bus rides, etc. an opportunity to talk about it [QT]. And my optimistic understanding is that now, the problem is well defined, that there needs to be a solution. What I proposed is one solution. There may be others out there, I don't know, I'm looking forward to the much more senior people with experience about other solutions. But what we have, I think it's already a practical one, it's not something which cannot be done, it can be done, maybe with some kind of arrangement. But for this, we need to have first also the discussion about our operational framework, which we have not fully started yet. And this will take some time. Time, which … will reach over into the next year. But also it did allow us to have a very profound and sound discussion what this means for the operational framework and how we can keep our balance sheet clean over the long run. … No, nothing this year, nothing for this year [on QT]. And the thing is that … we cannot have the discussion separated from our operational framework.’
‘… the months before [September’s lower-than-expected inflation] we had a surprise in the other direction. That's normal. If inflation comes down, it depends from month to month what kind of base effect you have which drops in, which drops out there. And so, one month’s data doesn't make a new development. But what it is, and I think we are all very careful in that, that's the last mile, as Isabel Schnabel puts it in this paper, is a difficult one. And when you read in details through her paper, it shows … how many aspects of monetary policy and the … underlying development may bring inflation back again. And I did it yesterday again, because I had a little bit of time, and I found out how … really complex the situation is. And on many of the things we have a broad understanding what it may mean, but we have still an imperfect understanding of the data which are related to that. And we all also … heard about the paper of the IMF a month ago ... If in 90% of the cases … the problems emerged happened because you eased early, I think it's an early warning. So, I definitely belong to those who think that we should be very careful, that we should we stand ready, again, to hike if needed, and certainly don't declare victory too early on. This may not happen this time. It's not excluded, but the probability is pretty small. … we need to stay vigilant.’
‘And there are many opportunities why [another rate hike might be needed], we saw still the ongoing conflict in Israel. It can easily lead to a further increase in energy prices. We had increased the energy prices compared to the projection by 25% over the last few weeks. … We still … don't have any fallout … on food. We have El Niño and El Niño didn't have an effective yet. … So, there, the data shows quite clearly that this can have an effect of 1% of increase of temperatures with El Niño, which is the lower area, not the upper one, could mean after 12 months 8% inflation in food. And given what this means you may have another, say, 1.5% coming in on the inflation rate there. So, there are many disturbances out there, which may still be there, which we should not underestimate.’
Boris Vujčić (Croatian National Bank)
09 November 2023
‘If our current projections materialise, then we will have a soft landing with a low sacrifice ratio, meaning without a recession and without a significant increase in unemployment. We cannot be certain that it will stay that way until we reach our goal, but in my view the soft landing is still a central scenario.’
‘First, we have to see whether such a shock [of higher energy prices due to the Middle East conflict] will happen or not. If it does, what is the nature of that shock and what is the extent of the shock? And then we will try to estimate the possible impact on price developments and act accordingly.’
[I]t’s too early to think about rate cuts … However, we have to stand ready either for a possibility of rate increases or rate cuts, depending on incoming data in 2024.’
‘We expect that we are in sufficiently restrictive territory as far as interest rates are concerned and that inflation can continue to decrease at this level.’
‘We must be aware that such a risk exists, that we have another shock on the supply side, perhaps of energy sources, if such a complication of the situation occurs. However, in our projection, where there is no such shock, we expect a gradual further decline in the inflation rate in the coming months and next year.’
‘We have finished with the process of raising interest rates for now. At this moment we see that inflation is falling, we have a disinflation process. And after we conducted a series of measures to dampen lending, it has fallen.’
Gaston Reinesch (Central Bank of Luxembourg)
NO UPDATE
Constantinos Herodotou (Central Bank of Cyprus)
28 November 2023
‘As of 2023, the euro area labour market's resilience appears to be changing. There are signs of a slow-down in job creation, particularly in the services sector. Business employment expectations are softening and vacancy rates are moderating. Notably, the slight increase in the unemployment rate in the euro area to 6.5% in October 2023, could be a further sign of the transition in economic dynamics. At the same time, wage growth remains strong, even though there are early signs of moderation, which could be fundamental in relieving inflationary pressures. The short- and medium-term economic outlook is positive in the sense that our downside case scenarios have not materialised. The euro area’s economic forecast points to a moderation in growth, but avoidance of a hard landing.’
‘Regarding price developments, inflation dynamics are on a strong corrective path. Recent months have witnessed a substantial turnaround in the inflation landscape of the euro area, with inflation dropping to 2.9% in October 2023, from the historical high of 10.6% in October 2022. This correction in inflation indicates that the ECB Governing Council’s monetary policy efforts are bearing fruit. The projections indicate a continued disinflationary process, with energy inflation in negative territory and a moderation in food inflation, which is still at a high level in the euro area, specifically at 7.4% in October 2023. Headline inflation is expected to stabilize, reaching 2.1% on average by 2025. However, a key concern remains with services inflation, which, due to the staggered nature of wage agreements, is expected to moderate more gradually than headline inflation in the projections.’
‘A crucial aspect of the ECB monetary policy against inflation lies in maintaining well-anchored inflation expectations, even in the face of significant inflation rates. This achievement, underscores the confidence of the markets and the public in the ECB's commitment and capability to maintain price stability. The anchoring of these expectations has been a cornerstone in preventing a self-fulfilling spiral of rising prices and wages, thereby contributing to the overall economic stability of the euro area. The ECB's actions have not only been effective in steering towards the price stability objective, during these turbulent times, but have also enhanced the credibility of our policy interventions. This credibility is fundamental in ensuring the continued effectiveness of our monetary policies and in maintaining the confidence of the markets and the public.’
Edward Scicluna (Central Bank of Malta)
NO UPDATE
END