They Said It - Recent Comments of ECB Governing Council Members
15 January 2024
By David Barwick – FRANKFURT (Econostream) – The following is an overview of recent comments made by European Central Bank Governing Council members. We include only comments made since the Governing Council meeting of 14 December, but earlier comments can still be seen in versions up to that of 08 December.
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Christine Lagarde (ECB)
11 January 2024
‘I think the hardest part is behind us.’
‘I think that rates, barring any further shocks or unexpected data, will not continue to go up. And if we win our fight against inflation, and if we are certain that inflation will indeed be at 2%, at that point rates will start to go down.’
‘As President of the European Central Bank, I cannot give you a date [for policy easing].’
‘While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.’
‘Underlying inflation has eased further. But domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.’
‘Our past interest rate increases continue to be transmitted forcefully to the economy. Tighter financing conditions are dampening demand, and this is helping to push down inflation. Eurosystem staff expect economic growth to remain subdued in the near term. Beyond that, the economy is expected to recover because of rising real incomes – as people benefit from falling inflation and growing wages – and improving foreign demand.’
‘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 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 or a further slowdown in global trade would also weigh on euro area growth. Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are key sources of geopolitical risk. This may result in firms and households becoming less confident about the future. Growth could be higher if rising real incomes raise spending by more than anticipated, or the world economy grows more strongly than expected. Upside risks to inflation include the heightened geopolitical tensions, which could raise energy prices in the near term, and extreme weather events, which could drive up food prices. Inflation could also turn out higher than anticipated if inflation expectations were to move above our target, or if wages or profit margins increased by more than expected. By contrast, inflation may surprise on the downside if monetary policy dampens demand by more than expected or the economic environment in the rest of the world worsens unexpectedly, potentially owing in part to the recent rise in geopolitical risks.’
‘Should we lower our guard? We asked ourselves that question. No, we should absolutely not lower our guard. I'll give you two good reasons for that. The first one is that our inflation outlook, which is one of the three criteria, is conditioned on the interest rate path that was embedded in market data at the time when our cut-off date was determined. The cut-off date, as you will see in the publication, was November 23rd. So that's point number one. Point number two: when we look at all the measurements of underlying inflation, there is one particular measurement which is hardly budging. It's declining a little bit, but not much, and that is domestic inflation. And domestic inflation is largely predicated by wages. We need more data, we need to understand better what happens there and why is domestic inflation resisting. To understand that, we need a category of things. Number one, we need wage data. And that is going to be measured in multiple ways. We have really as wide an area of indicators for that; the wage tracker, the number of job offers, the vacancies that turn around, plenty of them. That of course determines how tight the market is and therefore how wages will behave in the next few months. When we look at the data that we have now, it is not declining. Compensation per employee has declined from Q2 to Q3, that's true. But the other indicators no. So we need to have a lot more data in that regard. And the second element, which is critical given the way we have constructed our projections, the way staff has constructed projections, we need more information about unit profits as well. Because our projection is predicated on the assumption that a lot of the catch-up wage growth will actually be absorbed in the markup of enterprises and corporates. So we need to have these two on a more sustainable basis, demonstrating that domestic inflation too is going to head down towards our target. We don't have that yet. We will have a lot more data in the course of 2024. It will be particularly rich in the first half, but we will need that in order to determine whether it is actually sustainable or not.’
‘We did not discuss rate cuts at all. No discussion, no debate on this issue. And I think everybody in the room takes the view that between hike and cut, there's a whole plateau, a whole beach of hold. It's like solid, liquid and gas: you don't go from solid to gas without going through the liquid phase. This was just not discussed. I think going forward, we are going to continue to be data dependent. We are going to continue to determine meeting by meeting what we see on the totality of data. But obviously, given a certain resistance of domestic inflation and the risk of second-round effects that we absolutely want to avoid, we're going to be very attentive to that category of data that I have just described.’
‘Who wants to hang on for too long? But equally what we are saying today, on the basis of the forecast that we have, which has been produced by the Eurosystem staff, is that we don't think that it's time to lower our guard, and we believe that there is still work to be done and that can very much take the form of holding. I think in our monetary policy statement, what we essentially say and have said before is: 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 our goal. And we continue with: our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. If you combine that with our data dependency, and the fact that we are not narrowing the focus of what we look at, but we know that some data, and a combination of data and the mechanics between these two, wages and profit in particular, are going to play a significant role, and we will be particularly attentive to those. There will be more data coming in. We will have another bank lending survey, we will have a corporate telephone survey coming in, and we will take that into account to determine when we can lower the guard. That's where we are at the moment.’
Isabel Schnabel (ECB)
10 January 2024
‘The drop in unemployment to a historical low [in December] confirms continued strong resilience in labour markets, which is broadly in line with the December 2023 staff projections. As inflation falls, we continue to expect a gradual decline in wage growth in 2024.’
‘There is evidence that sentiment indicators are bottoming out, but the near-term economic outlook remains weak in line with our projections. At the same time, financial conditions have loosened more than projected, while energy prices have been weaker.’
‘Markets understand well that our policy is data-dependent and we have clearly defined the elements of our reaction function. I do not see a lack of credibility, but there can be different views on future economic developments and the inflation outlook.’
‘Our projections foresee inflation reaching our 2% target in 2025. So we are on the right track. Geopolitical tensions are one of the upside risks to inflation as they could drive up energy prices or freight costs. That’s why we need to remain vigilant.’
‘Inflation has eased but underlying price pressures remain elevated. Policy rates need to be sufficiently restrictive for as long as necessary to ensure that inflation sustainably returns to 2%. A slowing economy is part of monetary policy transmission.’
‘Crucial indicators for the outlook of underlying inflation are the developments of wages, profits and productivity. Due to the expected easing of monetary policy, financial conditions have loosened rather than tightened recently.’
‘According to our projections, inflation will approach 2% in 2025. Our monetary policy works with a lag. If we raised rates too strongly, this could lead to an undershooting of medium-term inflation and an unnecessarily strong slowdown of the economy.’
‘It is too early to discuss rate cuts. We will keep our key policy rates at restrictive levels until we are confident that inflation sustainably returns to our 2% target. This requires additional data confirming the disinflationary process.’
‘Our mandate is to preserve price stability. For that we need to see inflation returning sustainably to our 2% target. We expect inflation to reach 2% in 2025 and project that we can achieve this without causing a deep or prolonged recession.’
‘We currently foresee that inflation may pick up again temporarily in the near term, as base effects in energy prices reverse and government support measures expire, such as in Germany the gas price cap and the reduction in VAT on catering services. We expect that inflation will then gradually drop to 2% by 2025. So, we still have some way to go and we will see how difficult the famous last mile will be.’
‘Let me first assure you that we do not have any intention of adjusting our inflation target of 2%. At the same time, we may be confronted with more supply-side shocks. And these could turn out to be inflationary, even though that is hard to predict. Climate change, for example, drives prices, we see that already. Extreme weather can push up food prices, low water levels in the Panama Canal increase transportation costs, and carbon taxes raise the price of fossil fuels. A partial withdrawal from global supply chains can push up inflation as well. But there are also opposing effects such as the advance of artificial intelligence, which could boost productivity growth and thereby temper inflation.’
‘Banks have lent money at higher rates, but they have not passed the higher interest rates on to their depositors immediately or in full. But we expect banks’ profits to be under more pressure in the future because banks will face higher funding costs and rising credit default risks, while lending is weakening. Banks would therefore be well-advised to use these short-term profits to build up a buffer against future losses.’
‘In July we decided to no longer remunerate the minimum reserves while keeping the minimum reserve requirement at 1% of the minimum reserve base, which consists mainly of customer deposits. The minimum reserve requirement is not an effective way of compensating the remuneration of excess liquidity. Large banks have the highest excess liquidity, smaller banks have less. At the same time, the smaller banks are mostly funded by deposits. This is why they would be disproportionally affected by higher minimum reserve requirements.’
‘The ECB’s balance sheet has already shrunk significantly. This will continue in the coming years, thereby reducing excess liquidity. But the primary monetary policy instrument is ECB policy rates. The reduction of our balance sheet is happening gradually in the background, also to avoid market turbulence. While we are not expecting any, we are not taking any risks.’
Philip Lane (ECB)
13 January 2024
‘The first point to make is that there has been progress on inflation in recent months. It is hard to be exact about the role of individual hikes, but of course the September interest rate hike has helped with that. By underlining that the ECB will maintain a restrictive policy, it has helped cool down inflation expectations and moderate price setting in the autumn. Second, once the ECB begins lowering interest rates, this would not be by a single decision of a rate cut, there would most likely be a sequence of rate cuts. The September hike means the peak rate has been higher than it otherwise would have been. I recognise that there was an insurance element in that rate hike. And I will fully take that into account in terms of the scale and timing of the rate adjustment towards a more neutral monetary policy stance when it comes to it.’
‘The inflation release for December was broadly in line with our projections – I’m not seeing some major downside surprise. It was in line with our signal that there would be a jump. And the continued progress on the easing of core inflation is welcome. But we do see some headwinds to services inflation this year and, for the time being, wages are still growing well above any kind of long-run equilibrium rate. We don’t expect energy prices to continue falling at the same rate as last year. Our baseline staff projections include a significant recovery in the European economy this year due to stronger demand in Europe which is, on its own terms, inflationary. But we flagged in December that there are downside risks to our forecast. And that is one of the big data questions we have for these weeks: will we see a recovery or a continuation of the kind of stagnation we had for much of 2023? We remain very data dependent.’
‘I have a range of data I want to see. We do receive the data on the latest wage settlements every week. We have a wage tracker measure that we use as an early indication of the wage dynamics. We also look at market data on wages. But the most complete dataset is in the Eurostat national accounts data. The data for the first quarter will not be available until the end of April. By our June meeting, we will have those important data. But let me emphasise, we do have other data that we will be looking at every week, because, as you say, a lot happens every month and we look at all of the data available to us. It will take time to have a good understanding of whether the wage settlements are decelerating. We expect that 2024 will still have high wage increases, and it is important for people to recover the losses from high inflation. But the scale of that will determine the timing and the scale of rate adjustment this year.’
‘For the whole euro area, if inflation typically should be 2% and labour productivity grows at 1%, then the rate of a wage increase consistent with a 2% inflation target is around 3%. In 2023 we had increases of about 5% and in our projections we now have wage increases coming down by maybe a percentage point in 2024, then above 3% in 2025 and at around 3% in 2026. So for this year and next year we still expect high levels, to compensate for the high inflation, especially in 2022. This is natural. But the adjustment of wages is a multi-year process. If countries try to do it very quickly with very large wage increases, then you could get a wage-price spiral. It’s going to be a gradual process, in the interest of everyone.’
‘Obviously last week, a week ago we had the December inflation number and what I would say is that that broadly confirms our assessment from the December meeting, our December projections and I what I would say on that basis, of course we’re going to be looking at incoming data, but this is not a kind of a near-term topic.’
‘Once we’ve developed sufficient confidence that we’re firmly on the way back to 2% inflation target, then the rate cut topic will obviously come to the forefront. But right now, that is a tentative conjecture, and we will need to see the incoming data before we move beyond that.’
‘[I]t is not necessarily persistent disinflation and this is why we remain concerned’
‘It is not the time to declare victory in any way. This is essentially a prolonged second-round effect. Those big price increases in 2022 means there is a second round of wage increases coming up.’
Luis de Guindos (ECB)
10 January 2024
‘In 2023 a lot of progress was made in curbing inflation. However, more needs to be done to ensure a timely and sustainable return of inflation to our 2% medium-term target.’
‘2023 ended with an inflation rate of just below 3% in December, which was good news. The uptick from November was widely expected, reflecting base effects and the withdrawal of energy support measures. … The decline in 2023 affected all the main components of headline inflation, confirming a broad-based disinflationary process that gained momentum in the second half of the year. … Another important aspect is that core inflation entered a clear downward trajectory, continuing to decline to 3.4% in December. Services prices have been slower to recede, but they fell sharply in November and remained stable in December. Taken together, these trends reflect the indirect effect of falling energy prices, the easing of supply bottlenecks and the increasing pass-through of our monetary policy tightening to demand. However, high wage pressures, the outcome of upcoming wage negotiations and intensifying geopolitical tensions add on uncertainty around the future path of inflation. The rapid pace of disinflation that we observed in 2023 is likely to slow down in 2024, and to pause temporarily at the beginning of the year, as was the case in December 2023. Positive energy base effects will kick in and energy-related compensatory measures are set to expire, leading to a transitory pick-up in inflation, similar to what has happened with Spanish headline inflation in recent months.’
‘Soft indicators point to an economic contraction in December too, confirming the possibility of a technical recession in the second half of 2023 and weak prospects for the near term. The slowdown in activity appears to be broad-based, with construction and manufacturing being particularly affected. Services are also set to soften in the coming months as a result of weaker activity in the rest of the economy.’
‘The labour market continues to be particularly resilient to the current slowdown. … However, we are seeing the first signs of a correction taking place in the labour market. The latest data on total hours worked show a slight decline in the third quarter, the first since the end of 2020. This is mainly driven by the reduction in the average hours worked offsetting the increase from the rise in employment. The continuous decline in job vacancy rates, which marginally decreased again in the third quarter, suggests that the ongoing labour market adjustment may also weigh on the number of jobs.’
‘We believe that the current level of interest rates, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. … The key ECB interest rates are our primary tool for setting the monetary policy stance. Our future decisions will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.’
‘In terms of economic activity, the slowdown has so far been contained and gradual. However, the incoming data indicate that the future remains uncertain, and the prospects tilted to the downside.’
‘However, average wage growth in the euro area is over 5%, whereas productivity is barely improving. This means that unit labour costs are rising, which adds to inflationary pressures. … We will analyse developments in wage costs and profit margins, as both factors could delay the return of inflation to our 2% target. We are keeping a very close eye on this.’
‘Almost all income indicators have returned to their pre-pandemic levels and the focus is now on fighting inflation. To this end, the ECB takes action through its monetary policy but we also need to see fiscal policy return to normal.’
‘Once we see inflation is clearly converging in a stable manner to our target of 2%, monetary policy might then start to ease. But it’s still too early for that to happen.’
‘If sustained for a sufficiently long period of time, current interest rates will help bring inflation down to 2%. We are data-dependent. The data have been favourable but still not enough for us to change our monetary policy. It’s therefore too early to talk about a cut in interest rates.’
Piero Cipollone (ECB)
NO UPDATE
Frank Elderson (ECB)
NO UPDATE
Joachim Nagel (Bundesbank)
15 January 2024
‘First of all, I believe it is too early to talk about cuts. I think inflation is still high and the December numbers were higher than the November – this was not a surprise because of the base effects. But nevertheless, what we expect for this year compared to last year, that inflation will be half of the level of last year, this is good news per se, but as I said, inflation is too high. So for me, all the discussions regarding … cuts, this comes too early.’
‘The markets are, from time to time, they are optimistic. They are, maybe from time to time, they are over-optimistic. So it’s their view. I have a different view. So, I want to see new data that is kicking in, so we will wait for the next Governing Council meeting and then we will see.’
‘I think we do have to wait. I think it’s really much too early. So maybe we can wait for the summer break or whatever, but I don’t want to speculate. I think this is my, really, this is my understanding here: we should wait for new data. And we are living in a very uncertain world. And we shouldn’t forget that 2024 is coming with a lot of challenges and this will have impact on monetary policy. So, I really have to believe that this meeting-to-meeting understanding is the right way to do it.’
‘And the ECB Governing Council deems price stability to have been achieved when euro area inflation stands at 2% over the medium term. We need to carry on working to achieve that objective. The ECB has now raised key interest rates ten consecutive times to great effect: inflation is declining significantly. Just one year ago, we were seeing double-digit inflation rates; now we are at less than 3%. Monetary policy is working.’
‘Over the medium term, inflation is heading in the right direction: downwards. The turn of the year will probably see inflation tick higher again briefly owing to the impact of one-off effects. You see, the inflation rate shows how prices today compare with those exactly one year ago. And in December 2022, factors such as the immediate assistance granted by central government for gas and district heating were significantly depressing prices. That immediate assistance is absent now, which is why prices are markedly higher than they were back then. All in all, we need to remain vigilant: combating inflation isn’t a task that will take care of itself.’
‘On the ECB Governing Council, we look very closely at the data and make decisions on a meeting-by-meeting basis. It’s highly likely that interest rates have reached their peak. To all those who have therefore gone straight to speculating about imminent rate cuts, let me say this: people have been known to back the wrong horse, so be careful.’
François Villeroy de Galhau (Banque de France)
11 January 2024
‘The European Central Bank rates that we set are not going to increase anymore…’
‘At the beginning of 2023, I stated here before you that French inflation would pass its peak in the first half of the year – it has since declined from 7.3% in February to 4.1% in December – and that we should reach the terminal interest rate "by the summer" – this occurred in early September. I also made a “commitment” that barring any new shocks we would bring inflation down towards 2% by 2025 at the latest. A year ago, many people were expressing polite – or not so polite – scepticism. Today, our forecast is much more widely accepted and believed: average inflation of 2.5% in 2024 and 1.8% in 2025. However, confidence does not preclude vigilance; even if the recent rebound in inflation is technical and temporary – it was actually less than expected in December. In the face of inflation, monetary policy has proved to be an effective remedy: in France, core inflation (i.e. manufactured goods and services, which account for 70% of household consumption baskets) fell from 4.7% in April, to 2.9% in December. At the same time, we have managed to avoid a recession and maintain positive growth – even though this has undeniably slowed. This soft landing of 0.9% growth in 2024 should precede a gradual recovery from 2025 on. In this context – and barring any surprises – 2024 should be the year of our first interest rate cuts. I am aware that you are waiting for me to say in which season – spring, summer or autumn? – or even in what month. Well, actually no: our decisions will not be guided by a timetable but by data; and we must display neither obstinacy nor haste. Neither obstinacy: I have never believed that worries over the “last mile”, where inflation would become harder to bring down and would justify an excessively rigid monetary policy. Nor haste either: If you will allow me to paraphrase La Fontaine: "patience and time do more than a lot of talk". We will cut rates this year when the inflation outlook is firmly anchored at 2% – in actual data – and on a sustainable basis – in forward-looking data.’
‘I insist a little on this patience, this plateau. For what? Because if we lowered rates too soon, we risk a relapse into the disease of inflation.’
‘What we are saying now is that we will no longer raise interest rates. This is an important step.’
Fabio Panetta (Banca d’Italia)
NO UPDATE
Pablo Hernández de Cos (Banco de España)
10 January 2024
‘As for the euro area, economic activity has continued to show clear weakness and is only expected to increase in dynamism gradually. In the third quarter, GDP declined by 0.1 % and available indicators suggest stagnation in the fourth quarter.’
‘Inflation, for its part, has performed better than expected. ... The deceleration in prices is expected to continue in the coming quarters, although in 2024 the decline would be slower due to upward base effects and the gradual withdrawal of fiscal measures adopted during the energy crisis.’
‘Moreover, it is assessed that, if we maintain the current level of rates for long enough, we will be able to achieve the 2 % inflation target over the medium term. The aforementioned inflation developments and projections support this assessment, as well as the fact that monetary policy continues to feed through strongly to financing conditions, even above expectations. The relevant question is how long it will be necessary to keep interest rates at the current level, before starting to gradually reduce them. This will depend on future data developments, in a context where the level of uncertainty remains high.’
‘In any event, attention will have to be paid in the coming months to a number of developments that may condition the path of inflation and, hence, our monetary policy action. In particular,
- Risks to economic growth remain skewed to the downside. In addition to geopolitical developments, monetary policy transmission has been surprisingly strong, which, if extended in the coming years, would translate into lower growth. In fact, the analysts' consensus growth forecast for 2024 is below that of the Eurosystem (0.5%).
- Moreover, market rates have declined sharply in recent weeks and are clearly below the path incorporated in the projections, so that markets today expect a cumulative reduction of around 150bp in the 2024 deposit facility.
- The projections incorporate a gradual increase in real wages, which are projected to recover the loss of purchasing power observed in 2022 by the end of 2024. At the same time, productivity is expected to recover, allowing unit labour costs to moderate. However, labour markets remain tight, which could lead to higher wage pressures. Conversely, falling inflation could moderate wage demands. In any case, the first months of 2024 will see a wealth of information on new collective bargaining agreements, which will allow an analysis of the direction of wage pressures.
- As for margins, given the weakness of demand and the resolution of bottlenecks, a compression of margins is expected, as has already happened in the third quarter. Their future behaviour will be crucial to assess their role in cushioning wage pressures.
- Finally, fiscal policy may prove crucial to prevent inflationary pressures from rising. Governments should reverse the support measures associated with the energy crisis and the stance should be tight in 2024 and beyond to gradually reduce the high inflationary pressures. to gradually reduce the high levels of fiscal imbalances observed in some countries.
In sum, the high level of uncertainty implies that we must remain very vigilant to avoid both insufficient tightening, which would impede the achievement of our inflation target, and excessive tightening, which would unnecessarily damage activity and employment.’
‘Furthermore, we continue to assess that if we maintain their [interest rates’] current level for long enough, it is very likely that we will be able to achieve the 2% inflation target in the medium term. The recent evolution of inflation and the aforementioned projections support this - projections in which we have gained confidence, given that forecast errors have been reduced in recent months and, in fact, inflation has been lower than expected. Likewise, it is estimated that monetary policy continues to have a strong impact on financing conditions, even higher than expected. The question of how long it will be necessary to maintain interest rates at the current level, before starting to gradually reduce them, will depend on future developments in the data, in a context in which the level of uncertainty remains high.’
‘Other assumptions have also undergone significant changes since the closing of the year. Specifically, the prices of energy raw materials have been revised significantly downwards. However, geopolitical developments, particularly in the Middle East, continue to pose a downside risk to growth and an upside risk to inflation. … the risks for this growth scenario are biased to the downside. In particular, the transmission of monetary policy has been surprising us for its strength, which, if extended in the coming years, would translate into lower growth and inflation.’
‘The evolution of unit labour costs and business margins will also be crucial in determining the future behavior of inflation and the reaction of monetary policy. The projections incorporate a gradual increase in real wages, which would recover the loss of purchasing power observed in 2022 towards the end of 2024. At the same time, a recovery in productivity is anticipated, which would allow for a moderation in unit labour costs. However, labour markets remain tight, which could generate higher wage pressures. On the contrary, the fall in inflation could moderate wage demands. In any case, in the first months of 2024, abundant information will be received about the new agreements, which will allow an analysis of the direction of said salary pressures. Regarding margins, given the weakness of demand and the resolution of bottlenecks, a compression of these is expected, as has already happened in the third quarter. Their future behaviour will be crucial to assess their role as a buffer against wage pressures. Fiscal policy may also be critical. Governments should reverse the support measures associated with the energy crisis and the guidance should be restrictive as early as 2024 and beyond to gradually reduce the high levels of public debt and structural deficits observed in some countries. This is essential to prevent inflationary pressures from increasing, which would require an even more restrictive stance of monetary policy. With this objective in mind, it is important to reach an agreement soon on the reform of the economic governance framework of the European Union. In summary, the high level of uncertainty means that we must remain very vigilant and not let our guard down to promptly detect any risk that affects the inflation outlook. This way we can avoid both insufficient tightening, which would prevent the achievement of our inflation objective, and excessive tightening, which would unnecessarily harm activity and employment.’
‘In particular, the Council took into account the fact that inflation has fallen significantly in recent months and, according to the latest Eurosystem staff projections, is expected to gradually decline over the next year and to approach to the 2% target in 2025. Furthermore, all core inflation indicators continued to moderate, although domestic inflationary pressures remain strong, mainly due to strong growth in unit labour costs. Likewise, despite a further downward revision of projected economic growth, the risks to future economic growth in the euro area are considered to be biased to the downside, while those associated with inflation are balanced. Finally, it is estimated that the previous increases in interest rates continue to be strongly transmitted to financing conditions, even higher than expected. On the basis of this assessment, the Council maintained the assessment that the current levels of the ECB's official interest rates, maintained for a sufficiently long period, will contribute substantially to the achievement of our inflation target of 2% to medium term. In other words, this means that 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. This is also confirmed by the latest inflation projections, in whose future evolution path we have gained confidence, given that forecast errors have been reduced in recent months and, in fact, inflation has been below expectations, including a notable downward surprise in November. The question of how long it will be necessary to maintain interest rates at the current level, before beginning to gradually reduce them, is not easy to answer ex ante. It will depend on the evolution of the data in the coming months, in a context in which the level of uncertainty around the future dynamics of the economy remains high and is subject to geopolitical risks, among other factors, the evolution of which is difficult to predict. anticipate. Additional shocks could occur, and the response to them will depend on their origin and magnitude and their impact on the inflation outlook. A reference that may be useful when analyzing this issue is the one that is implicitly included in the Eurosystem's macroeconomic projections. As I noted previously, the most recent, published last week, anticipate a progressive convergence of inflation towards the 2% objective in the medium term. Well, these projections are based on market expectations regarding the evolution of interest rates at the closing date of the external assumptions for the year, November 23, 2023. The survey of the Eurosystem to monetary analysts. At that time, the median of analyst expectations anticipated the first interest rate reduction at the beginning of the third quarter of 2024, so that at the end of 2024 the deposit facility rate would be around 3.25% , compared to the current 4%, and the long-term interest rate would reach 2%. However, since the end of November, the market interest rate path has been sharply reduced and is now below the rate path contemplated in the projections. Beyond interest rates, other assumptions that serve as the basis for preparing the projections have also undergone significant changes since the closing of the year. … In summary, the high level of uncertainty means that we must closely monitor all information received and continually verify whether it is consistent with the assumptions underlying our projections. By remaining vigilant, we can quickly detect any risks to the inflation outlook that are materialising, both on the upside and downside. This way we can avoid both insufficient tightening, which would prevent the achievement of our inflation objective, and excessive tightening, which unnecessarily damages activity and employment. The inflation target is now within our reach, but, precisely for this reason, we must not let our guard down.’
Klaas Knot (De Nederlandsche Bank)
20 December 2023
‘Yes, the latest inflation figures were a very welcome confirmation that we are on the right track to bring inflation back down to the target level of 2%. But we have to wait and see how wages develop before we can say that inflation has also turned the corner durably. Our projections are based on a clear deceleration in wage growth and profit margins in 2024.’
‘Based on the information available today, I think it is rather unlikely [to cut interest rates in the first half of 2024]. But we are data-dependent and not time-dependent. We have to get inflation to 2% by 2025 – that's crucial. And a lot has to go well still for that to happen. So we have to remain vigilant.’
‘Based on current information, I don't see any urgent need for further interest rate hikes. We can be satisfied with the current monetary policy stance. But the wage data can go either way and then we may have to react accordingly. So, although quite unlikely, I wouldn't categorically rule out further interest rate hikes just yet.’
‘But the November inflation data was good news in the short term. And not just because of overall inflation. Much more important was the fall in core inflation from 4.2% to 3.6%. This decline was also stronger than expected. But we have a medium-term orientation. And I am happy to repeat myself: there is still one important piece of information missing. There is still no turnaround in wages. And we will have to see some good news from the wage front before we can say that inflation has also durably turned the corner.’
‘It should be recognised that the disinflation path we are assuming in our new projections is based on financial conditions that involve significantly less policy easing than is implied by current market prices. So if current market prices continue to deviate from this path, this in and of itself represents an upside risk to our December inflation outlook. That is the first important observation. And on the market dynamics themselves: Markets always tend to be optimistic at the end of the year, often followed by a hangover in January.’
‘The projections for 2023 have been remarkably accurate. In addition, inflation is really coming down. These two facts together show that we are getting a better grip on inflation again. I am confident that the return to 2% inflation in 2025 is a credible prospect.’
‘The fourth quarter is likely to be weak again and the first quarter of 2024 won't be great either. But in the medium term, there are factors that give us confidence. Real wages will increase in 2024 and boost purchasing power. And the labour market remains strong. The combination of these factors forms a credible basis for an upturn in 2024. The economy has also proven to be very resilient. The damage we are doing to our economy through higher interest rates is extremely limited compared to previous disinflation episodes. This is another reason why I would be in no hurry to cut interest rates. Any eventual withdrawal of monetary policy restriction can and must be gradual and patient.’
‘Given the inflation outlook and how I see the risk balance, I beg to differ [that the ECB has gone too far with tightening]. That doesn't mean we should be blind to the possibility of excessive tightening at some point in the future. But we must not let our guard down either, as our President Christine Lagarde has said. I fully agree with her that a premature declaration of victory is still the dominant concern.’
‘The markets are completely calm and orderly. Spreads came down upon our PEPP announcement. There is currently no risk of fragmentation.’
Our mandate is price stability rather than increasing our profitability or envying the profitability of the banking sector. We should therefore discuss this issue [the proposal to increase the minimum reserve ratio] as part of our review of the operational framework. A limited increase might make sense. However, we should also not destabilise liquidity risk management in the banking sector by rushing through changes to the minimum reserve requirements.’
‘A structural bond portfolio is one of the ways through which we could provide liquidity. I haven’t really made up my mind yet on how much room I see for this instrument. But if it were to be such a portfolio, it should be as small as possible. Also in view of Article 123 of the EU Treaty, the prohibition of monetary state financing. I interpret this to mean that we should not provide governments with permanent funding guarantees. This also protects us against fiscal dominance and allows us to continue making our decisions independently.’
Pierre Wunsch (Belgian National Bank)
15 December 2023
‘[T]he probability of a hike has gone down quite a lot.’
‘We are moving in the right direction on inflation and I am much more optimistic than a few months ago, but we still need to see good news on wages.’
‘It is going in the right direction for some indicators but wage increases are still too high and there are no clear signs that this is slowing down fast enough. We need to see a slowdown.’
‘We know a lot of negotiations will take place in the first quarter and the data will not be ready to interpret until the second quarter.’
‘We see that [companies compressing their profit margins to absorb rising wage costs] happening so it is not like we are dreaming this is going to happen.’
‘There is a combination of shocks where we could continue to have much weaker inflation and a sharp downturn early next year that brings March into play for a rate cut, but that is highly unlikely and not our assumption.’
‘It [the possibility of Fed cutting rates before the ECB] has an impact, such as on market expectations. But we have to decide on the basis of what is happening in the Eurozone.’
‘A lot of governors believe financial conditions are now not likely to be restrictive enough. They are a lot looser than those we have in our projections. But that is partly offset by the fall in energy prices since the cut-off date for our projections and other elements.’
Mārtiņš Kazāks (Latvijas Banka)
20 December 2023
‘Most likely it [initial policy easing] looks like the middle of next year — in June or July. But in the spring, at the current moment that’s too early.’
The timing of easing ‘is really dependent on how the economy really behaves and what happens to the economy.’
Tuomas Välimäki (Bank of Finland)
NO UPDATE
Madis Müller (Eesti Pank)
15 December 2023
‘There is no reason to consider either a further increase in interest rates or a reduction in interest rates in the near term.’
‘Now, above all, it is necessary to wait patiently before the next decisions for clearer indications that euro area inflation will indeed fall permanently to 2% within a reasonable period of time.’
‘It is hard to believe that the central bank can become so confident as quickly as financial market investors are currently expecting.’
Boštjan Vasle (Banka Slovenije)
NO UPDATE
Yannis Stournaras (Bank of Greece)
22 December 2023
‘Inflation is coming down. Remember, a year ago, it was close to 10%, now it's down to 2.4%. It will now go up a little bit, because when the energy subsidies go away, it will go up a little bit though, but it will start to fall again from the beginning of next year and hopefully by the middle of next year it will be well below 3%...’
First of all, inflation is one thing and the price level is another. The price level has gone up now, inflation may go down but the price level will not go down easily, especially in food, because this is a climate change issue, it's a drought issue, the price of oranges has gone up dramatically because of the drought in Latin America and elsewhere, so it's climate change that is very much affecting the price of food. The war in Ukraine, because both Russia and Ukraine are grain fields as well. But at the European Central Bank, we want to hope that if inflation falls well below 3% towards the middle of next year, then possibly that will be the time when we will start to cut interest rates as well. Possibly.’
‘We need to see inflation sustainably below 3% by the middle of the year before cutting rates.’
‘We’ll also have to evaluate the overall state of the economy. … unit labour costs, unit profits and inflation expectations must all point to inflation going back to 2%.’
Peter Kažimír (National Bank of Slovakia)
18 December 2023
‘The positive drop in inflation observed in the past few months, including November, isn’t enough to declare victory and move to the next stage. We are not out of the woods yet. We are increasingly confident that inflation will reach our target in 2025 and that we can accomplish this in a soft-landing scenario. The progress, however, is still subject to risks. The policy mistake of premature easing would be more significant than the risk of staying tight for too long. Prudence is the key. We’re closely watching the economic indicators but will not make hasty moves. This isn’t the time to relax our vigilance. We still expect a slight uptick in inflation in the coming months. Afterwards, inflation should decline, but only very gradually. Base effects and phasing out energy support measures prevent a faster drop in inflation rates. We also need to see clear signs of wage moderation. For inflation to sustainably converge to our target, we must remain determined and keep the policy at current levels for as long as necessary to secure convergence towards the target. Growth may keep disappointing. Still, I’m convinced that the monetary policy is not the main drag here. We have a competitiveness problem. The problem is the sluggish pace of structural reforms and the slow adaptation of the European economy to the needs of the 21st century. Europe needs to invest and reform to boost productivity in order to secure sustainable economic growth. The decision to hold off a discussion on cutting rates is a strategic choice to maintain economic stability and support a gradual return to normality. Our choice to stay the course is a measured response to a complex economic scenario. It reflects a strategy of caution and careful monitoring.’
Mário Centeno (Banco de Portugal)
09 January 2024
‘The answer [to the question of whether beyond any reasonable doubt, we've reached the terminal rate] is yes, based on current data. We decide meeting by meeting and are always data-dependent, but the baseline now tells us that we have already increased interest rates sufficiently to make a substantial contribution to inflation converging to 2% in the medium term. In fact, since the end of 2022, our inflation forecasts for 2025 have been consistently very close to 2%, which means that inflation rates are very strongly anchored at our medium-term objective. If new shocks in any way disturb the evolution of prices, which we do not expect, then we must talk again.’
Since decisions are made meeting by meeting based on available information and we are no longer relying on forward guidance, I can’t answer when [we will start cutting], but I can make a slightly more qualitative analysis and say that the most recent developments on inflation and the economy have obviously brought the moment of easing closer to us. We expect in the next quarter further confirmation that inflation is on a path of convergence to 2% in the medium term. The absence of such confirmation would bring new difficulties both for monetary policy and citizens, difficulties that we very much hope to avoid. The decision to keep nominal rates steady for the moment is appropriate and we will decide when to cut them sooner than we thought until recently.’
‘Yes [the lower-than-expected December HICP confirms sooner-than-expected easing]. These [December inflation data] are good news, but to me not surprising; the pick-up was smaller than the market expected and less than the base effects incorporated in the forecasts. As I said, we will remain data-dependent, which also means that we must incorporate recent data on inflation and economic activity in forthcoming monetary policy decisions.’
‘I don't think we have to wait until May to make decisions. I think we must, in each of the next meetings, take the decisions that best accommodate the objective of bringing inflation back to 2%. I have a clear vision about the labour market, which I recently published on the website of Banco de Portugal. I don't see any sign that second-round effects on wages have materialised or will materialise or that wages will put additional pressure on prices. Real wages in the euro area are still below the pre-inflationary period. Unlike the USA, where they have already recovered, this has not happened in the euro area. It is natural that real wages will recover, in fact it is even desirable that real wages recover soon. A pick-up in real wages is an all-natural process. We must keep in mind that in this recovery, what is truly important are productivity gains. We must have productivity gains associated with wage gains. The pressure variable for inflation is not wages, but unit labour costs. This is why productivity is important in this context.’
‘It [whether easing will proceed at a pace like that of the preceding tightening] is a decision that we will make meeting by meeting and with all the data available, but with a logic of economic stability and having in mind that we target medium term inflation, and that inflation is no longer too high, even if it still has to come down. On this issue of pace, let me take the opportunity to mention a fact: inflation rose more slowly than it has been falling. In other words, the descent has been faster than the climb. And this means that inflation was a more temporary phenomenon than many believed a few months ago. And this has been true for both headline and core inflation indicators. The temporary nature of inflation will mean that it left no marks on the process of price formation and the functioning of our economy, there are no signs that past inflation will lead to systematically higher inflation rates in the future. This means that the latest inflation figures tell us two things: one is that the reduction of inflation will happen sooner than what we thought six months ago, and the other is that the easing process will also be faster than what we thought six months ago. But we do not have the assurance that inflation will converge to our 2% target without adjustments in monetary policy. We must be attentive to how quickly this convergence process takes place to avoid creating overshooting and undershooting in the economy, which are detrimental for economic agents. Monetary or fiscal policy are designed to be stabilisation instruments.’
Gabriel Makhlouf (Central Bank of Ireland)
NO UPDATE
Gediminas Šimkus (Bank of Lithuania)
19 December 2023
‘Recently there has been a lot of talk on the current market expectations. Yet, I would have a few thoughts on this. First of all, there’s more than one expectation in the market – there are a lot of market participants that are working in a variety of different directions and those expectations reflect a few things: what is the history and data, how could economic growth look in the future and, lastly, they are trying to foresee how central banks could function in this particular context. Secondly, market participants aren’t stable. If we looked at the expectations or the interest rate curves and compared them, for example in October, we would find a significant difference. Even though there was some positive information about the growth of prices and the numbers we had in November were surprising, if we took a glance at the ECB macroeconomic projections, we would see that the average situation of the perspectives didn’t change as much: inflation rates of this year and the upcoming year were reviewed, the projections of the economic situation were worsened, but the projections for 2025 and 2026 haven’t changed that much.’
‘I think that the market expectations are too optimistic. For these expectations to come to life, the macroeconomic information would have to positively surprise us ... But if there weren’t any surprises, that expectation for early and quick cuts of interest rates could be way too optimistic.’
‘Talking about surprises, price development was heavily affected by external factors like energy or food raw material price shocks. These are the factors that can affect inflation projections to be higher.’
‘While assessing the balance of risks there are factors that have an impact on both sides. These factors, the balance of risks in the sense of GDP growth is leaning towards the negative side. In the context of inflation, the balance of risks is pretty much balanced.’
Robert Holzmann (Austrian National Bank)
15 January 2024
‘The geopolitical threat has increased because what we saw until now by the Houthis — I think it’s not the end, it might be the overture to something much more broad based, which will impact the Suez Canal and increase the prices there. We should not bank on the rate cut at all for 2024.’
‘Once such a date [for a rate cut] would be set, it would trigger immediately a dynamics which we cannot control. And with all the knowledge we currently have, it would not be honest to do it because we don’t know how inflation will develop.’
‘If geopolitical risks lead oil prices going up, gas prices would shoot up, this would also hit in a number of industries which are already hit. Perhaps even the services industry. Then, a recession is not improbable.’
‘…even though we have had ten uninterrupted interest rate increases, a series of increases that is unprecedented in the history of the ECB, there is still no guarantee of interest rate cuts for 2024. This monetary policy normalization is already having an effect in the decline in inflation, but it would be premature to think about interest rate cuts now.’
‘In the euro area, we will probably reach our target of 2.0% inflation within the next two years, although the path there will still be challenging. Fighting inflation is like running a marathon – the last few meters are the most difficult.’
Boris Vujčić (Croatian National Bank)
11 January 2024
‘If we see a faster decline in inflation than we forecast ... then of course we can move also earlier. It's not excluded.’
‘[O]n the labour market, I would say that the labour market has surprised everyone. We have seen significant slowdown in the economy without the labour market so far, up until recently, weakening to the extent [of] the previous episodes of decline in the GDP growth. So, this time is different. It’s rarely different, but this time it’s really different in the labour market. And what, personally, I try to understand, and I think many of my colleagues that I talk to, is whether … something in the nature of the labour market has changed. And what kind of the reaction function in labour markets to the economic activity developments we can expect in the future. And I think the jury's still out. We're not certain. … We also know that the pandemic has changed also the way labour markets operate … there's much more work from home, there's much more distance work. The way that the companies decide on hiring and firing has also changed as a consequence of some experiences … during the lockdowns and the pandemic. And we now still have to see whether that has some permanent impact on the labour market or not, whether we have some new irregularities that we can detect. What we do see now is that the unemployment rate we expected in our projection, the unemployment rate will go up a little bit, but that's really a little bit. It's not, it's not definitely a concern, it's kind of a … consequence of the economic activity. And if you think about it, … it's still much less than what we saw previously in the previous episodes of the same kind of slowing down of the … economic activity. Now, if the inflation rate comes down faster … than we expect at the moment, that will definitely impact our decision-making … on the rate moves, because this is one of the three elements that we always emphasise we look at.’
‘What we like to see is markets aligning more with the way we think. But personally, I am among those that have less problems with seeing markets being probably further away than we would generally like them to be … in terms of the pricing. So, I personally am not very … concerned or upset … by that fact. I think we still have to continue to explain how do we think, try to explain our reaction function, and let … the market price. They have been pricing differently probably than the Governing Council wanted them to in the past as well, as you know. And sometimes they were right, sometimes they were wrong. So that's the nature of the job.’
‘[W]e’re seeing the 4.5% [wage growth] in our projection. But there’s quite a bit of uncertainty about that. It could end up higher or lower. … If it's going to be at 4.5% as we projected, then, of course, there is still this component that I mentioned before, where 4.5 might not be compatible with the inflation rate coming down to 2.7% in 2024, on average, or closer to 2% … by the end of the year, if we don't get some compensation on the unit profit front, so if companies do not pack all these wage increases into the prices on to the final consumers. That depends on the market power, pricing power … of the companies, which we think, given that the economy has slowed down, and when we talk to the companies is now not as strong as it was before. And we do think that part of that wage increase … will not be passed on to the final consumer… But again, that remains to be seen. … And my feeling is at the moment is that they [companies] are, at the beginning of 2024, less capable or willing of passing fully any increase in the input costs on to the final consumer, which, if it is so, will help us to bring down the inflation even … with the wage growth of close to 5%.
‘[T]his [Q1 wage growth] is a very important piece of the puzzle. And we do know … that most of the wage negotiations will be done … in the first quarter. So, this will be a very valuable piece of data. It's not that much will happen directly, no. But once we get these data, we will know where we are on that front, … which is something … that we need to know. But don't forget, I mean, there are other things also that might impact the inflation rate, not only … the labour market wage development. … So, it's not only the … upside risk in terms of the second-round effect of wages, inflation expectations and profits, but also we have this other risk … on the downside which might materialise.’
‘… I feel the risks [are] really balanced at the moment, and I think we definitely [have] avoided the risk of not doing enough. Let's see how things will develop … over the next few months, but then I would say personally, I'm more relaxed about it that we're at the right point at the moment … in terms of the monetary policy stance.’
‘[The] December projection is still relevant. We have not seen such a depart … in the data that we got meanwhile, over the last month or so, that it would make it less reliable. … And I think by March again, we'll get very important bits of information … for the March round of the projection, but at the moment, I don't expect it to depart much from what we've seen in the in the December projection.’
‘We do discuss the operational framework, but in a sense, it's not that relevant … for the moment and for the current monetary policy, simply because we will stay in the environment of large excess liquidity for quite some time to come, until the balance sheet of the central bank [declines] to the extent that it disappears and brings the question of the operational monetary policy on the table of everyday policymaking. However, it is important if we are about to make a decision which impacts the size of the balance sheet with which we will operate in the future, because it will also affect the expectations of the market today. So, I would say it's not irrelevant if we make that decision, but we do not need to make that decision at the moment. We are … in the now already, I would say, intermediate stage of the discussions. We’ll be in the advanced stage of discussion sometime in Spring of this year. But we have not decided yet on what we will communicate as the decision, and one has to have in mind that that communication might have an impact on the market expectations, and actually bring forward something … what we might do … primarily in terms of the normalising of the … balance sheet … of the central bank.’
Gaston Reinesch (Central Bank of Luxembourg)
NO UPDATE
Constantinos Herodotou (Central Bank of Cyprus)
15 January 2024
‘So, it is fair to say that I have not grown more pessimistic since the September forecasts and any contraction in the economic activity in the euro area in the near term is expected to be shallow and short-lived.’
‘Negotiated wages in the euro area exhibited a high annual rise of 4.7% in the third quarter of 2023. In addition, many wage negotiations in the euro area will take place in the first half of 2024, thus an important element for the ECB’s monetary policy analysis still remains unknown. Therefore, it is warranted to remain very attentive to wage negotiations’ developments in the coming months in order to have a clear picture on these underlying dynamics and further inform policy actions going forward.’
‘I believe it is important to take a holistic view when assessing the economic situation and the outlook for inflation by looking at information from various surveys as well as from various data sources and indicators, among which are wages. Having said that, wage developments may currently warrant more attention given the staggered and often multi-annual nature of wage setting processes in the euro area labour markets, in light of possible stronger upcoming wage demands by workers, in order to cover for their income losses of the previous years due to high inflation.’
‘As anticipated, December 2023 headline inflation is expected to rebound to 2.9%, up from 2.4% in November 2023, related predominantly to upward base effects in the energy component and the reversal of some fiscal support measures. That said, the overall disinflationary process is expected to continue over the medium term. … But there are some risks that could delay this path. Energy prices remain a major source of uncertainty amid the impact of fiscal measures and heightened geopolitical tensions, even though the effect of the conflict in the Middle East on energy inflation has so far been muted. Food prices could also come under upward pressure due to unfavourable weather events and the unfolding climate crisis. At the same time, the disinflation process could be derailed if wage pressures or profit margin dynamics move in a different direction than expected. Conversely, potential inflationary pressures could be eased by the softening of global economic activity, slowing jobs growth and other labour market developments or moderating demand from China.’
‘Acknowledging that there is substantial uncertainty given the consecutive shocks to the economy, our policy decisions are calibrated on a meeting-by-meeting basis and by analysing the most recent economic and financial data at hand at the time of each decision. At this point, under the current juncture of the two geopolitical conflicts and the possible supply chain disruption through the rerouting of trade ships away from the Red Sea, any discussion of possible rate cuts would be premature. However, it is important to emphasise that inflation is now on the right decelerating path. Nevertheless, more time and further progress is needed to assess and conclude that this path is firm and sustainable enough to bring inflation back to its 2% target.’
‘Looking ahead, further transmission from past monetary policy decisions to credit and the real economy is still in the pipeline. However, a lot more data shall be available during the first half of 2024, which are necessary for the calibration of future decisions. Any discussion regarding the time and potency of the first rate cut, as well as the pace of further cuts thereafter, would be premature at the moment and would not constitute a data-dependent approach.’