They Said It - Recent Comments of ECB Governing Council Members
12 February 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 25 January, but earlier comments can still be seen in versions up to that of 19 January.
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Christine Lagarde (ECB)
30 January 2024
‘We need all sorts of data, but one of which is critically important — it’s the data concerning wages.’
‘We are not there [at target] yet.’
‘I want to get to 2%, and I want to get to that 2% sustainably so that people in the street will do their shopping and will go to the petrol station and appreciate that we are doing the job for them.’
‘If you look at what those years were when Mr Trump was president of the United States… there could be threats and there could be issues for which the Europeans should be prepared.’
‘First of all, the consensus around the table of the Governing Council was that it was premature to discuss rate cuts. In addition to that, I typically stand by my comments. So the comments I made to your television channel, Bloomberg, I certainly stand by them. I’m not sure that I would exactly characterise them as you have, but I stand by what I have said, not what others have commented that I have said. One other thing which was very much the consensus around the table was that we had to continue to be data-dependent. So rather than being fixated on any kind of particular calendar, which would be being date-dependent, we reaffirmed our data dependency. And I have flagged in the course of the monetary policy statement some of the areas that we will be particularly attentive to in the course of the next few months.’
‘But we are observing very carefully because we are seeing what you are all observing, which is that shipping costs are increasing, delivery delays are increasing and, while we all know that there is more shipping capacity than there was in 2020 and 2021, we also know that costs and fees are increasing. Now, I think most observers agree to say that it has a moderate impact. The percentage of the water transport costs is a little north of 1.5% of total input costs. But we are being very careful and looking attentively to the developments, and it’s pretty clear. I think whether you look at the IMF, the OECD, or other commentators, if the conflict in that region was to develop further, clearly that would be an additional risk, whether it’s a question of the disruption of shipping that we alluded to or the price of energy and commodities at large.’
‘We are seeing those indicators at a high level. What we are also seeing on the wage tracker is stabilisation, which explains the comments included in the monetary policy statement. And in Indeed we are seeing also a slight reduction of the volume of vacancies that are advertised. Now, we take all these data at face value, and we try to constantly corroborate them. We do that with the national central banks, observers, and economists to make sure that we really canvas the 20 Member States as accurately as possible. It’s not elusive because really, we’re trying to pin it down, but it requires that we look at it from multiple angles to make sure that we are as accurate and as up to date as we can be. Being forward-looking is not an easy one for wages. But just to give you an idea, I think it’s 40% of the employees covered by our wage tracker which have had their employment contract renewed without new terms of salary levels in December. So the 40% include those whose terms and conditions have expired and must be renewed at the end of December and those for which the same will happen in the first three months of 2024. So you have 40% of the workforce of whom salaries, wages, one-off payments are yet to be determined and will be tracked by our wage tracker. This information will come in the course of the next few months, which will be of course really rich in information to help us better understand exactly where we are on wages.’
‘As I said, we are data-dependent, and we make decisions one meeting at a time. What we have done in the course of this meeting today is that we have confirmed our inflation outlook and we consider that the information that we have received in the last few weeks since our December meeting showed that the medium-term inflation outlook is broadly following the path that we had projected in December. That’s point number one. Point number two, we look also very carefully at data concerning underlying inflation and here we are seeing a decline across the board of pretty much all our indicators. We also look carefully at inflation expectations. Those were a few weeks which were rich in information, where we have seen that both the market-based and the survey-based inflation expectations are also, both in the short term and for some of them also for the medium term, really coming in at around our 2% target. And of course, we look at the latest inflation numbers, and you will have seen all of you that the December number was 0.5pp north of the November number, which was this 2.4. But we had expected that upside, which was caused by base effects largely attributable to German measures. It was weaker than we had anticipated but it was totally predicted, and it does not detract from the view that we have that the disinflation process is at work.’
‘All I can say is that the consensus around the table of the Governing Council this morning was that it was premature to discuss rate cuts. It’s as simple as that.’
‘On wage growth, I think whether you look at past wage numbers, whether you dissect that in compensation per employee, in negotiated wages, taking on or excluding the one-off payments, we are seeing a slight decline. So it’s directionally good from our perspective. To your question about should it stabilise or should it decline, it’s already declining. Clearly, our hope is that the wage increases – because we are still seeing an increase, whether you look at 5.2% or 3.4% depending on what measurement item you take – are sufficiently absorbed by the profit unit, as we are seeing happening at the moment. So that it does not go into fuelling inflation, which would create the risk of a second-round effect, which we are not seeing for the moment. So the hypothesis that we had when we built the baseline of December, which was that the profit unit would eventually come down as a result of dampened demand as a result of our monetary policy stance, is actually happening, and there is a phenomenon of catching up for employees. It’s also one of the reasons why we see growth coming up and the recovery beginning in the course of 2024; because of rising wages while inflation comes down, which will free up some purchasing power, which hopefully will stimulate consumption.’
‘I think in terms of an overall evaluation of our policy trajectory, which many of you are after, we need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner and in a sustainable way at target. So, it's a disinflation process in which we are. It is working but we need to be more advanced and we need to be further along in that process to be confident that inflation will be at target sustainably so.’
Isabel Schnabel (ECB)
07 February 2024
‘My view is that we are probably past the peak of transmission. This also connects to the question about the last mile of disinflation. Initially, we had the quick wins of disinflation, which is the reversal of the supply-side shocks. We’ve seen that quite impressively with inflation coming down from the peak of 10.6% in October 2022 to 2.9% only a year later. Since then, inflation has remained broadly stable. I would argue that we are now entering a critical phase where the calibration and transmission of monetary policy become especially important because it is all about containing the second-round effects.’
‘Yes, the last mile remains a concern. We are observing a slowdown in the disinflationary process that is typical for the last mile. This is very closely connected to the dynamics of wages, productivity and profits. We had a sharp decline in real wages, which was followed by strong growth in nominal wages as employees are trying to catch up on their lost income. The services sector is affected particularly strongly because wages play a dominant role in its cost structure. At the same time, we’ve seen a worrying decline in productivity and there’s a discussion about what is driving this. One of the factors is labour-hoarding, which has happened on a broad scale. Other factors could be the composition of the workforce, such as the integration of less productive workers or a higher share of public employment and possibly an increase in sick leave. The combination of the strong rise in nominal wages and the drop in productivity has led to a historically high growth in unit labour costs. … The crucial question is: How are firms going to react? Will they be able to pass through higher unit labour costs to consumer prices? This is where monetary policy comes in, because it works by damping the growth in aggregate demand. If demand is held back by restrictive monetary policy, it will be much harder for firms to pass through higher costs to consumers. They will be forced to absorb at least part of those higher costs. This is critical, in particular during the last mile, and we are seeing some evidence that it is happening. But this process is rather protracted and quite uncertain because the economy could pick up more strongly than expected. That could encourage firms to again pass through costs to consumers. In fact, if you look at selling-price expectations in services, they have gone up for several months in a row. That’s why recent incoming data do not allay my concerns that the last mile may be the most difficult one. We see sticky services inflation. We see a resilient labour market. At the same time we see a notable loosening of financial conditions because markets are aggressively pricing the central banks’ pivot. On top of that, recent events in the Red Sea have sparked fears of renewed supply chain disruptions. Take together, this cautions against adjusting the policy stance soon. It means we must be patient and cautious because we know also from historical experience that inflation can flare up again. I’m referring to a recent research paper from the IMF, which showed that the flare-up could happen several years after the initial shock.’
‘The latest PMI survey confirmed signs of a turnaround. We also saw the Citigroup Economic Surprise index turn positive for the first time in many months. This may be a sign that we have passed the peak of policy transmission so there is less impact from our restrictive monetary policy. We see that bank lending rates are starting to come down. If you look at online portals for mortgage rates, for example in Germany, you see they have declined quite a bit. I’m not saying that a flare-up in inflation is going to happen. It’s not my baseline, but I think it’s a risk we should be prepared for. This is an argument against adjusting the policy stance hastily. We have made substantial progress, and that is good news. But we are not there yet.’
‘What we really care about is the short-run R-star, because it is relevant to determine whether our interest rates are restrictive or accommodative. The problem is we don't know where it is precisely. This implies that, once we start to cut rates – and as I said, we're not there yet – we must proceed cautiously in small steps. We may even need to pause on the way down if inflation proves sticky and the data does not give a clear picture about how restrictive our monetary policy is. Just as we did over the past year, we need to look at the economy in order to assess how restrictive our policies are.’
Philip Lane (ECB)
08 February 2024
‘From the end of 2024, all the main inflation components are expected to continue to ease, supporting headline HICP inflation in reaching the ECB’s target in the second half of 2025. Inflation could decline more quickly in the near term if energy prices evolve in line with the recent downward shift in market expectations for the future path for oil and gas prices. This is recognised in the risk assessment of the January ECB monetary policy statement.’
‘Momentum indicators have eased further for headline inflation and all of its components (Chart 11). The annualised three-month-on-three-month growth rate of seasonally-adjusted HICPX stand at 1.4%, with momentum in goods inflation at zero and momentum in services inflation close to 2%, while the momentum of food inflation is around 3%. Taken at face value, these readings might be interpreted as challenging the medium-term forecast. However, according to the staff projections, several factors are expected to raise momentum in the coming months, for both headline and core inflation. First, the windfall of plunging input costs through lower energy costs and lower intermediate prices, which may have temporarily muted the need for firms to raise prices is expected to level out. This, in turn, means that rising wage costs (even at the decelerating rate foreseen in the projections) will exert stronger upward pressure on overall costs. Second, the projections foresee a recovery in domestic and external demand this year. All else equal, this will increase pricing power compared to last year. Third, many of the fiscal measures that leaned against strong price pressures in 2022 are scheduled to expire, which will act to push up prices in the near term. This combination of factors explains why the overall trajectory of inflation in the December 2023 projections only converges to the target in the second half of 2025.’
‘Forward-looking wage trackers provide timely and higher-frequency complements to the official wage data releases and may act as leading indicators for the subsequent releases of the official compensation per employee data. One important indicator from the wage tracker is average wage growth for twelve months ahead, as embedded in agreements reached in the latest quarter. This indicator also gradually edged down in the second half of 2023. Many wage agreements will be renewed in the early months of 2024, and updates to the wage trackers will provide essential information in projecting wage dynamics. The available survey indicators are broadly consistent with the decreasing wage profile foreseen in the latest Eurosystem staff projections. According to our most recent discussions with large European non-financial corporations, the wage growth expectations of this set of companies for 2024 are 4.4% on average, which is a marked easing compared to the average 2023 wage growth of 5.3%. Similarly, in the ECB’s latest Survey of Professional Forecasters (SPF), expectations for annual growth in compensation per employee point to a gradual decline in wage growth looking ahead and were revised down over the longer horizon. While expectations are only slightly below that forecasted for 2024 in the December 2023 BMPE round (by 0.15 percentage points), SPF respondents expect a much faster decline in wage pressures in 2025 and 2026. Finally, progress along the disinflationary path will also depend on firms buffering rising labour costs with a slowdown in profit growth. Since the aggregate level of profits surged in 2021-2022, there is some room for profit compression without driving profitability to below-average levels. The contribution of unit profits to domestic price pressures continued to fall in the third quarter of 2023, suggesting that unit profits are absorbing some of the price pressures coming from rising unit labour costs. The profit margin proxies derived from the responses to recent corporate telephone surveys also suggest that this buffering process is at work.’
‘…it is encouraging that measures of shorter-term inflation expectations have come down markedly more recently, while measures of longer-term inflation expectations mostly stand around 2%. In particular, the inflation expectations of professional forecasters have moved down over the entire horizon, with longer-term expectations now standing at 2.0%. Similarly, while the expectations component contained in market-based measures of inflation compensation, such as the five-year-in-five-years inflation-linked swaps, has remained anchored at 2% throughout the inflation episode, it is notable that risk premia have receded over recent months.’
‘The declining trend in underlying inflation has continued, and our past interest rate increases keep being transmitted forcefully into financing conditions. By tightening financing conditions, the restrictive monetary policy stance is dampening demand, and this is helping to push down inflation and stabilise inflation expectations. The December 2023 Eurosystem staff projections see inflation stabilising around the 2% target from about the middle of 2025 onwards. The incoming data suggest that the process of disinflation in the near term in fact may run faster than previously expected, although the implications for medium-term inflation are less clear. At the same time, the strength of the recovery of the economy, the path of fiscal policies, wage developments, and the degree to which firms absorb higher input costs, all in a context of continued heightened geopolitical uncertainty, will have an important bearing on the inflation trajectory. The March 2024 ECB staff macroeconomic projections will provide the opportunity for a comprehensive update of our medium-term inflation outlook. We will continue to follow a firmly 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. In this process, monetary policy needs to carefully balance the risk of overtightening by keeping rates too high for too long against the risk of prematurely moving away from the hold-steady position that we have been in since September. In terms of an overall evaluation of our policy trajectory, we need to be further along in the disinflation process before we can be sufficiently confident that inflation will hit the target in a timely manner and settle at target sustainably.’
‘Now, the December conjecture was this year would be some progress, but not a massive amount of progress.’
‘What’s important for inflation is what’s happening to unit labour costs, because if the compensation per employee remains fairly elevated, there’s a big drop projected in unit labour costs this year.’
‘So the projection for this year is that the recovery should be stronger and we can get more production out of this set of workers, so net productivity should grow this year… This is contingent on the economy growing more quickly, that is the conjecture.’
‘Unemployment is too low, which means the labour market is too hot to cool down on wages.’
‘The PMIs basically indicate there’s more to come, there’s more disinflation thus to come, but of course the last readings have picked up a bit, so it’s not disinflation forever, but more to come.’
‘How do you get to 2% inflation if wages are still going on 4[%], 5%? Part of what we’re saying is firms would absorb these labour costs. And why would they do that? Because demand is restrictive and monetary policy is one of the reasons. How can they afford to do that? It’s the level of profits.’
‘We put an equal weight on undershooting as in overshooting, so I think that would drive our decision-making.’
‘I don’t think it’s productive to speculate on this forum exactly when we’ll discuss [interest rate cuts]. We have our inflation target at 2%, we will base our interest rate decisions basically on “are we sufficiently confident?”’
‘We said last week, we confirmed our medium-term inflation outlook. That medium-term inflation outlook says unless we get surprises, we should be converging back to 2%. And when the incoming data makes us sufficiently confident, that’s when we’ll start cutting.’
‘So what we have said that for a long time, our strategy is to maintain the current interest rates until we are sure that inflation will come back to 2%. Right now, in December, the inflation was at 2.9%. So we have made progress. But we still need to make sure we will return to 2% as quickly as possible, if you like. And so we will keep this rate until we are more confident that we are on our way back to 2%. But of course, that this will be hotly debated in the coming months.’
‘So as I said, inflation at the end of last year was at 2.9%. We do think this year it will move closer to 2%. So this compared to the very large inflation that we had, is a smaller problem. It's a smaller problem. But it remains a challenge for us as the European Central Bank, to make sure inflation continues to come down towards 2%. So for the typical person on the street, I think you don't need to worry about inflation as much when it's at the current level as where they were, it was 10%. So the problem is now smaller. But it is still a problem.’
Luis de Guindos (ECB)
31 January 2024
‘Monetary policy works with a lag. We can see that banks are already charging higher interest rates and so have tightened their financing conditions. But assessing the extent to which this is already reflected in the real economy – in other words, in consumer spending and investment − is far more difficult. … My personal estimate is that the greater part of the tighter financing conditions, perhaps two thirds, has been passed through to the real economy already.’
‘In December we projected that the euro area would grow by 0.8% this year. … I personally think that the prospects have even deteriorated in the meantime. Some of the risks mentioned in our projections have materialised: world trade has lost momentum, geopolitical uncertainties have increased, and our interest rate hikes are being transmitted forcefully to the economy sooner than expected. So growth in the euro area could even be slightly below 0.8%. But let us wait for our next projections to be released in March.’
‘…inflation figures have mostly brought positive surprises recently. I think that inflation will be slightly lower than we have predicted.’
‘The good news is inflation has fallen a lot. In addition, all the underlying inflation indicators all indicate a downward trend.’
‘The evolution of inflation has been positive, we consider that the disinflation process, if no mistakes are made and no accidents, will continue in the future. Growth will be reduced, it will be the second year with growth below 1%. We believe that the markets' attention will shift from inflation to economic growth in Europe. But as I said before - and perhaps with that I’ll finish - the most important thing is attention is going to return to economic growth.’
‘There has been good news regarding the evolution of inflation, and that — sooner or later — will end up being reflected in the monetary policy.’
‘We are going to be dependent on the data, we don’t have any kind of calendar, it will depend on the evolution of inflation and I am optimistic regarding the evolution of inflation.’
‘What I would tell you is that the recession is not going to be deep and that the labour market is holding up.’
Piero Cipollone (ECB)
NO UPDATE
Frank Elderson (ECB)
03 February 2024
‘And as we’ve shown for almost the past two years and demonstrated again last week: we’re determined to bring inflation back down to our target of 2% and we’re making good progress.’
Joachim Nagel (Bundesbank)
03 February 2024
‘…we mustn’t let up too soon and lose focus. I can’t say whether we are currently playing a tie-break in the fifth set. But we’ve certainly reached a stage in the game that will decide the outcome.
‘We look at the data, not the calendar. We of the Governing Council of the European Central Bank (ECB) are confident that our monetary policy is working and will bring inflation back to its target of 2%. Inflation has been decreasing significantly, and that’s a good sign. It also looks as though a soft landing will be possible in the euro area – in other words, reducing inflation without simultaneously putting too much of a strain on economic activity.’
‘We currently appear to be administering the correct “dose” of interest rate increases. But, just as in medicine, it is also important in the field of monetary policy to keep a close eye on the “patient”. We mustn’t jeopardise what has been achieved by reducing the dose too early. That’s a challenge. As I see it, the price outlook still isn’t clear enough: that’s why interest rate cuts are premature at the current juncture.’
‘A geopolitical escalation undoubtedly represents a particular risk. For instance, Russia’s terrible war of aggression against Ukraine drove up energy prices from one day to the next. This put a considerable strain on enterprises and households, as well as creating uncertainty. Even though we have now overcome this shock, energy prices are still subject to major fluctuations. The Middle East is another source of uncertainty right now; the Red Sea shipping route is under threat. That is why we monetary policymakers would be well advised to make decisions based on actual data and the current outlook. The same applies to wages. These don’t tend to rise until relatively late, which makes them a lagging indicator. Profits have already increased earlier. Both profits and wages can have a strong impact on the inflation rate; that’s something we need to bear in mind.’
‘As expected, the inflation rate in Germany fell again in January – to an estimated 3.1% as measured by the Harmonised Index of Consumer Prices. There was an outlier to the upside in December, when inflation came in at 3.8%. But that was due to a one-off factor in energy prices that now no longer applies. Over the next few months, I expect the prices of food and other products to continue to normalise. The good news is that the inflation rate is moving broadly in the right direction in 2024: that is to say, downwards.’
‘We want to avoid a situation in which market financing conditions become too loose and are thus no longer able to sufficiently dampen inflation. Abrupt price fluctuations are also unwelcome. There is no point in watching financial markets with eagle eyes the whole time, to be sure. Now and again, though, we central bankers do need to send a signal to market participants. It doesn’t matter to me whether market participants’ bets pay off or not – our job isn’t to protect people when speculation goes wrong. But if there is a mismatch between financial conditions and the inflation outlook, it becomes more difficult to maintain price stability. And that is our job – that’s just the way it is.’
‘I am now convinced that we have tamed that greedy beast.’
‘I am convinced that we will get very, very close to the inflation target of 2% in 2025.’
‘I do not believe that we have a very restrictive monetary policy.’
François Villeroy de Galhau (Banque de France)
09 February 2024
‘Things are getting better... Inflation is falling, on average, we were at 7%, we are around 3[%], which is still too much. And we should be – we are going to be – towards 2% next year.’
‘This is a slightly positive growth…. But we are going to escape the dark scenario, remember, that we feared a year ago, a year and a half ago, which was the recession.’
‘We will probably lower interest rates this year because we are making progress against inflation.’
‘We are vigilant, particularly regarding possible consequences of the situation in the Middle East. But in this case, we would adapt, particularly in the timing of key rate cuts.’
‘We will lower our rates this year. On the precise date, none is excluded, and everything will be open in our next meetings. We will judge based on sufficient progress towards inflation at 2%, and we will have to avoid two risks which have become balanced: cutting too early and then letting go of the target, but also acting too late and excessively slowing down activity.’
Fabio Panetta (Banca d’Italia)
10 February 2024
‘Last December, the European Central Bank revised the 2024 growth projections downward, to 0.8%, leaving those for 2025 unchanged at 1.5%. These estimates are higher than those of private analysts and, given the recent data, could prove to be optimistic. In any case, they all point to a modest pace of growth, slower than before the pandemic.’
‘We could argue about the pace and intensity of monetary policy, but one thing is clear: inflation has not become self-sustaining or endemic. Medium-term inflation expectations have remained anchored at the 2% target, a prerequisite for price stability. This has limited the cost of disinflation, which has so far unfolded without triggering a deep recession. For this to be the end result, for inflation to be permanently eradicated and for the economy to return to a path of growth and stability, the next monetary policy decisions must be consistent with the current macroeconomic picture. In this uncertain environment, any speculation on the exact timing of monetary easing would be a sterile exercise and disrespectful to the ECB Governing Council as a collegiate body. What should be discussed now are the conditions to start monetary easing, while avoiding risks to price stability and unnecessary damage to the real economy.’
‘There are three conditions for starting monetary policy normalization. First, the disinflation process must be well under way. Recent data suggest that progress towards price stability has been greater than many were expecting just a few months ago. Inflation fell to 2.8% in January, 8 percentage points below its peak in 2022. Core inflation, which excludes food and energy, has also fallen rapidly. While varying in intensity, this decline was broad-based across all countries and across a very large proportion of items in the consumption basket, including products that typically show more persistent price changes. Second, the fall in inflation needs to be sustained. Indicators of short-term and underlying inflation clearly point to ongoing disinflation. Measures of inflation momentum – which are less influenced by past trends and reflect current developments more accurately – are consistently below annual inflation. These are also at low levels for both headline and core inflation, with similar trends for services and industrial goods. The decline in firms’ and households’ inflation expectations, as well as those of market participants, points in the same direction. The latter expect inflation to return to around 2% as early as this spring. Subsequent downward revisions in the Eurosystem’s projections also signal that disinflation is under way. Another key element is the unwinding of the energy shock. Specifically, gas prices are now close to their mid-2021 level and below the technical assumption used in the latest Eurosystem projections. The third condition for monetary normalization to begin is that the achievement of the inflation target is not jeopardized by a potential interest rate cut. This last requirement depends on several factors: the outlook for economic activity, the transmission of monetary policy to the financial and real sectors, and the risks to future inflation developments. On the first point, I have already outlined the domestic and international factors that are holding back the economy. As regards the transmission of monetary policy, the effects of tightening are proving to be stronger compared with both past experience and the ECB’s previous estimates. Moreover, interest rate hikes and the reduction in liquidity supply will continue to weigh on the economy throughout 2024. The impact on the credit market has been particularly pronounced, with lending rates to households and firms rising and real growth rates similar to or lower than during the crises of the past decade. These developments reflect not only the decline in credit demand due to higher lending rates, but also the tightening of credit supply standards at a time when borrowers are expected to become riskier. Looking ahead, this tightening may be exacerbated by banks’ lower liquidity buffers due to the reduction in the size of the Eurosystem’s balance sheet.’
‘Turning to the risks to inflation, let me first emphasize that the main concerns raised in the past are proving to be unfounded. I have already mentioned that there has been no upward de-anchoring of inflation expectations; if anything, downside risks are emerging. Concerns about the hypothesis of persistently high core inflation have also proven to be groundless: indeed, core inflation has declined in recent months, following the fall in headline inflation, in line with past empirical evidence. Similarly, fears that inflation would stop falling after the initial rapid decline – the ‘last mile problem’ – now appear unwarranted: inflation is falling at the same rate or faster than it has risen. The risk remains that still strong nominal wage growth could reignite inflation. This possibility should not be underestimated, but a closer look at the data allays these concerns. Labour is only one production factor, and its share of total costs for firms is much lower than that of intermediate goods and energy. Current wage growth, while higher than in 2021 and 2022, is offset by the decline in other costs that has been ongoing for months. The increase in firms’ total production costs – which is the main driver of inflation – has gradually fallen to zero, easing inflationary pressures. In line with these developments, firms do not expect total costs to accelerate in the coming months. The effects of stagnating total production costs are compounded by those of weak demand for goods and services, which makes firms less likely to pass on wage increases to prices, for fear of losing market share. Therefore, a hypothetical increase in wage growth is currently highly unlikely to trigger a wage-price spiral. Moreover, with inflationary pressures tilted to the downside and corporate profits high, some recovery in the purchasing power of wages, after the recent losses, is to be expected and will support consumption and the economic recovery. Conflicts in the Middle East also pose risks to inflation. However, maritime transport only accounts for a small share of total production costs. Here too, low demand and high inventories reduce the likelihood of higher transport costs being passed on to prices to a significant extent. Nonetheless, it cannot be ruled out that the situation will worsen and that tensions will escalate, affecting the supply and prices of energy products. These developments will need to be monitored closely.’
‘Macroeconomic conditions suggest that disinflation is at an advanced stage, and progress towards the 2% target continues to be rapid. The time for a reversal of the monetary policy stance is fast approaching. The March ECB staff projections will provide useful elements for assessing the next monetary policy move. The first step, but also the various options on the way to monetary policy normalization must be carefully weighed. We need to consider the pros and cons of cutting interest rates quickly and gradually, as opposed to later and more aggressively, which could increase volatility in financial markets and economic activity.’
Pablo Hernández de Cos (Banco de España)
11 February 2024
‘Right now, more important than calendar-based guidance, is understanding under what circumstances a rate cut would be warranted. In this regard, it is important to acknowledge that the disinflationary process in the euro area is now well advanced. This process is expected to continue in the coming quarters, with the latest Eurosystem projections seeing inflation easing to around our 2% objective in 2025 and 2026. And our confidence in the staff projections has increased notably, since the forecast errors have been very small and even negative in recent quarters, meaning that inflation figures have been somewhat below projections. Monetary policy continues to be strongly passed through to financing conditions and is dampening demand, with the risks to the growth outlook remaining tilted to the downside. All in all, we are now more confident that the next interest rate movement will be a cut. In any case, given the high level of uncertainty, our decisions will continue to be based on the data and in particular on our assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. In March we will have more information available including, in particular, a new comprehensive macroeconomic projection exercise. The projections will be key to assessing, first, whether we can be sufficiently confident that our 2% medium-term target will be achieved, taking into account the associated risks, and second, the rate path that is compatible with reaching our symmetric target.’
‘The projected gradual road to recovery would rely above all on private consumption, buoyed by the rise in households’ real disposable income in an environment of rising wages and falling inflation. External demand is also expected to perform positively, although its contribution to growth will be limited by euro area exports’ loss of market share. However, uncertainty remains high and the risks to economic growth remain tilted to the downside. In particular, the war in Ukraine and the tragic conflict in the Middle East are key sources of geopolitical risk.’
‘We’re not here to confirm the expectations of the market. We follow our own assessment.’
‘It is already very important for European citizens to know that we are confident the next move will be a cut. I think it's also wise not to be precise.’
Klaas Knot (De Nederlandsche Bank)
28 January 2023
‘We now have a credible prospect that inflation will return to 2% in 2025. The only piece that's missing is the conviction that wage growth will adapt to that lower inflation.’ Once this is assured, the ECB ‘will be able to lower interest rates a bit.’
Pierre Wunsch (Belgian National Bank)
08 February 2024
‘To be frank with you, I mean, if it would not be about remuneration – wages are still running, depending on the measure, 5, 4.5% - I mean, [unintelligible] inflation is at 2, growth is weak. We would already be talking about reducing rates if it were not for wages. And I would be completely fine with it. But we have a problem: we have still wages running at a level which is not compatible with 2%. So, in our projections, there is a combination of … growth of wages going down and profit margins absorbing part of the shock. And we see that, at least on the profit margin front. And we have some indication that, you know, the dynamics of wage growth is decelerating, but not very strongly. … There is maybe here a bias for waiting a little bit to get more information. … Now, let’s be honest. I mean, we won’t get full comfort within a reasonable period. So, I think there is some value to waiting to get some more data on wages, but at some point, we are going to have to bet on where inflation’s going. We won’t have full comfort before we [unintelligible] start cutting rates. So, I’m on the side of those that believe there is some value to waiting. But again, we won’t get full comfort.’
Mārtiņš Kazāks (Latvijas Banka)
09 February 2024
‘That dragon has been pushed to the ground, but it has not been killed yet. The nature of inflation is insidious. Therefore, we will need to be patient a while longer. But the good news is that inflation has come down sharply and monetary policy has helped push it down. Once there is confidence that inflation has been killed, [interest] rates will come down.’
‘If nothing negative happens that will push inflation up again, then rates will start to decrease this year. When exactly, it will depend on what the data say, what will happen to the dynamics of inflation, what will happen to the strength of the economy.’
‘We have to wait until the story of inflation is over. If you hurry, inflation and also rates can start to rise again.’
‘At the moment, there are expectations that the rates could be cut in the spring, in March or April — I wouldn’t be optimistic. I would be cautious and I would wait until the inflation story is over. Then we can safely breathe and those rates can be lowered step by step.’
‘That [rushing to cut] would be by all means worse than waiting just a bit. We’ve seen from the 70s and 80s that if one starts to be relaxed too early then there’s the risk that inflation starts to come back and then one would need to raise rates much more.’
‘There are many ways to get to 2% — you could do earlier smaller steps or you could somewhat later larger steps — that will be all data dependent.’
Tuomas Välimäki (Bank of Finland)
NO UPDATE
Madis Müller (Eesti Pank)
26 January 2024
‘At this meeting of the Governing Council of the European Central Bank, we decided to keep the interest rates of the central bank at the same level. This was probably expected by all those who closely follow the activities of the central bank, and it is reasonable to expect the same from the next several monetary policy sessions.’
‘…it is not surprising that market analysts have begun to speculate more actively about when the European Central Bank will start lowering interest rates. … However, as a central banker, I have to admit that it is still too early to talk about the next interest rate decisions in a definite form. For this, there is simply too little confidence that the upward pressure on prices has eased to a sufficient extent. The core inflation indicator, which describes more permanent price pressure and excludes the impact of energy and food prices, is only close to 3.5%, and wage growth, which directly affects the prices of services in particular, is close to 5% on average in the euro area. This is not in line with the target set by the central bank, which is a sustained slowdown in price growth to close to 2%. At the same time, it is also clear that high interest rates have already cooled down the momentum of the credit market and the economy, which has also weakened the pressure for price increases.’
‘In essence, the Eurozone economy is stagnating at the moment, and it is not yet clear how quickly the expected recovery will actually materialise. The reason for moderate optimism is given by the purchasing managers' indices that have strengthened in recent months, which describe the expectations of companies and new orders for the coming year. Also, in the last months of last year, the global trade volume started to grow again. These are all positive signs. The labour market is still in a strong state - unemployment is at a record low in the euro area and the pace of wage growth is quite fast. After all, this is also a sign of entrepreneurs' faith in a better near future, because otherwise people would certainly not be recruited. At the same time, the current situation of the euro area economy does not seem too encouraging, if you look at the business volumes of companies or the behaviour and confidence of consumers.’
Boštjan Vasle (Banka Slovenije)
26 January 2024
‘The short-term price developments present a favourable outlook for the ongoing anti-inflation process. The main risks of more persistent high inflation continue to come from the tightness of the labour market and elevated wage growth.’
‘Our assessment is that if maintained sufficiently long, the current level of interest rates will make a significant contribution to the timely return of inflation to its target level. The next steps will continue to depend on the situation as it stands at the time, in particular on the economic and financial data, developments in core inflation, and the effectiveness of our measures. Our decisions will ensure that interest rates are kept at sufficiently restrictive levels for as long as it takes for inflation to return to our 2% target in a timely manner.’
Yannis Stournaras (Bank of Greece)
05 February 2024
‘Already, for several months, there has been a significant de-escalation of inflation worldwide and, in 2024, the reduction of key central bank interest rates is expected to begin.’
‘The news is good on the inflation front, and if this trend continues then we will be able to start reducing interest rates after the end of the year’s first half.’
Peter Kažimír (National Bank of Slovakia)
29 January 2024
‘We stand at a crucial crossroads marked by slowing inflation. I stress that patience is essential before making pivotal decisions concerning the timing of the cut in our interest rates. Incoming data and the upcoming March update of our inflation projections will guide our decisions. The peak of the tightening cycle is behind us. The next move will be a cut and it is within our reach. I am confident that the exact timing, whether in April or June, is secondary to the decision’s impact. The latter seems more probable, but I will not jump to premature conclusions on the timing. As soon as it is warranted, we won’t hesitate to act. We are not behind the curve; it’s more the case that the market has got ahead of events since December. Acting hastily based on short-term surprises without having more clarity about the medium term would be risky. It could easily derail the progress we have made towards reaching our target. We exercise patience in the name of stability, that’s what we need. The global landscape remains riddled by uncertainties. We need to see if the early-year repricing delivers any surprises in the other direction. Wages agreements for the coming years are still an unpredictable factor too – a cat in the bag. The risks of a premature cut, in my view, are much greater than those of acting a bit later. One should always keep in mind, that we can act as swiftly and flexibly as necessary. I am confident in our capability and willingness to do so if needed. In a nutshell – though the signs are good, we do not yet have enough information to make a confident conclusion. For this reason, discussing the timing of an interest rate cut at this point is premature. Our decisions will be driven by data and subjected to rigorous analysis. Patience, in this context, is more than a virtue; it’s the cornerstone of sound economic policy. That’s desired and it will also be delivered.’
Mário Centeno (Banco de Portugal)
06 February 2024
‘All the indicators we have show that inflation has been falling. In fact, at a rate that is faster than the one at which it climbed. … What is necessary for the monetary policy cycle to continue is that we have confidence in the degree of permanence of this process, which the next few months, I am sure, will bring, if, in the meantime, there are not more adverse shocks such as, unfortunately, we have seen for the past a few years and which led to a rise in prices.’
‘The target will be reached in the near future. Let's talk openly: cutting interest rates doesn't just happen when inflation reaches 2%. That's not how it works, because we know that there is a convergence towards that value. And, as long as this convergence is anchored, is firm, and is sustained, monetary policy can and should react.’
‘[W]e are at a stage in which, after stabilising policy rates last September, we can now begin to consider the new phase that will bring interest rates to levels compatible with medium-term 2% inflation. It is an expectation that we all have and which has very solid bases in the data we are receiving. Inflation is falling and the markets already have expectations of a reduction in rates in the near future. … For this expectation to be solid and to maintain the trajectory of Euribor and in this moment of reduction, we need to see inflation data in the coming months remaining compatible with our forecasts. We are convinced that this will happen and therefore I think that such a new phase of the monetary policy cycle will certainly materialise and - I will use an expression that many at the ECB do not like, but which is effective - provide some relief. I must not fail to make the following warning: even when interest rates start to fall, the restrictiveness of monetary policy will remain, it will remain for some time until the moment we can align this interest rate with the value that in the medium and long term will be compatible with inflation remaining at 2%.’
‘We always follow the data, this is the rule, any deviation from this statement does not follow the rules that we have established at the ECB and therefore we are not dependent on the calendar. We do not have indicators that allow us from the point of view of policy to establish dates for a certain event to take place. We have been surprised on the downside by the result of inflation, the numbers have been lower than our forecasts, the European economy has not grown for five quarters.’
‘The problem with assuming the rate cut debate is that it creates speculative pressure about when it will happen. Of course, it is highly likely that the next move, finally, when we leave this state of pause in the interest rates, will be to reduce them. When will it happen? It is still uncertain, the data will determine it. All the information that has been published and disseminated and that we have received in multiple analyses shows that this moment will come sooner than, for example, we could have thought six or nine months ago because inflation has been falling faster than we expected. But the exact date, the data will tell.’
‘Monetary policy has been at work, but with the usual transmission lag
o Strong impact on financial conditions and aggregate demand
• Contributes to the disinflationary process
• Additional restrictive effect on consumption and investment
• Under current conjecture, need to carefully assess:
o Risk of de-anchoring expectations (on the downside)
o Risks of overshooting
• Going forward: gradual approach; remain data dependent’
‘There is no evidence of second order effects due to wages pressures
• But…no room for complacency in the labour market itself – wage demands – and policy wise – fiscal and monetary.
Unfortunately, labour market slumps do not come gradually’
‘[I]f inflation is going down and it is coming down very fast — actually faster than it went up — monetary policy ought to respond to that.’
‘We will do our job in the next few months bringing stability also in this process and making sure that when interest rates need to go down, they will go down. That will of course maintain them in restrictive territory for quite some time to make sure that inflation is not back.’
‘We cannot have an economy that does not grow, that’s my main concern about Europe.’
‘[T]he first quarter of 2024 may be the sixth [quarter without growth]. This is 1 1/2 years of stagnant economy.’
‘One of those [ways to stimulate the economy] needs to come from monetary policy, from these expectations that need to be materialized that at some point interest rates will be cut.’
‘I think we need to have confidence in the results that monetary policy is achieving. Patience is always needed in these processes, because these issues take time and we will remain dependent on data. I think the decision [of Thursday] is consistent with this.’
‘I think the most important message is that we currently have a lot of evidence that inflation is falling in a sustained manner, compatible with the medium-term objective, and that monetary policy has made a significant contribution for this development and that we will remain dependent on data. There is no question of a calendar, there is no fixed date on which we can make this or that decision. It is also necessary to understand that from yesterday's message comes an idea, in my interpretation: all options are open and that it is very clear that the direction of the decisions in the next meetings, is to evaluate the adequacy of the level of interest rates to this goal.’
‘Inflation has been systematically lower than we have predicted and this has happened in recent months, which is a very important period as it is the period of approach to the medium-term objective. And therefore, we should perhaps even be a little more sensitive to these news. And I say this because the objective is 2%. And we are sensitive to deviations, either up or down from that goal. And we are almost obliged to make decisions that are compatible with the elimination of these deviations. In other words, if there is no further shock that could justify an inflationary process, the terminal rate has been reached and we reached it in September. And it is natural that the next movement will be a movement to lower rates.
‘I'll be very clear: we don't need to wait for salary data in May to get an idea about the inflation trajectory.’
‘As for the labour market, we have been paying close attention to salary data for more than two years and absolutely nothing has happened that could tell us that there are second-round effects that are materializing - companies' total costs, at the moment, are to fall. A gradual recovery in real wages is expected, it has already happened in the United States, it has not yet happened in Europe, the latest data we have still does not show a recovery in wages on a quarterly basis. Normally salaries are a backward looking indicator , salary negotiation is done with information from the past, and therefore we have to be very careful with how we read a salary growth of 3%, a salary growth of 4%. We do expect a recovery in real wages in the medium term, but it has to be gradual and so we all have to pay attention. But there is a lot more information and [being] data dependent is not [being] wage data dependent .
‘Ideally, it [monetary policy easing] would be a continuous, sustainable process, without there being back-and-forth , and not abrupt.’
‘It [25bp steps] is a possible metric. We have also been rising in steps of 25bp, when the process began to stabilise. I think it's a good metric, but that decision is yet to be made. But always understood gradually. We should never hold our cards until the last minute, because this is more typical of games other than monetary policy.’
Gabriel Makhlouf (Central Bank of Ireland)
08 February 2024
‘The rate of inflation is falling and any change in our monetary policy stance will depend on the data and evidence as we aim to reach our 2% target in a sustainable way.’
‘Economic activity and inflation weakened in euro area in the second half of 2023. The short-term outlook points to stagnation in activity in the face of tighter financing conditions, weak business and consumer confidence and low foreign demand. Over the medium term the economy should gradually return to growth as both domestic and foreign demand recover. A broad-based disinflationary process is unfolding and is expected to continue during 2024 as the effects of past energy price shocks and other pressures fade. The pace of growth in labour costs will then be the dominant driver of core inflation. … Following our latest meeting on 25 January, my colleagues and I (on the ECB’s Governing Council) decided to keep the three key ECB interest rates unchanged. The 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. We consider that policy rates are now at levels that, if maintained for a sufficiently long duration, will make a substantial contribution to bringing euro area inflation back to target. Looking ahead, we should remain open-minded about the rate path, which is the essence of data dependence. With disinflation well underway, we are confident in sustainably reaching our target of 2%.’
‘Monetary policy is working and we’re seeing disinflation ... inflation is tracking downward in the EU and also in Ireland.’
‘I think we’ve probably reached the top of the ladder.’
Gediminas Šimkus (Bank of Lithuania)
17 January 2024
‘The further we go into 2024, the greater the chance of a rate cut. … The increase in the odds is exponential, not linear.’
Robert Holzmann (Austrian National Bank)
08 February 2024
‘There is a certain probability that there will be no rate cut at all this year or only at the very end of the year. In the past it has been shown again and again that combating inflation and the time needed for this are often underestimated.’
‘Much of what caused the inflation rate to fall recently was so-called statistical base effects: energy was more expensive in January a year ago, and the price declines are correspondingly strong now. This is not yet a signal that we are already moving towards the ECB's target of 2%. Risk assessment also plays an important role. There’s no green light there yet. … Geopolitical risks have also increased. ... All of this should make us cautious. There is also a strategic dominance of waiting: it is easier to cut interest rates more quickly if inflation falls faster than expected than it is to raise them again immediately after a rate cut if there is a setback in inflation. The loss of trust would be very high.’
‘Companies will impose what the market will bear. This will be an exact calculation. Ultimately there will be price increases. This is also made easier by the fact that the governments' fiscal policy, if all special funds are taken into account, continues to be expansionary.’
‘If it were the case that inflation moved towards the 2% mark faster than expected or even fell below 2%, we would of course react accordingly. But certainly not rushed. It is also important here that the financial markets can adapt to new scenarios.’
Boris Vujčić (Croatian National Bank)
04 February 2024
‘We need to have patience at the moment before we get into the easing cycle, to make sure that wage costs aren’t translating into sustained wage pressure.’
High corporate profits mean companies can absorb ‘much of the wage costs through their profit margins … But you cannot be sure about that until you see it.’
A wait-and-see approach is called for ‘in order not to repeat the mistakes that central banks have sometimes done in the past.’
‘The data on the GDP figures tell us that we are about to end up where I for a long time thought we would, and that is a soft landing. So, the risk of a recession I guess is smaller and smaller. … we do expect that the economy will pick up this year, so we’re going to have a modest rate of growth coupled with further disinflation. We of course in thinking about the monetary policy rate moves look at the whole set of data, not at a single data at a single point in time, so we will still have to wait for more data … before we make a decision.’
‘I would say that this difference between April and June doesn’t really make much difference for the economy. I think it’s more important that we achieve a kind of a smooth transition to the rate-cutting, whereby as I said before, I think 25bp moves are preferable than to larger moves. Larger moves happen if you feel you are a bit behind the curve. … 25bp start would be, I think, preferable. And then, I think the more important issue than the date – the date is important for rate traders, but for the economy, I think the more important is the pace. It doesn’t have to be continuous like we saw on the way up — but there will be some, probably, pauses. And then, of course, where do we end up on the way down?’
‘It [the communication at the press conference] nicely reflected the discussion we had in the two days. But lately I have the feeling that markets take whatever you say as being dovish. They have been very trigger happy.’
‘We need patience at the moment to get enough data to be confident that inflation is really firmly sustainably on the way to our medium-term target. That will come gradually, that will come over every month.’
Favours 25bp cuts
‘There is always the possibility’ of bigger steps. 25bp steps are a ‘smoother way of running monetary policy, but of course there’s also the possibility of doing more if warranted by the data.’
Gaston Reinesch (Central Bank of Luxembourg)
NO UPDATE
Constantinos Herodotou (Central Bank of Cyprus)
06 February 2024
‘You can’t know from now or announce from now when the interest-rates cuts will start. We need to see data.’
‘Taking into account the progress in inflation as recorded in recent months and without any further unexpected developments, interest rate cuts should be expected within 2024 and always based on the assessment of economic and financial data. The descent of interest rates should not begin without being absolutely certain because then inflation may return. But neither should there be an unnecessary delay in reducing interest rates in order not to affect economic growth. So we have to rely on incoming data to pick when in 2024 interest rates will start to come down.’
‘We are taking into account the progress made and I would say there will definitely be some interest rate cuts within 2024, unless we see some unexpected developments.’
‘It is important to say that the decrease of interest rates should not start too soon because then inflation may return, and that will be a negative development, because then we will have to act again with measures to limit it.’
‘So, based on the data, we have to see when it is justified to see a decrease in interest rates within 2024.’