/
20230202_President Lagarde presents the latest monetary policy decisi.txt
1 lines (1 loc) · 12.1 KB
/
20230202_President Lagarde presents the latest monetary policy decisi.txt
1
You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Katie Ranger. Today is Thursday, 2nd of February, 2023, and it's time for our regular episode with the latest monetary policy decisions taken by the ECB's Governing Council. Here's President Christine Lagarde presenting those decisions in our press conference. The governing council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points, and we expect to raise them further. In view of the underlying inflation pressures, we intend and we expect to raise them further. In view of the underlying inflation pressures, we intend to raise interest rates by another 50 basis points at our next monetary policy meeting in March and we will then evaluate the subsequent path of our monetary policy. path of our monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In an event future policy decision policy rate decisions will continue to be data-dependent and follow meeting by meetings approach. The Governing Council today also decided on the modalities for reducing the Eurosystems' holdings of securities under the Asset Purchase Programme. As communicated in December, the Asset Purchase Program. As communicated in December, the Asset Purchase Program portfolio will decline by 15 billion euros per month on average from the beginning of March until the end of June 23. And the subsequent pace of portfolio reduction will be determined over time. Partial reinvestments will be conducted broadly in line with current practices. In particular, the remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent program of the APP and under the public sector purchase program to the share of redemptions of each jurisdiction and across national and supranational issues. For our corporate bond purchases, the remaining reinvestments will be tilted more strongly towards issues with a better climate performance. Without prejudice to our price stability objective, this approach will support the gradual decarbonisation of the Eurosystems corporate bond holdings in line with the goals of the Parisisation of the Eurosystem's corporate bond holdings in line with the goals of the Paris Agreement. The decisions taken today are set out in a press release available on our websites. The detailed modalities for reducing the APP holdings are described in a separate press released which will be published at 345 local time. I will now outline in more details how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions developing and will then explain our assessment of financial and monetary conditions. So looking at the economic activity first, according to Eurostat's preliminary flash estimate, the Euro area economy grew by 0.1% in the fourth quarter of 2022. While above the December Euro system staff projections, this outcome means that economic activity has slowed markedly since mid-22 and we expected to stay weak in the near term. Subdue global activity and high geopolitical uncertainty, especially owing to Russia's unjustified war against Ukraine and its people, continue to act as headwinds to euro-area growth. Together with high inflation and tighter financing conditions, these headwinds dampen spending and production, especially in the manufacturing sector. However, supply bottlenecks are gradually easing, the supply of gas has become more secure, firms are still working off large-order backlogs, and confidence is improving. Moreover, output in the services sector has been holding up supported by continuing reopening effects and stronger demand for leisure activities. Rising wages and the recent decline in energy price inflation are also set to ease the loss of purchasing power that many people have experienced owing to high inflation. This in turn will support consumption. Overall, the economy has proved more resilient than expected and should recover over the coming quarters. The unemployment rate remained at its historical low of 6.6% in December 2022. However, the rate at which jobs are being created may slow and unemployment could rise over the coming quarters. Government support measures to shield the economy from the impact of high energy prices should be temporary, targeted, and tailored to preserving incentives to consume less energy. In particular, as the energy crisis becomes less acute, it is important to now start rolling these measures back promptly in line with the fall in energy prices and in a concerted manner. Any such measures falling short of these principles are likely to drive up medium-term inflationary pressures, which would call for a stronger monetary policy response. Moreover, in line with the EU's economic governance framework, fiscal policies should be oriented towards making our economy more productive and gradually bringing down high public debt. Policies to enhance the euro area's supply capacity, especially in the energy sector, can help reduce price pressures in the medium term. To that end, governments should swiftly implement their investment and structural reform plans under the Next Generation EU program. The reform of the EU's economic governance framework should be concluded rapidly. Turning now to inflation. According to preliminary Eurostat's flash estimate, which has been calculated using Eurostat estimates for Germany, inflation was 8.5% in January. This would be 0.7% percentage point lower than the December figure, with the decline owing mainly to a renewed sharp drop in energy prices. Market-based indicators suggest that energy prices over the coming years will be significantly lower than expected at the time of our last meeting. Food price inflation edged higher to 14.1 percent as the past surge in the cost of energy and of other inputs for food production is still feeding through to consumer prices. Price pressures remain strong, partly because high energy costs are spreading throughout the economy. Inflation excluding energy and food remained at 5.2% in January, with inflation for non-energy industrial goods rising to 6.9% and services inflation declining to 4.2%. Other indicators of underlying inflation are also still high. Government measures to compensate households for high energy prices will dampen inflation in 23, but are expected to raise inflation once they expire. At the same time, the scale of some of these measures depends on the evolution of energy prices and their expected contribution to inflation is particularly uncertain. Although supply bottlenecks are gradually easing, their delayed effects are still pushing up goods price inflation. The same holds true for the lifting of pandemic-related restrictions. While weakening, the effect of pent-up demands is still driving up prices, especially in the services sector. Wages. Wages are growing faster, supported by robust labour markets, with some catch-up to high inflation becoming the main theme in wage negotiations. At the same time, recent data on wage dynamics have been in line with the December Euro system staff staff projections. At the same time, recent data on wage dynamics have been in line with the December Euro system staff projections. Most measures of longer term inflation expectations currently stand at around 2% but these warrant continued monitoring. continued monitoring. Turning to our risk assessment, the risks to the outlook for economic growth have become more balanced. Russia's unjustified war against Ukraine and its people continues to be a significant downside risk to the economy and could again push up the costs of energy and food. There could also be an additional drag on euro-area growth if the world economy weakened more sharply than we expect. Moreover, the recovery would face obstacles if the pandemic were to re-intensify and cause renewed supply disruptions. However, the energy shock could fade away faster than anticipated, and euro-area companies could adapt more quickly to the challenging international environment. This would support higher growth than currently expected. The risks to the inflation outlook have also become more balanced, especially in the near term. On the upside, existing pipeline pressures could still send retail prices higher in the near term. In addition a stronger than expected economic rebound in China could give a fresh boost to commodity prices and foreign demand. Domestic factors such as a persistent rise in inflation expectations above our target are higher than anticipated wage rises could drive inflation higher also over the medium term. On the downside, the recent fall in energy prices, if it persists, may slow inflation more rapidly than expected. This downward pressure in the energy component could then also translate into weaker could then also translate into weaker may slow inflation more rapidly than expected. This downward pressure in the energy component could then also translate into weaker dynamics for underlying inflation. A further weakening of demand would also contribute to lower price pressures than currently anticipated, especially over the medium term. So let's now look at the financial and monetary conditions. As we tighten monetary policy, market interest rates are rising further and credit to the private sector is becoming more expensive. Bank lending to firms has deceler accelerated sharply over recent months. This partly stems from lower financing needs for inventories, but it also reflects weakening demand for loans to finance business investment in the context of a steep upward move in bank lending rates and a considerable tightening in credit standards, which is also visible in our most recent bank lending survey. Household borrowing has continued to weaken as well, reflecting rising lending rates, tighter credit standards, and a sharp fall in the demand for mortgages. As loan creation decelerates, money growth is also slowing rapidly, with a marked decline in its most liquid components, including overnight deposits, only partially compensated by a shift to term deposits. So summing up, the governing council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium term target. Accordingly, we today decided to raise the three key ECB interest rates by 50 basis points and we expect to raise them further. In view of the underlying inflation pressures, we intend to raise interest rates by another 50 basis points at our next monetary policy meeting in March and we will then evaluate the subsequent path of our monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of persistent upward shift in inflation expectations. Moreover from the beginning of March 2023 the APP portfolio will decline at a measured and predictable pace as the Euro system will not reinvest all of the principal payments from maturing securities. Our future policy rate decisions will continue to be data dependent and determine meeting by meetings. We stand ready to adjust all of our instruments within our mandate to ensure that inflation returns to our medium-term target. Those were the decisions taken by the ECB's governing council today. If you want to find out more, check out the show notes for the full transcript and the Q&A session with journalists. We'll also link to an easy-to-understand overview of what we decided. The next monetary policy press conference will be held on the 16th of March 2023. In the meantime, keep an eye on the ECB podcast for new episodes. From the European Central Bank, I'm Katie Ranger, and this was another episode of the ECB podcast. If you like what you've heard, please subscribe and leave us a review. Until next time, thanks for listening.