Unsurprisingly, at its monetary policy meeting in Frankfurt on Thursday 25 January, the Governing Council of the European Central Bank (ECB) decided to keep the ECB’s three key interest rates unchanged. The interest rate on the main refinancing operations therefore remains at 4.50%, the rate on the marginal lending facility at 4.75%, and the rate on the deposit facility at 4.00%, its highest level since the creation of the euro.
Christine Lagarde, President of the ECB, stressed that the disinflation process was underway.
According to the President, the information available confirms the Eurosystem’s forecasts, which showed a downward inflation outlook, despite a recent trend and a slight rise in December (see EUROPE 13322/16) expected by the Eurosystem teams (see EUROPE 13314/11), which materialised weaker than anticipated and caused by a base effect “largely attributable to German measures”.
However, referring to underlying inflation, the President pointed out that domestic inflation still seemed to be resisting these falls.
Towards a rate cut?
Christine Lagarde stated that there was a consensus at the Governing Council table on the premature nature of a discussion on a rate cut.
Without providing any forward guidance, she indicated: “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”.
Another point on which there was consensus, according to the President, was the desire to be dependent on data for future monetary policy decisions rather than on a timetable.
However, the President confirmed that she stood by her statements made at the World Economic Forum in Davos on Bloomberg TV, in which she said that rate cuts were likely this summer, although later than the markets were expecting.
Macroeconomic factors
The European economy is likely to have stagnated in the last quarter of 2023. Without categorically describing it as a recession, the President indicated that the ECB recognised the weakness of European growth and the risk weighing on this reality.
The President also pointed out that, without wishing to speak of bottlenecks in supply chains, there had been an increase in transport costs and times.
For the President, observers believe that this will have a moderate impact, but the ECB will remain attentive to developments, particularly in the Red Sea. If the conflict in the region were to develop further, this would pose an additional risk.
Data examined for decision-making purposes and, in particular, data concerning employment
The President pointed out that, when examining the available data, there was no fixation on wages alone, but that they were important because of their contribution to the formation of prices for services. Services are one of the sectors where inflationary pressures are most persistent.
Although wage increases are keeping prices high, the ECB does not foresee any second round effects, which would result in a spiral of wage increases fuelling inflation.
Christine Lagarde pointed out that the Eurosystem’s basic scenario was that wage increases would be gradually absorbed over time by a gradual reduction in unit margins, due in particular to falling demand linked in part to the ECB’s restrictive policy, in her view. “And that’s exactly what we’re seeing”, said the President.
Similarly, the ECB is counting on the combined effect of this catch-up phenomenon for employees and a fall in inflation to reactivate purchasing power, which in turn would fuel a recovery in growth in 2024.
The President indicated that the labour market remained tight, even though the ECB’s wage tracker showed a fall in the number of job vacancies.
In addition to these data on employment, the President also stressed the importance of a broad spectrum of indicators, including data on budgetary policies. Christine Lagarde also stressed that energy prices, which are volatile by nature, would continue to be extremely relevant.
Monetary policy transmission
In addition, the ECB believes that its restrictive monetary policy is continuing to have an impact on financing conditions and curbing demand. Interest rates on business loans fell slightly to 5.2% in November. Mortgage interest rates rose to 4.0%.
Survey
President Lagarde, asked about the recent survey published by the IPSO syndicate and revealed by Politico (see EUROPE 13334/26), emphasised that the ECB conducts internal surveys in a way that she described as “very technically proof way that we can trust”, stressing the positive responses from the team and the high levels of satisfaction shown by employees in these surveys regarding their work at the Central Bank. “As far as I’m concerned, I don’t matter as long as I’m running an institution made up of talented people, not just economists, who are committed to doing their job and delivering results”, she said.
Neutral interest rate
Asked about the neutral rate, the Chair said that such a rate would not be known until it was achieved. At a Q&A session in January (see EUROPE 13325/13), ECB Executive Board member Isabel Schnabel was also cautious, but estimated that such a rate could turn out to be slightly higher than before the Covid-19 pandemic, due in particular to the investment needed for green and digital transitions, as well as geopolitical movements.
Operational framework for monetary policy
Finally, Christine Lagarde indicated that work on the operational framework was progressing and should be completed by the end of spring.
Link to decisions: https://aeur.eu/f/akw (Original version in French by Émilie Vanderhulst)