At its monetary policy meeting in Frankfurt on Thursday 7 March, 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. In addition, the Governing Council seems to be heading for June to pave the way for a possible rate cut.
Macroeconomic projections
ECB staff have revised their inflation and growth projections.
Projections for overall inflation, calculated using the harmonised consumer price index, are now estimated at an average of 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026.
Underlying inflation excluding energy and food is now estimated to average 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026.
Projections for real GDP growth have been revised downwards to 0.6% for 2024. A recovery to 1.5% in 2025 and 1.6% in 2026 is expected, fuelled by consumption and investment.
According to President Christine Lagarde, the ECB has not sacrificed growth, adding that this was a slight delay in a process of growth recovery that the ECB had anticipated (see EUROPE 13336/14). She pointed out that errors in the teams’ projections had been significantly reduced.
Towards rate cuts?
The ECB President stated that the Governing Council had not discussed cutting rates at all at the March meeting, but had simply begun to discuss reducing the ECB’s restrictive stance. “I would use the analogy of seasons and episodes. We are still in the holding season. We will move to the restrictiveness season. That will take a while, and once that season is over, we will move into a normalisation season. But if that’s the definition of ‘gradual’, so be it. But I would not commit to any kind of pace rhythm magnitude because we will continue to be data dependent”, stressed Ms Lagarde.
She said that the ECB needed more data in order to be confident about achieving its price stability objective. In her view, there was a broad consensus within the Governing Council that the ECB would know a little more in April, but a lot more in June.
The President indicated that the trends observed were good and that the ECB was approaching the 2% inflation target in the medium term, but had not yet achieved it. However, she made it clear that the Governing Council would not wait to reach the 2% or observe the 2% target before taking a decision, and that under no circumstances would this decision be taken on the basis of a single criterion, she added.
According to Ms Lagarde, the indications of a trend are not yet solid or lasting enough. And this is important, she stressed, because the ECB, which will continue its meeting-by-meeting approach based on the three criteria [inflation projections provided by economic and monetary data, underlying inflation and the level of transmission of the ECB’s monetary policy, editor’s note], wants to remain dependent on the data.
Salary and profit trends under the microscope
While most trends are encouraging, domestic inflation is resilient, said President Lagarde, adding that domestic inflation was largely driven by services. She added that as many services are very labour-intensive, they are sensitive to wage trends.
The ECB will therefore be paying close attention to two components of inflation: wages and profits, in particular by observing unit labour cost and unit profit. This, Ms Lagarde pointed out, is “to see whether there is confirmation or not of this beginning of moderation that we are seeing on the wage front, and confirmation of what has been observed on the profits as to whether or not profits absorb and act as a buffer for the wage increases.
So it's the combination of the two. I’m not suggesting that wages should decline or that wage growth should be dampened”, she added.
In addition, she said that the transmission of the ECB’s monetary policy was good and solid.
Financial stability and commercial property
ECB Vice-President Luis de Guindos stressed that commercial property was one of the main risks to financial stability at the moment, and that the ECB was monitoring the sector. He said that European banks were not, on average, heavily exposed to the commercial property sector, with commercial property lending accounting for around 5% of the total assets of European banks.
However, some banks have high concentrations in their portfolios. In addition, non-banks are more exposed to this risk than banks.
Capital Markets Union
Aside from monetary issues, Christine Lagarde indicated that the Governing Council had significantly updated the ECB’s statement on the Capital Markets Union and had unanimously agreed on a new, more specific statement calling for faster progress.
The Governing Council is also waiting with interest for two reports: Mario Draghi’s on the competitiveness of the European economy (see EUROPE 13358/9) and Enrico Letta’s on the future of the Single Market (see EUROPE 13336/7).
Decisions: https://aeur.eu/f/b70
Macroeconomic projections: https://aeur.eu/f/b71
The CMU declaration: https://aeur.eu/f/b73 (Original version in French by Émilie Vanderhulst)