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Lagarde comments at ECB press conference

·8-min read

FRANKFURT, Sept 8 (Reuters) - The European Central Bankraised its key interest rates by an unprecedented 75 basispoints on Thursday and signalled further hikes, prioritising thefight against inflation even as the bloc's economy is headingfor a likely winter recession.

Following are highlights of ECB President Christine Lagarde's comments at a news conference after the policy meeting.

CONTRAST WITH U.S. INFLATION

“If you compare the situation of the U.S. and that of Europe, and in particular in relation to inflation, inflation in the United states is largely driven by demand. In the euro area it is largely driven by supply, not exclusively, there is also a portion of demand in the sources of inflation but it is predominantly supply.

"When you look at the labour market, which is an important phenomenon to appreciate whether we have a risk of further escalation of inflation and second-round effects in particular we see a U.S. market which is some of you say it, red-hot, where the rate of vacancy to unemployed person is 3-1 whereas here, in the euro area at large, it is 0.3-1. So for one vacancy we have three unemployed people, it is a slightly different situation.

"The third difference is that clearly ... the Fed is starting from a different base from that of Europe ... There are multiple other differences that I can give you but those are the ones that matter most for your analysis for the different inflation situation that we have.”

INFLATION SUPPLY-DRIVEN

Inflation is "still predominantly a supply driven-phenomenon. I cannot reduce the price of energy. I cannot convince the big players of this world to reduce gas prices. I cannot reform the electricity market. And I am very pleased to see that the European Commission is considering steps to that effect because monetary policy is not going to reduce the price of energy... It will give a strong signal to people that we are serious and that we will contribute to reducing inflation but if the cause is predominantly ... based on energy prices that keep rocketing, this if for somebody else to do the job."

MORE ON GETTING TO 2%

"We have more steps to that rate at which we believe we will return inflation to 2% in the medium term. If it means that we have to go further than whatever rate you refer to we will do so.

"We have a goal, we have a mission. We have incredibly high inflation numbers, we are not on target in our forecast and we have to take action. We don't want to see second round effects.

"We want economic actors to understand that the ECB is serious about returning inflation back to 2% in whatever decisions they make."

GETTING TO 2% TARGET

“I am not scratching my head around the neutral rate versus the terminal rate versus the … so on and so forth. What we know is that we want to get that 2% medium-term target and we will take the necessary steps along the way in order to get there. We think that it will take several meetings to get there. Some people will ask how many is several? Well, it is probably more than two including this one but it is probably also going to be less than five. Now, I will leave it to you to decide whether it is going to be two, three or four. You have at least a ballpark idea of how long it will take, that is the length of the journey.”

TLTRO

“The TLTRO changes of conditions that were introduced during the pandemic were engineered, designed and intended to encourage the banks to lend to the economy, which is what we all wanted which was what was predominantly done. The TLTRO pricing that was then designed was intended to that effect.

"Is it obvious that as we are shifting to positive territory in terms of interest rates, there are multiple dimensions of our operational frameworks, of our remuneration mechanisms that need to be revisited and this is a matter that we will take up, that will see some resolution it has not yet been debated on the occasion of this particular monetary policy meeting but it’s an overall review that we will obviously conduct in due course."

TERMINAL RATE

"Do I know what is the terminal rate? No."

"It is one we have to decide as we get closer."

NEUTRAL RATE

"What I know today is that zero is not the neutral rate and

that where we are is not the neutral rate. We're heading in that direction. It takes a frontloading, it will take further hikes in the next several meetings of a magnitude and at a pace that will be determined meeting by meeting and on the basis of the data that we receive, but we're certainly heading there because that's where we believe that we will actually deliver on our 2% medium term target as indicated in our strategy."

SUPPLY SHOCK

"Obviously if we are faced with a major supply shock, if for instance gas prices were to continue to skyrocket, we will take that into account both in terms of the consequences for growth which would be recessionary but also the consequences on inflation.

"And that work will be done in due course, as I said, meeting by meeting."

WON'T TARGET EXCHANGE RATE

"We have noted the depreciation of the euro against a basket of currencies but in particular against the dollar."

"We know it has a lagging impact on inflation."

"But we do not target the exchange rate. We have not done so and we will not do so".

DARK DOWNSIDE SCENARIO

“In the baseline (scenario), we don’t forecast negative growth in ’23. In the downside scenario we do ... it includes in particular a total shutdown of all Russian gas supply. Well, we are almost there, there is still a bit of flow going through the Ukrainian ones. But we also foresee rationing across the whole euro area and no measures of compensation between the shortage of gas supply and other alternative sources of supply. So nothing coming from you know either Asia or other producers of gas, and, in particular, we don’t take into account the LNG that we could be sourcing, more of it, from Norway, from the United States so it’s a really dark downside scenario but it is one that concludes to a ’23 recession."

ON WHETHER ECB LAGGING BEHIND

"To persistently repeat that the European Central Bank is lagging behind I contend that we are on a journey that started back in December where we decided to put an end to asset purchases under PEPP and under APP.

"This was not an isolated decision, but that we would raise rates further. We did not say we would raise interest rates at 75 basis points as if 75 was the norm. It is not."

RATE DECISION UNANIMOUS

“The Governing Council unanimously decided to raise the three key ECB rates by 75 bps. We had different views around the table, a thorough discussion but the outcome of our discussions was a unanimous decision.”

UKRAINE WAR RISK TO GROWTH

"In the context of the slowing global economy, risks to growth are primarily on the downside in particular in the near-term.

"As reflected in the downside scenario in the staff projections, a long- lasting war in Ukraine remains a significant risk to growth, especially if firms and households faced rationing of energy supplies. In such a situation, confidence could deteriorate further and supply side constraints could worsen again."

MORE JOBLESS LIKELY

"Looking ahead, the slowing economy is likely to lead to some increase in the unemployment rate."

FISCAL SUPPORT MUST BE FOCUSED

"Fiscal support measures to cushion the impact of higher energy prices should be temporary and targeted at the most vulnerable households and firms to limit the risk of fuelling inflationary pressures, to enhance the efficiency of public spending, and to preserve debt sustainability."

ECONOMIC SLOWDOWN AHEAD

"We expect the economy to slow down substantially over the remainder of this year. There are four main reasons behind this.

"First, high inflation is dampening spending and production throughout the economy, and these headwinds are reinforced by gas supply disruptions.

"Second, the strong rebound in demand for services that came with the reopening of the economy will lose steam in the coming months.

"Third, the weakening in global demand, also in the context of tighter monetary policy in many major economies, and the worsening terms of trade will mean less support for the euro area economy.

"And fourth, uncertainty remains high and confidence is falling sharply."

ENERGY PRICE IMPACT

"Very high energy prices are reducing the purchasing power of people's income. And although supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse geopolitical situation, especially Russia's unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers."

TODAY'S HIKE

"We took today's decision and expect to raise interest rates further because inflation remains far too high and is likely to stay above our target for an extended period."

INFLATION STILL RISING

"According to Eurostat's flash estimate, inflation reached 9.5% in August. Soaring inflation and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation."

MORE RATE HIKES TO COME

"Over the next several meetings, we expect to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations."

(Reuters Global News Desk)