Inflation declining but still elevated in Euro area: ECB President

July 28, 2023 (MLN): Following the decision of the European Central Bank (ECB) to hike its three main rates by 25bps, Christine Lagarde, President of the ECB while addressing the press conference stated that inflation in the euro area is showing signs of decline but remains at elevated levels.

To combat this, the Governing Council decided to increase the three key ECB interest rates by 25 basis points.

As of June, inflation reached 5.5%, with energy prices falling by 5.6% YoY, and food price inflation remaining high at 11.6%.

Underlying inflation remains overall high due to factors like rising wages and robust profit margins, while some measures of longer-term inflation expectations are still elevated.

The euro area's near-term economic outlook has deteriorated, primarily due to weaker domestic demand resulting from high inflation and tighter financing conditions.

Manufacturing output has been especially affected, along with housing and business investment.

The services sector, particularly tourism-related areas, remains more resilient but is also experiencing a slowdown.

In light of the uncertain economic growth and inflation outlook, the ECB will maintain a data-dependent approach to set restrictive interest rates as necessary.

The remuneration of minimum reserves will be set at 0% to maintain control over the monetary policy stance while reducing interest costs on reserves.

Despite the challenges, the labor market remains robust, with the unemployment rate at a historical low of 6.5% in May.

To address inflationary pressures, the ECB urges governments to roll back energy crisis-related support measures promptly and to implement fiscal policies that enhance productivity and reduce public debt.

The ECB is mindful of both downside and upside risks to inflation, including geopolitical tensions, the global trade environment, and energy and food prices.

Financial and monetary conditions are being closely monitored, with interest rate increases effectively transmitted to financing conditions.

She expressed that the ECB is committed to combating inflation and ensuring a timely return to its medium-term target of 2%.

The Council stands ready to adjust all instruments within its mandate to achieve this goal and preserve the smooth functioning of monetary policy transmission.

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