ECB Lagarde: Inflation Is Declining, but Global Trade Friction Pose Risks

Economic

Summary:

The euro area economy grew modestly in 2024. While output stagnated in the fourth quarter, it was still 0.9% higher than at the end of 2023.

The euro area economy grew modestly in 2024. While output stagnated in the fourth quarter, it was still 0.9% higher than at the end of 2023. Surveys indicate that manufacturing continues to contract while services activity is expanding. Consumer confidence is fragile and, despite rising real incomes, households are hesitant to spend more. Nevertheless, the conditions for a recovery remain in place. A solid job market and higher incomes should strengthen consumer confidence and allow spending to rise.

Europe has faced a series of unprecedented challenges in recent years, each with its own far-reaching impact. From the COVID-19 pandemic to surging energy prices and the geopolitical upheaval caused by Russia’s invasion of Ukraine, we have navigated our way through a storm of supply shocks. One of Europe’s first priorities should be to deepen the Internal Market. By removing remaining barriers within the Single Market – barriers that effectively function like tariffs – we can unlock economies of scale, encourage innovation and reduce costs for consumers and producers alike.

Inflation stood at 2.5% in January and has recently developed broadly in line with staff projections. Core inflation has remained at 2.7% in recent months, showing its stickiness. Wage growth is moderating as expected, although it remains elevated, while profits are partially buffering the impact of wage increases on inflation. Inflation is set to return to our 2% medium-term target in the course of this year, with risks on both the upside and the downside. Greater friction in global trade would make the euro area inflation outlook more uncertain.

In total, the ECB has lowered interest rates by 125 basis points since last June, and the deposit facility rate – the rate through which we steer the monetary policy stance – now stands at 2.75%. At our last meeting in January, we decided to lower our key interest rates by 25 basis points, based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. We are not pre-committing to a particular rate path.

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ECB Lagarde: Inflation Is Declining, but Global Trade Friction Pose Risks

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