 You're listening to the ECB podcast bringing you insights into the world of economics and central banking. My name is Katie Ranger. The ECB's governing council has just taken the latest monetary policy decisions for the 340 million people who use the euro every day. It's Thursday 21st of July 2022 and here is President Christine Lagarde presenting those decisions in our press conference. Today in line with our strong commitment to our price stability mandate, the governing council took further key steps to make sure that inflation returns to our 2% target over the medium term. We decided to raise the three key ECB interest rates by 50 basis points and approved the transmission protection instrument that I will refer to as TPI. The governing council judged that it is appropriate to take a larger first step on its policy rate normalization path than signalled at its previous meeting. This decision is based on our updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy. It will support the return of inflation to our medium term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver our inflation target in the medium term. At our upcoming meetings, further normalization of interest rates will be appropriate. The front loading today of the exit from negative interest rates allows us to make a transition to a meeting by meeting approach to our interest rate decisions. Our future policy rate path will continue to be data dependent and will help us deliver on our 2% inflation target over the medium term. In the context of our policy normalization, we will evaluate options for remunerating excess liquidity holdings. We assessed that the establishment of the TPI is necessary to support the effective transmission of monetary policy. In particular, as we continue normalizing monetary policy, the transmission protection instrument will ensure that our monetary policy stance is transmitted smoothly across all Euro area countries. The singleness of our monetary policy is a precondition for the ECB to be able to deliver on its price stability mandate. The TPI will be an addition to our toolkit and can be activated to counter unwarranted disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the Euro area. The scale of TPI purchases depends on the severity of the risks facing policy transmission. Purchases are not restricted ex ante. By safeguarding the transmission mechanism, the TPI will allow the governing council to more effectively deliver on its price stability mandate. In any event, the flexibility in reinvestment of redemptions coming due in the Pandemic Emergency Programme portfolio remains the first line of defence to counter risks to the transmission mechanism related to the pandemic. The decisions taken today are set out in a press release available on our website and the details of the TPI are described in a separate press release that will be published at 3.45. I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions. So, economic activity is slowing. Russia's unjustified aggression towards Ukraine is an ongoing drug on growth. The impact of high inflation on purchasing power, continuous supply constraints and higher uncertainty are having a dampening effect on the economy. Firms continue to face higher costs and disruptions in their supply chains although there are tentative signs that some of the supply bottlenecks are easing. Taken together, these factors are significantly clouding the outlook for the second half of 2022 and beyond. At the same time, economic activity continues to benefit from the reopening of the economy, from a strong labour market and from fiscal policy support. In particular, the full reopening of the economy is supporting spending in the services sector. As people start to travel again, tourism is expected to help the economy in the third quarter of this year. Consumption is being supported by the savings that households built up during the pandemic and by a strong labour market. Fiscal policy is helping to cushion the impact of the war in Ukraine for those bearing the brunt of higher energy prices. Temporary and targeted measures should be tailored so as to limit the risk of fueling inflationary pressures. Fiscal policies in all countries should aim at preserving debt sustainability as well as raising the growth potential in a sustainable manner to enhance the recovery. Inflation increased to 8.6% in June. Surging prices were again the most important component of overall inflation. Market-based indicators suggest that global energy prices will stay high in the near term. Food inflation also rose further, standing at 8.9% in June, in part reflecting the importance of Ukraine and Russia as producers of agricultural goods. Persistent supply bottlenecks for industrial goods and recovering demand, especially in the services sector, are also contributing to the current high rate of inflation. Price pressures are spreading across more and more sectors, in part owing to the indirect impact of high energy costs across the whole economy. Accordingly, most measures of underlying inflation have risen further. We expect inflation to remain undesirably high for some time, owing to continued pressure from energy and food prices and pipeline pressures in the pricing chain. Higher inflation pressures are also stemming from the depreciation of the euro exchange rate. But looking further ahead, in the absence of new disruptions, energy costs should stabilise and supply bottlenecks should ease, which together with the ongoing policy normalisation, should support the return of inflation to our target. The labour market remains strong. Unemployment fell to a historical low of 6.6% in May. Job vacancies across many sectors show that there is a robust demand for labour. Wage growth, also according to forward-looking indicators, has continued to increase gradually over the last few months, but still remains contained overall. Over time, the strengthening of the economy and some catch-up effects should support faster growth in wages. Most measures of longer term inflation expectations currently stand at around 2%, although recent above-target revisions to some indicators warrant continued monitoring. Risk assessment. A prolongation of the war in Ukraine remains a source of significant downside risk to growth, especially if energy supplies from Russia were to be disrupted to such an extent that it led to rationing for firms and households. The war may also further dampen confidence and aggravate supply-side constraints, while energy and food costs could remain persistently higher than expected. A faster deceleration in global growth would also pose a risk to the euro area outlook. The risks to the inflation outlook continue to be on the upside and have intensified, particularly in the short term. The risks to the medium-term inflation outlook include a durable worsening of the production capacity of our economy, persistently high energy and food prices, inflation expectations rising above our target, and higher than anticipated wage rises. However, if demand were to weaken over the medium term, it would lower pressures on prices. So turning to financial and monetary conditions now. Market interest rates have been volatile as a result of the pronounced economic and geopolitical uncertainty. Bank funding costs have risen in recent months, which has increasingly fed into higher bank lending rates, in particular for households. While the volume of bank lending to households remains strong, it is expected to decline in view of lower demand. Lending to firms has also been robust as high production costs, inventory building and lower reliance on market funding have created a continued need for credit from banks. At the same time, demand for loans to finance investment has declined. Money growth has continued to moderate owing to lower liquidity savings and lower euro system asset purchases. Our most recent bank lending survey reports that credit standards tightened for all loan categories in the second quarter of the year, as banks are becoming more concerned about the risks faced by their customers in the current and certain environment. Banks expect to continue tightening their credit standards in the third quarter. So, summing up, inflation continues to be undesirably high and is expected to remain above our target for some time. The latest data indicates a slowdown in growth, clouding the outlook for the second half of 2022 and beyond. At the same time, this slowdown is being cushioned by a number of supportive factors. The governing council has today decided to raise the key ECB interest rates and approved the transmission protection instrument. At our upcoming meetings, further normalization of interest rates will be appropriate. Our future policy rate path will continue to be data dependent and will help us deliver on our 2% inflation target over the medium term. We now stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilizes at our 2% target over the medium term. Our new transmission protection instrument will safeguard the smooth transmission of our monetary policy stance throughout the euro area as we keep adjusting the stance to address high inflation. Check out the show notes for the full transcript and the discussion with journalists during the press conference. We'll also link to an easy to understand overview of what we decided today. The next monetary policy press conference will be on 8 September 2022. But in the meantime, keep an eye on the ECB podcast for new episodes. From the European Central Bank, I'm Katie Ranger and this was another episode of the ECB podcast. If you like what you've heard, please subscribe and leave us a review. We'd also love to hear from you, so do share your feedback and ideas with us via social media. Until next time, thanks for listening.