 You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Stefania Secola, and this is my first episode. Today is Thursday, 14th of September 2023. Our governing council has just decided on monetary policy for all of us using the euro every day. Here is President Christine Lagarde explaining those decisions in our press conference. Inflation continues to decline, but is still expected to remain too high for too long. We are determined to ensure that inflation returns to our 2% medium term target in a timely manner. In order to reinforce progress towards our target, the governing council today decided to raise the three key ECB interest rates by 25 basis points. The rate increase today reflects our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The September ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024, and 2.1% in 2025. This is an upward revision for 2023 and 2024, and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices. Underlying price pressures remain high, even though most indicators have started to ease. ECB staff have slightly revised down the projected path for inflation, excluding energy and food to an average of 5.1% in 2023, 2.9% in 2024, and 2.2% in 2025. Our past interest rate increases continue to be transmitted forcefully. Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target. With the increasing impact of our tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7% in 2023, 1% in 2024, and 1.5% in 2025. Based on our current assessment, we consider that the key ECB interest rates have reached levels that maintain for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restrictions. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The decisions taken today are set out in a press release which is available on our website. 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 turning to the economic activity. The economy is likely to remain subdued in the coming months. It broadly stagnated over the first half of the year, and recent indicators suggest it has also been weak in the third quarter. Lower demand for the euro area's exports and the impact of tight financing conditions are dampening growth, including through lower residential and business investment. The services sector, which had so far been resilient, is now also weakening. Over time, economic momentum should pick up as real income are expected to rise, supported by falling inflation, rising wages, and a strong labor market. And this will underpin consumer spending. The labor market has so far remained resilient despite the slowing economy. The unemployment rate stayed at its historical low of 6.4% in July. While employment grew by 0.2% in the second quarter, momentum is slowing. The services sector, which has been a major driver of employment growth since 2022, is now also creating fewer jobs. As the energy crisis fades, governments should continue to roll back the related support measures. This is essential to avoid driving up medium-term inflationary pressures, which would otherwise call for an even stronger monetary policy response. Fiscal policies should be designed to make our economy more productive and to gradually bring down high public debt. Policies to enhance the euro area's supply capacity, which should be supported by the full implementation of the Next Generation EU program, can help reduce price pressures in the medium term, while supporting the green transition. The reform of the EU's economic governance framework should be concluded before the end of this year and progress towards capital market union should be accelerated. Looking now at inflation, inflation declined to 5.3% in July, but remained at that level in August, according to Eurostat's flash estimate. Its decline was interrupted because energy prices rose compared with July. Food price inflation has come down from its peak in March, but was still almost 10% in August. In the coming months, the sharp price increases recorded in the autumn of 2022 will drop out of the yearly rates, thus pulling inflation down. Inflation, excluding energy and food, fell to 5.3% in August, from 5.5% in July. Goods inflation declined to 4.8% in August, from 5% in July and 5.5% in June, owing to better supply conditions, previous drops in energy prices, easing price pressures in the earlier stages of production chain and weaker demand. Services inflation edged down to 5.5%, but were still kept up by strong spending on holidays and travel and by the high growth of wages. The annual growth rate of compensation per employee remained constant at 5.5% in the second quarter of the year. The contribution of labour cost to annual domestic inflation increased in the second quarter, in part owing to weaker productivity, while the contribution of profits fell for the first time since early 2022. Most measures of underlying inflation are starting to fall as demand and supply have become more aligned and the contribution of past energy price increases is fading out. At the same time, domestic price pressures remain strong. Most measures of longer-term inflation expectations currently stand at around 2%, but some indicators have increased and need to be monitored closely. So what's our risk assessment? The risks to economic growth are tilted to the downside. Growth could be slower if the effects of monetary policy are more forceful than expected, or if the world economy weakens, for instance owing to a further slowdown in China. Conversely, growth could be higher than projected if the strong labour market, rising real incomes, and receding uncertainty mean that people and businesses become more confident and spend more. Upside risks to inflation include potential renewed upward pressures on the cost of energy and food. Adverse weather conditions and the unfolding climate crisis more broadly could push food prices up by more than expected. A lasting rise in inflation expectations above our target or higher than anticipated increases in wages or profit margins could also drive inflation higher, including over the medium term. By contrast, weaker demand, for example due to a stronger transmission of monetary policy or a worsening of the economic environment outside the euro area, would lead to lower price pressures, especially over the medium term. Turning now to the financial and monetary conditions. Our monetary policy tightening continues to be transmitted strongly to broader financing conditions. Funding has again become more expensive for banks as savers are replacing overnight deposits with time deposits that pay more interest and the ECB's targeted longer-term refinancing operations are being phased out. Average lending rates for business loans and mortgages continue to increase in July to 4.9% and 3.8% respectively. Credit dynamics have weakened further. Loans to firms grew at an annual rate of 2.2% in July, down from 3% in June. Loans to households also grew less strongly by 1.3% after 1.7% in June. In annualized terms, based on the last three months of data, households' loans declined by 0.8%, which is the strongest contraction since the start of the euro. Amid weak lending and the reduction in the euro system balance sheet, the annual growth rate of M3 fell from 0.6% in June to an all-time low of minus 0.4% in July. In annualized terms over the past three months, M3 contracted by 1.5%. So in conclusion, inflation continues to decline but is still expected to remain too high for too long. We are determined to ensure that inflation returns to our 2% medium-term target in a timely manner in order to reinforce progress towards our target. The governing council today decided to raise the three key ECB interest rates by 25 basis points. Based on our current assessment, we consider that the key ECB interest rates have reached levels that maintain for a sufficiently long duration will make a substantial contribution to the timely return of inflation to our target. Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. We will continue to follow a data dependent approach to determining the appropriate level and duration of restriction. In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation returns to our medium-term target and to preserve the smooth functioning of monetary policy transmission. That was it for today. If you want to know more, please check out the show notes for visual material about our governing council decisions, the full transcript of the discussion with journalists during the press conference and our projections on how we see inflation and the economy evolving. The next press conference will be on 26 of October 2023. In the meantime, stay tuned for new episodes. You've been listening to the ECB podcast with Stefania Secola. If you like what you've heard, please subscribe and leave us a review. Until next time, thanks for listening. And as we say in Italian, a presto!