reflects the June meeting of the
Governing Council. And in a speech format today, the
President was able to maybe to elaborate on the message, which
was maybe conveyed in a more concise, abstract format in our
margin policy statement. And essentially, I think the message
from today's speech, which is the message, I think of
collectively of the Governing Council, is we do have a central
scenario, our baseline scenario is inflation being high, coming
back down at 235 More or less next year, and then more close
to the target and 24. But we have to recognize in a world of
uncertainty, that we will have to be agile, that if some
declare risk factors do materialize, or if those risk
factors go up, we will have to
be more decisive, and to move rates more quickly. But let me
again, emphasize that is just one scenario. Under our
baseline, we've explained that we intend to raise rates by 25
in July, and we intend to raise again in September, where the
scale of that increase will be data dependent. And then we said
after that, we expect a gradual, sustained further set of
increases. So I think it's, you know, fairly clear that we have
a baseline. But with the uncertainty, we have to manage
the two risks on one side, there could be forces that keep
inflation higher than expected for longer. On to the side, we
do have the risk of a slowdown in the economy, which would
reduce inflationary pressure. So it's very much having a clear
vision for the next couple of meetings, having an orientation
to move away from the very low rates we've had for quite a few
years, but also fully respecting the importance of being data
dependent. And to retain the optionality to respond to what
we see, in the coming months, the market is more or less
pricing in some 150 to 200 basis points by March 2023. So is the
market correct in that anticipation? Well, I think,
again, without market pricing, it's a reflection of if like
their expectation of where the policy rate is going. Plus, of
course, the risk premia. And in today's world, the market also
is going to price the risk
of the uncertainty that we face. So I don't really want to
particularly comment on on whether that's the the a very
good forecast of where rates will go. And in the end, for us,
going back, we've been clear about the will be two hikes in
July and in September, we've been clear that we expect a
gradual sustained a series of hikes after that. But
essentially for us, we we need to be data dependent. And where
we ended up in the coming months will be driven by the headstrong
will be the inflation momentum versus how severe will be any
slowdown risk coming come from coming from recessionary forces.
That's from here. Okay. Well, we from where
is it? Interfering with?
No?
Sorry, I'm sure.
This is bizarre.
That could be an interesting world if they had background
music for interviews.
I first thought that it was very docile ringtone of some mobile
phone
is it a problem for the audio?
Yeah, me too.
It's a bit like me, you probably don't know lower yo. It's a
German comedian.
Like from many years ago, he
was like, he always did this real life acceleration. And it's
funny.
But you don't speak German. Right. So it's, it's a shame. I
think it's only available in German at least fix my human
Okay, fine.
Christine Lagarde was also saying that there's a risk of
inflation or a start of a self fulfilling spirit. So what has
to happen? That you would say, Okay, wait a moment. Inflation
is having some self reinforcement mechanism.
So I think it's really boils down to
forces. So we know, one, that issue is going to be the
really two
evolution of inflation expectations. So whether that's
in the markets, whether it's among expert forecasters, or
other measures coming from households and firms, because
clearly, there's a very different dynamic that will take
hold, if, on top of the inflation we've seen already,
which has been a surprise, the world has been taken by surprise
by having inflation in the last 12 months around 8%. If, in
addition to absorbing and adjusting to this currently high
inflation rate, if decisions were based on a belief that this
would persist into the future, that inflation would remain well
above 2% indefinitely. And so for us, and for all central
banks, monitoring expectations will be very important.
I think the other big metric to look at will be wage
settlements. So the way you can get that spiral is high prices
now
give rise to high wage settlements, which in turn, give
rise to a further wave of price increases. So so far, we've been
clear, we're closely monitoring wage settlements, we do think
they're going to be higher than normal, there is a catch up
effect, that with the 8% inflation rate we're seeing
right now, over time when we do expect that nominal wages to
have to increase more than normal. But it's very different
big difference between a catch up dynamic, which is in our
forecast, versus a more unstable situation where wait settlements
not only reflect our catch up, but it reflects a belief that
inflation will not come down towards 2%, which, of course,
would basically be a failure on our part, if that type of
expectation became embattled, given the record high inflation
of the euro area, or in the euro area. It's Yes, at least for
some policy makers, not understandable why you would not
hike rates by 50 basis points in July. So why are you hesitant to
do so
very important to to make sure that we understand that monetary
policy works through the whole yield curve. And we've seen that
this year, compared to where we were in December, the yield
curve has jumped quite a bit. So for many people, if the interest
rate that matters to you is the two year ahead rates, the five
year head, right the 10 year Head rates, all of these have
moved quite a bit. So for us, the issue is that it's not any
one meeting. It's the sequence that we expect to see. And if
you think about the third quarter,
between July and September, essentially what we said is just
going to be two hikes. We've said that if the inflation
situation bases maintained, okay, it's worse, the second
time will be bigger than 25 basis points. So he then you're
looking at at one quarter, July in September a few weeks apart,
having rate hikes of at least 50 basis points, and possibly more
collectively, and for one quarter. That's a fairly sizable
move already. So I think in the context of saying there's going
to be two hikes, July and September, it makes sense that
the first lichens in July will be 25 basis points. And really
the big debate between now and the September meeting is the
appropriate size of that second pie on September. I would like
to bring you back to something that you said earlier, like if
there is potentially an external shock, would that potentially be
the stop of gas deliveries to the euro area? What would that
do to your rate setting
will clearly be many implications, which by the way,
the staff looked at in the June projection exercise, there is a
downside scenario, which includes an element of an
embargo and rationing. And it's clear, if we had a rationing of
energy in Europe, there will be a much bigger hit to the
economy. There would be a bigger spike for sure, I think in
energy prices at the start, but because of the fact you know,
the the ability to substitute away from from gas in the near
term is it's not zero, but it's limited that these are scenarios
with would be a much bigger drop in GDP in the coming months.
And, you know, the staff forecast had higher inflation
initially in that 20 to 23 being factor lower inflation 24
Because the recessionary effect of that would mean less heating
The market, for example. So we would have to very much look at
the labor
that scenario. But hand in hand about similar what else we've
talked about? What is it doing to inflation expectations? What
is it doing to wage dynamics before we would I think, form an
overall conclusion. Okay. Let me bring you to the topic of this
emergency meeting, which you recently recently had. Why did
you decide to have it? And why at that time? So I think I
disagree with rephrasing what what is true is an ad hoc
meeting, okay, we decided, because it's very let me
emphasize, it is not the case. We think the European economy
isn't an emergency situation, it was not an emergency situation.
But I think for sure, we do think that's important to be
agile and responsive. And, you know, in the week, at 10 days,
after the June monetary policy meeting, there were starting to
be signs of fragmentation risk. And rather than, you know, sit
around and be be passive about it. I think it made a lot of
sense after that ad hoc meeting. And as the President announced
this morning, when I come about is we will be from Friday, July
one
reinvesting the pet portfolio on a flexible basis, we've all
said, the staff, the committee's will be working on this more
general anti fragmentation tool. So I think it's just good
policymaking to be agile, to be well prepared. And to make sure
that we don't take a passive attitude to these risks. Let's
talk about that potential, or that anti fragmentation tool is
what has to be the key features some governors see on the
ground, we're already suggesting that it should have no limits
and should be really free. But at the same time, I hear the
German Constitutional Court already appealing against it
when I hear like a limitless tool. Right. So I mean, I think,
of course, we will always operate within our mandate, we
will always operate within within a legal framework. And I
think it's, you know, I think, once we we've got this worked
out, if once it's designed, we will, we will explain it. But I
think today, it's you know, it's better that the staff continue
their work, rather than trying to feed you too much what the
design will look like. But essentially, I think, present
the guards that is today. The bottom line is we will make sure
it's an effective tool, it will do the job that is intended. And
I think we can combine being effective with also respecting
all of the treaty obligations, we have those very important
that leave that very important legal framework, which makes
sure we do what we need to do for monetary policy, while
remaining within within the legal framework. What why one
option also be to sell core
to bring those yields higher than the yield gap is also
closing, we're gonna I don't really want to to preempt the
design of the tool.
But what I would emphasize maybe two points. One is fragmentation
risk does have an asymmetry about us. Know, there's many
different scenarios that one can look at. One scenario is if
you'd like a rotation from holding the demands of the
periphery towards holding the bonds of the core. But I think
in terms of thinking about that rotation, you have to look
closely about the implications for the monetary policy stance.
And we're always clear about making sure that the stance and
the anti fragmentation dimension are married, by the way that
doesn't compromise the science. And so any conception about
the yields in the core, absolutely will have to be
looked at very much. So it's interesting, I think that the
junction where you are it's probably the most difficult one
to withdraw the stimulus from the markets. We've seen like
this taper tantrum in the states some years ago. Are you
concerned about such an overreaction? Well, I mean, I
think it's very important. I mean, look what's happened from
from december two nine, so we now six months, where by and
large going from a very high rate of purchasing in 2021. To
stopping now we were in the last couple of days of the of the
purchasing now. Net purchasing under bap, by and large, I would
say that has gone quite smoothly. We have seen a steep
in the yield curve, maybe in part that has to do with the
Under net purchases, in part, of course, it's a mix of expecting
us to raise the policy rate over time. So these and also the risk
global uncertainty. So there is a rising near term premium here
in the US, there is global uncertainty about inflation, and
that's going to be reflected in long term yields. So going back
to the last couple of weeks, it's very much, I think, just
good management by us to make sure that we do have
a response to to any risk of fragmentation. We're both
getting going way with flexibility and pathway
investments. We're working hard on having a more general tool.
But I think it's important at to to be clear, that by and large,
the rotation by us the rotation globally, where central banks
are moving away from Super accommodative policies, more
towards that normal policies towards mutual policies has been
going on for months now. And in the grand scheme of things, it's
been relatively smooth. And I do think it's important that we are
able to deliver that predictable
policy that makes sure interest rates are on the right paths,
again, within a very orderly manner. One last question on
recession, because the recession word comes up more often and
more frequently, also in discussion with CEOs in almost
every part of the world. So what's your scenario? So again,
in our June, baseline, we have the European economy continuing
to grow, because let's not forget the reopening of the
economy. We do think many bottlenecks will be are easy and
will ease. So what I would say is, especially if you talk to
CEOs and so on, there may well be some industries, which do see
a decline, they may well be
simultaneously that we do think this year hassles,
even the more going back to work. The high inflation rate
does mean a decline in living standards this year for many
people. So there is a kind of feel bad effect at a particular
industry level. For many hassles, especially lower income
households. That is true. But in the aggregate, we do still think
the European economy will continue to grow, but with clear
downside risk. So our central scenario when we kind of worked
through everything, it is continuing to grow. There is an
acknowledgement of downside risk, which could extend to
recession risk. But then I think people live in individual
sectors
and as individuals as households, and there may well
be a loss of living standards this year.