Christine Lagarde, President of the European Central Bank (ECB), and Luis de Guindos, Vice-President of the ECB, addressed a press conference in Frankfurt am Main on July 18, 2024. They announced that the Governing Council decided to keep the three key ECB interest rates unchanged.
"The incoming information broadly supports our previous assessment of the medium-term inflation outlook," said Lagarde. She noted that while some measures of underlying inflation increased in May due to one-off factors, most were stable or declined in June. Despite high wage growth being buffered by profits, domestic price pressures remain elevated with services inflation also high. "Headline inflation is likely to remain above our target well into next year," she added.
Lagarde emphasized their commitment to ensuring that inflation returns to their two percent medium-term target. "We will keep policy rates sufficiently restrictive for as long as necessary," she stated, noting that decisions will be data-dependent and assessed meeting-by-meeting without pre-committing to a specific rate path.
The euro area economy grew in the second quarter but at a slower pace than the first quarter. Services led this recovery while industrial production and goods exports remained weak. Investment indicators point to muted growth amid heightened uncertainty for 2024. However, consumption driven by higher real incomes from lower inflation and higher nominal wages is expected to support recovery along with an anticipated rise in global demand boosting exports.
The labor market remains resilient with an unemployment rate steady at 6.4 percent in May, its lowest since the euro's inception. Employment grew by 0.3 percent in the first quarter supported by an expanding labor force at the same rate.
National fiscal and structural policies should aim at enhancing productivity and competitiveness to raise potential growth and reduce medium-term price pressures. The effective implementation of the Next Generation EU program, progress towards capital markets union, completion of banking union, and strengthening of the Single Market are critical factors for fostering innovation and investment in green and digital transitions.
Annual inflation eased slightly to 2.5 percent in June from 2.6 percent in May with food prices increasing by 2.4 percent while energy prices remained flat. Both goods price inflation and services price inflation were unchanged at 0.7% and 4.1% respectively.
Domestic inflation remains high with wages rising significantly due to past high inflation periods contributing to unit labor cost growth despite a slight deceleration in Q1 this year.
Inflation is expected to fluctuate around current levels for the rest of this year before declining towards target over next year's second half due to weaker labor cost growth, restrictive monetary policy effects, and fading impact from past inflation surges.
Economic growth risks are tilted downwards influenced by potential weaker global economies or trade tensions escalation among major economies alongside geopolitical risks such as Russia’s war against Ukraine or conflicts in the Middle East affecting confidence levels globally disrupting trade activities further impacting euro area growth negatively if monetary policy effects intensify unexpectedly leading lower-than-expected economic performance domestically unless offset by stronger-than-anticipated world economy performance boosting spending through rising confidence & real incomes exceeding expectations instead otherwise pushing up downside risk potentials likewise upside risks linked higher-than-anticipated wages/profits amidst geopolitical tension heightening energy/freight costs driving up food prices amidst climate crisis unfolding unpredictably more likely dampened monetary policy curbing demands unexpected global economic environment worsening abruptly additionally recent 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