Related to aging, digitalization, greening of the economy, and with all that we have to deliver on our mission of price stability. So if you're interested in those issues, come to the ECB forum in Sintra. We will debate all that and more.
Welcome back after lunch. I'm delighted to announce one of the highlights of the ECB's central forum, a policy panel. The world economy is undergoing a period of rapid and intense change. The questions for our next panel will cover what these fundamental shifts mean for the future of monetary policy. And we are honored to have an exceptional lineup of officials to answer them. We are also honored to have Francine Lacqua, anchor and editor at large at Bloomberg Television to be guiding the conversation. Francine, the floor is yours.
Hello everyone. Clara, thank you. Thank you so much for that introduction. What can I say? We have one hour and there's a lot to discuss. So, welcome to the policy panel Sintra 2025. Now from tariff related trade ructions to oil price gyrations caused by also Middle East hostilities there are many many questions on first of all how to handle the fallout from some of the political decisions but much more how the economy behaves now one year on since the last intra panel and of course halfway through 2025 global policy needs to navigate risks posed both to inflation and growth a challenge highlighted by the bank for international settlements in a report this week so let's get started we have Kazuo Ueda, Governor, Bank of Japan. Of course, our host Christine Lagarde of the European Central Bank President. We have Jay Powell, chair, board of governors of the Federal Reserve System. We have Changyong Rhee, Governor, Bank of Korea. And then Andrew Bailey, Governor for the Bank of England. Madame Lagarde, let's start with you as our host. So, first of all, thank you so much for having us all here. We had a little bit of data today, this morning. Consumer prices rising some 2% from a year ago up from May's 1.9%. But then the tariffs still loom large. So how do you see that developing?
Well, first of all, I would note that we are at 2%. And this is the latest reading. This is also the target that we have had and this is the projection that our staff is indicating for the medium-term which is exactly what we had anticipated. So I'm not saying mission accomplished but I say target reached. And I think we should start by recognizing that we faced massive amount of shocks compounded shocks occasionally and we are now through that disinflationary process that we have conducted over the last two years and yes we are facing a lot of uncertainty. Yes, we are facing the risk of fragmentation increasing and yes, we are facing geopolitical developments that are worrying generally but that also are causing two-sided risk to inflation. So we have to continue to be extremely vigilant. We have to continue to be committed to delivering on our target and I think we are at this point in time in a very good position to do that. So we are well equipped to navigate the tormented waters that we should anticipate.
Chair Powell, tariffs are not yet showing up in inflation. Is this forcing you or your staff to actually rethink what the models say about how much the tariffs will ultimately feed through to some of the final prices?
So thank you Francine and Christine. Thank you to you and your colleagues for putting on another great conference here today. It's been a pleasure. I guess I would start, if I may, by saying that the US economy is in a pretty good position. Inflation has come down close to 2%. We're at 2.3 headline, 2.7 core. The unemployment rate is at 4.2%. So, we're healthy overall. If you look, ignore the tariffs for a second, inflation is behaving pretty much exactly as we have expected and hoped that it would. We haven't seen effects much yet from tariffs and we didn't expect to by now. We've always said that the timing, amount, and persistence of the inflation would be highly uncertain and it certainly proved that. So, we're watching. We expect to see over the summer some readings, higher readings, but we're prepared to learn that it can be higher or lower or later or sooner than we'd expected.
But Chair, would the Fed have cut more by now if it weren't for the tariffs?
So I do think that I think that's right. We're in effect we went on hold when we saw the size of the tariffs and where and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs. So we didn't overreact in fact we didn't react at all. We're simply taking some time. As long as the US economy is in solid shape, we think the prudent thing to do is to wait and learn more and see what those effects might be. And again, they haven't really shown up. And so for now we're waiting.
Governor Rhee, I mean, South Korea's economy is of course highly reliant on trade. Putting aside the deals that each government could strike with the Trump administration, what can central banks in your position do to shield economies from the impact of trade tariffs?
Actually about the tariffs impact on inflation our current inflation is well stabilized around 2%. And we believe tariff tends to be deflationary rather than inflationary for three reasons. One is Korea is not likely to use retaliatory tariff. Second, we import 22% of our import from China and recently export price of China has been falling at 5% a year for several years and we believe that it'll continue to do so and at this moment our growth rate is 0.8% which is well below our potential growth rate. So aggregate demand pressure is much lower. So our problem is not the inflation itself but the growth impact of tariff.
So what does that mean you'll do going forward?
Yeah, actually we have been in easing cycle and we cut our interest rate 100 basis points from last October and we will continue to be in an easing cycle given our growth rate but recently financial stability risk has been rising especially housing price in metropolitan area is increasing very fast. So we are keeping eye on this financial stability risk in deciding the pace and the timing of the further cuts.
Governor Bailey, you've taken the view that the latest rises in inflation in the UK will be transitory. Why are you so confident that inflation will fall back?
Actually, you may have detected I've tried to avoid using the transitory word because oddly enough, it has a bit of a history, but to be serious, obviously any increase in inflation is an increase in inflation. Sorry to state the obvious. The reasons it's gone up is really entirely due to so-called administered prices. Now, that's as I say that's an increase in prices, don't get me wrong, but it's not telling us much or anything about the context of the economy. In other words, it's not telling us anything really much about the balance of supply and demand in the economy. So, I think the key judgment for us is are we going to get second round effects from this pickup? And of course, it's nothing like the pickup of a few years ago just to be clear. And my judgment is at the moment is that the context is different that we do see evidence and I see some signs of softening in the economy. I see signs of softening in the labor market. We are going to have to see those come through though I mean come through into prices. I think you've still got to see the evidence in prices. But that background context allows certainly me to say look I think the direction of interest rates continues to be downwards.
When you look at all the uncertainty again is it a bold call given what happened to oil prices and trade negotiations?
It is. I mean I would say two things on that. One, I think as others have said it's probably Jay was saying I think it's a bit too soon I think really to see the price effects coming through from the trade and tariffs action. We've made a point of saying also that I think as Christine was saying that these are two-sided they could go either way. Could be weaker demand. We could see supply chain disruption. And the second thing of course is that some of these effects if you take the oil price story I mean it's gone up it's come down all since our last meeting effectively. So we always reach for the lexicon at this point. I mean we've added unpredictability to uncertainty. I was slightly amused at the introductory film this morning with Christine saying all these words because it's true. Because not only are we getting uncertainty in the sense, you know, the range of outcomes, but unpredictable in the sense that if you get things like, you know, the tariff action, history really isn't a particularly good guide to that. Actually, you can't really draw much from the past on that.
Now, Governor Ueda, you're in a slightly different situation, right? Japan's CPI has stayed above 2% for three years now. What do you see as fundamental changes in your economy that make inflation more persistent?
So let me say to put it simply as you say headline inflation has been above 2% for almost three years while what we call underlying inflation is still somewhat below 2%. That's the situation we are in. But if I could decompose it further there's probably about three components to it. First, there's underlying inflation dictated by wage price dynamics whereby increases in prices affect wages which further affect prices helped by resilient domestic demand. This component has been going up slowly but as I said it's still somewhat below 2%. Then there's going to be perhaps a second component which will be the expected negative effects of possible tariffs on the economy and the prices. We are expecting this to take place but we haven't seen that yet. There's a third component which is domestic supply shock generated by increases in food prices. Actually this component accounts for about 50% of the headline inflation we've got at the moment. So netting these three we think the first component and the second component will produce a slow increase in underlying inflation toward 2% by end 26 or 27. The third component food in inflation is going to subside toward the year end. So but we will be closely monitoring interplays between these three forces.
But Governor, how do you view trade concerns the day after President Trump threatened Japan with more tariffs?
Well, it's being negotiated by our minister in charge. So I'm trying to avoid making any specific comments on this.
So let me just ask you what will be the key trigger for Japan for deciding further rate hikes?
Okay, as I said it will depend on the relative strength of the three inflation dynamics I was describing and we need some more information to determine that.
President Lagarde, when you look at rate cuts, I mean, where do you see actually the ECB going? You're in a pretty comfortable position right now out of all the central banks.
Data will tell. So, I think we are determined to continue to be data dependent, to decide meeting by meeting, and to not commit to any particular rate path. That's the stance. And we're very lucky because we have just completed our strategy assessment which really gives us a good framework and good strategy lines within which to operate but those three aspects that I have mentioned data dependent meeting by meeting no commitment to any particular rate path are constant in that ongoing strategy based on what we have concluded actually yesterday.
So from our standpoint as you will have seen a solid majority of FOMC participants do expect that it will become appropriate later this year to begin to reduce rates again. And so that will depend though as Christine just mentioned on the incoming data. We'll be monitoring particularly what does show up in terms of inflation or what does not show up and also carefully watching the labor market. You know there we watch very carefully for signs of unexpected weakness. We see a gradual cooling but we don't really see that yet. So those are the things we'll be watching but as I mentioned a majority of us do feel that will be appropriate in the remaining four meetings of the year to begin to reduce rates again.
Madame Lagarde the euro has also surged about 12% against the dollar so far this year. Are you concerned that its strength runs counter to your efforts to also loosen financial conditions?
You know, I'm not going to comment on the exchange rate. We take it into account for purposes of our projections. Obviously, it has an impact, but it's a reflection of the market conditions and assessment. It's also a reflection of the strength of our economy, but there has been a clear appreciation relative to the dollar. Depending on how you look at it, it's either a depreciation of the dollar or an appreciation of the euro. And there might be a bit of both. In that particular case, we're also looking at the movement the flow of capitals and the attractiveness of euro denominated assets which is also an interesting phenomena that we've observed lately.
Jay Powell, is it fair to say I know nothing is guaranteed number one we all know this barring a real surprise is July just too soon to seriously even consider a rate cut?
Yeah I really can't say it's going to depend on the data and we are going meeting by meeting. I mentioned how I'm thinking about that but I wouldn't take any meeting off the table or put it directly on the table. It's going to depend on how the data evolve.
Governor, what's the biggest risk stemming from protectionist trade policy actually for the global economy and for South Korea's? Can you just the biggest risk stemming from trade and protectionist measures?
You know Korea is quite export-driven economy. So whatever the global fragmentation has serious impact not only direct impacts through the US tariff but also indirect impacts through China, Mexico, Canada and we easily can it really depends on what's going to happen to July 9th. We are actually waiting for the result and but we don't know what's going to happen but for example like if the tariff goes back to 26% retaliated tariff that was announced in April 2nd and then also with a lot of sectoral tariff which affect our economy aluminum steel and cars we can easily say that it has a impact larger than close to 1% in our GDP growth rate and depending on how long it lasts I think we have to adjust to the new supply chain. So the impact will be larger. So but I hope that scenario won't come.
What is the most concern for the Bank of Korea? Is it a stalling South Korea exports slowdown in global trade or a downturn in the US economy?
It's all linked, right? So, it's a global economy slowdown. And one thing I mentioned some negative sides only but one positive side I don't know is positive or not but Korean companies has been preparing for the supply diversification long time ago before the US tariffs start to do because we have some issues with China and then also Chinese industry has become very competitive so we had to relocate our production site from China to elsewhere. So relatively speaking we are well prepared and second still good thing is that we have some strong industries such as semiconductor which benefit from the AI technology development. So I hope that we can manage it but on the other hand given the just we look at the sheer size of the export dependence we will be significantly affected.
Governor Bailey do you think interest rates will be closer to three or 4% at the end of the easing cycle given all of the inflation and trade dynamics?
That's a subtle way into the r-star question actually. I would detect. So look, I'm fairly cautious about the whole discussion of the level of r-star and therefore sort of where rates are going to reach in the cycle. There is huge uncertainty around it. What I think is important and what we spend our time looking at is how restrictive is policy both now and going forwards. And our staff do a huge amount of work on that front to judge the restrictiveness of policy in the current context and how restrictive it's going to be looking forwards if you project forward with the market curve. And the assessment we've got at the moment is that policy remains restrictive. It will continue to be restrictive although the level of restrictiveness will come down over time which is what I would expect. And I so I would expect that level of restrictiveness to come down to a point where it goes more neutral but you say I think you have to judge that in context. Just to give you an example of that in the UK economy the level of household and corporate debt in the UK economy is actually lower than we would have expected it to be based on past experience. So again that feeds through into just how restrictive policy is at a given interest rate. It's somewhat less restrictive probably than it would have been historically.
Could I ask all of you actually thoughts on the neutral rates? Chair Powell, thoughts on the neutral rate.
So I think there are countless empirical and theoretical ways to derive it. At the end of the day I think I like to look at the economy and ask whether our policy stance is having the effects we expect and want on the economy. And to me, I would say we're somewhere probably modestly restrictive at this level. And by some formulations, we're more restrictive than that. But if you look at the economy, growth has been solid. The labor market is solid and still at historically low levels of unemployment. It's not an economy that feels like it's suffering from very tight monetary policy, but I would say that policy is still restrictive.
I would say that it's a nice concept. It's interesting and many of the terribly talented and brilliant economists in this room actually are delighted with discussion about the neutral rate. But honestly, as we're getting closer to target and to where we should be or are where we should be, I don't want to pass judgment on that. I think that discussion becomes less relevant. I think what our staff at the ECB measures leads us to believe that it is higher than where it was before the great financial crisis but it's relatively low as well compared for instance with what the US neutral rate is at the moment but it's in a way it's a bit of an illusion to discuss that at the moment because the neutral rate is normally defined in a world where there is no shock where you have perfect equilibrium. Now, are we in a world with no shocks at the moment? I don't think so. So, it's nice to have as a concept, nice to elaborate on it, nice to do research on it, but to use it at the moment where we are as a guiding principle to where we should be, I don't think is particularly appropriate.
Well, that sort of continues what I was saying earlier. Again, I don't use it as a sort of a guide to where policy should be. But I think this whole concept of restrictiveness is of course critical to our judgment because that's critical to the transmission mechanism of policy which we have to judge every time we meet. So that's a judgment that in a sense we renew every meeting we have. I think I'd rather agree with what Jay was just saying. I think in our case policy is restrictive at the moment. It's going to become less restrictive based on the curve that we've got in the market. That's what I would expect. We will judge it each time.
How would you see it, Governor Ueda?
Yes. So we also estimated something like the neutral rate a number of times but the range of estimates is very wide. So but at least we think we can say that the current rate is below neutral. But other than that I could refer to what Jay said a year or two ago in a Jackson Hall conference which was like we are guided by our stuff but under cloudy sky.
President Lagarde can you talk to us about scenario and why this is because of the shocks and actually the changes that are going very fast why scenarios make more sense as a template of the economy.
Oh okay. So this is a topic that we have largely debated as part of the strategy assessment that we conducted in the last year and I think in fairness the baseline which is the essential projection on which we work and we determine our monetary policy stance holds and is decisive in our consideration. But at the same time our staff has I wouldn't say forever but as long as I know myself has always conducted scenario analysis sensitivity analysis in order to arrive at the most solid baseline. It is probably the case that we will do more of it more systematically that we might publish more often than we have. We have published I think in the last few years four in four circumstances we have published scenario analysis the invasion of Ukraine was one covid was one the oil crisis as well and the tariff threats so all those were exogenous factors that were sort of hitting our screens I think we might do more scenario analysis that will be looking at the longer term trends that will affect our economy and that will inform and strengthen our baseline enhance it probably in its reliability. So that's what we are debating at the moment. How this is built, what assumptions we make, what choices are decided in terms of publishing will be determined by the governing council in good intelligence with our staff.
So for many years we have used scenario analysis internally and I personally find it very useful. I think many of my colleagues do too. You have just many different kinds of scenario. We have six or seven at every FOMC meeting. They're often the topic of discussion among governors and at the meeting. We have not taken the step of using them as a public communications device and that's a big difference. So that's one of the things we're going to be talking about this fall. We will wrap up the first part of our framework review which is the consensus statement, our monetary policy framework. We expect to by the end of the summer and then we're going to use the fall meetings to look at communications ideas and that's one of the ones we'll look at. I will say it has a lot of appeal and a lot of questions and so my expectation is we if we're going to do something in that area it's going to be putting a toe in the water and not just throwing ourselves in over Niagara Falls on it. So I can imagine a situation where we would try that in a particular circumstance. But for us, we're just going to do the work and understand it as many other central banks are doing now.
In our case, we use the scenario analysis in our risk management section as a kind of representing the tail risk. But I have to read the ECB report. But if we have to move that section into the more forecasting section for public communication, I wonder whether it's going to be easy to get some consensus which scenario we have to do it among our probably members in the monetary policy meeting. So because that scenario and underlying assumption may be much harder to communicate to agree among the members and also it's specific to us but how I can differentiate the previous approach of risk management section to the focusing that I have to think over what we have to do.
So I think two things I would add and it's very much in the same spirit as colleagues. One, you know, we introduced two scenarios in the May round and then the May report for me they were very useful they were either on either side they weren't symmetric by the way but they were either side for me they were very useful in terms of my decision-making because they helped me to answer the question given the uncertainty if we're wrong if I'm wrong in my judgment how wrong am I going to be you know do I think I'm going to be and what would be the consequences of that and what would we then have to do to deal with them and is it manageable and that was helpful. And then I think the question coming back to what Jay was saying in terms of public communication I mean this is the big step I think and it is challenging I tell you why because I say this quite a lot we make a lot of conditional statements you might have detected this in all the interviews you do and I'm not making a personal comment now Francine but a lot of those conditional comments get immediately translated as unconditional comments. It's sort of life. We're quite careful. But no, no, it's not personal. You know, this is the general point. And so the reason I say this is that if we introduce scenarios that's a message to us that you're going to have to do this very carefully in that world because to get the point across about there is always uncertainty, there is always risk. How you calibrate those and how you as Jay was saying how you communicate those publicly is critical but quite pretty challenging frankly in that environment.
Yes, we also carry out many simulation exercises about scenarios but we have not as far as I know published them. We do discuss in our quarterly reports qualitatively what risks we have in mind. On top of that I would say in a very rough way we are carrying out something like risk management approach to monetary policy which is probably a bit similar to what Christine was talking about yesterday. I can't come up with a good example but so risk scenarios thinkings about tail risks sometimes do affect our monetary policy.
Can I ask you all about the dollar everyone's favorite subject so when you tune out noise right of the past few months what has really changed about the dollar Governor Rhee are we really seeing some sort of paradigm shift in the status as a reserve currency that means historians will look back on 2025 as some sort of pivotal moment?
I don't think so especially in case of Korea our Korean won has appreciated significantly in the last two months but I think it's mostly due to the very unique situation that we had and we had a very unexpected unnecessary martial law declaration in last December and after that this political risk together with the slowdown our economy really make a Korean won depreciate much more than our fundamentals explained. So in some sense the appreciation that we have observed in the last two months in some sense normalization of our currencies and as for the kind of long-term shift of the dollar sentiment we have discussions but looks like people are talking about it but at this moment they keep the dollar assets while they increasing the hedge.
So at this moment I think the lion's share of the impact we show is mostly moving from the unhedged to the hedged positions. So we have to see what will happen in the future.
Well, I'd say two things. First of all, I think that it's important to bear in mind what the sort of definition of a reserve currency is and how it's evolved over many years. So like Jay, I don't see there being a sort of major shift at the moment, not least because in this day and age the definition of reserve currency has as much to do with the supply of safe assets into the market that can be used for all the purposes of sort of collateral and security as it is about a sort of pure exchange rate. So I think we're a long way off that sort of change happening. The second thing is going back to something Christine was saying earlier. I mean when we look at financial conditions, as we do of course, but I do think particularly, I mean I always believe this but I think it's even more relevant at the moment, to unpack a financial conditions index. And the reason I say that is because we've seen a breakdown in the correlations of the components of a financial conditions index. So you look at sort of bond yields, you look at exchange rates, you look at equity risk premium for instance, those correlations are not the ones that we've tended to see established over time. So you have to look at it much more carefully. There are stories to my mind about each of the components of that. So when I look at the exchange rate, you know, I look at it very much on that basis. I don't think it's sensible to sort of pack it all up as we normally would and say it's all behaving normally because the correlations are not actually.
Governor Ueda, I mean there's also many colleagues at central banks I guess around the world are building up gold reserves. Is that the only real alternative to the dollar?
I think it's up to a certain extent what areas like Europe or China would do in terms of improving the efficiency or convenience of their currencies, like the kinds of things we were discussing this morning, capital markets integration, and these things will change the degree to which the role of the dollar may decline in the future.
You know, I think I don't know if 2025 will be a pivotal year. I would tend to think that yes, it might very well be. But for a major change to occur will take a lot of time and will require a lot of effort. And I completely agree with the points made by Andrew about the dichotomy that we're seeing at the moment. And that might be an indication of the fact that investors are looking at options. This is what investors are saying. They ask questions. They seek alternatives. And whether that translates into a general lack of confidence that will be further fueled by more uncertainty, more unpredictability, a bit of a jump in the unknown on several fronts, not just monetary policy, not just even the economics, but beyond that in terms of security at large, for instance, I think remains to be seen. It's not going to happen just like that overnight. It never did historically. There's no reason it should now. But there is clearly something that has been broken and whether it is fixable or whether it is going to continue to be broken, I think the jury is out on that front.
Chair Powell, how do you think we'll look back on 2025?
So you're asking me how we're going to look back on 2025.
