Governor, thank you so much for joining us here at the IMF World Bank meetings. Let me ask you first up about the impact to the Euro area from the Iran conflict. Just how dangerous is this versus everything that Europe has weathered previously?
We don't know yet, to be honest. It's why we at the ECB published three weeks ago three different scenarios, and this is exactly what the IMF did here this week. And let me stress that we cannot bet only on the most favorable scenario, so-called reference scenario for the IMF. We must be prepared for each of these scenarios because there is unprecedented uncertainty, even unknown. It could be prolonged. There could be secondary effects not only on energy but also on some other products. So in our case, we expect higher inflation and we expect lower growth. In each of these scenarios, the Euro area as well as the French economy would avoid recession. But clearly this is a negative supply shock.
But stock markets are pricing in a swift resolution to the conflict. If we look at what the S&P 500 has done this week, back to record highs, suggesting that investors are optimistic. You're saying there will be legacy impacts even if the war was solved tomorrow.
We cannot bet only on market expectations, and they are more linked to what I call the reference scenario. So we all hope for the better, to have a truce, a peace with a strong resolution, a strong reopening of the Strait of Hormuz, a strong reopening of production capacities in the Gulf countries. But we all know that probably the reality will be a bit more difficult, a bit darker. So we have to be prepared for any possible scenario.
It feels as though the implications from the conflict are going to wash across Europe in waves. What data are you watching very closely and what's the time frame for seeing any big impact for Europe?
So let me stress perhaps two things in this unknown environment. First, starting position is better than in 2022 because we have much less inflation. We have won the battle against inflation and we have much less inflationary pressures on demand, supply, or on wages. And the second thing is perhaps to precise not exactly how we will act, this is too early to tell, but how we think. We as central banks are not responsible for the first-round effect, energy prices or some prices of products which are directly impacted like plastics, fertilizers, aluminum, and so on. But we are responsible to prevent possible second-round effects to services, manufactured goods, and wages. So let me be extremely clear about the KPI we will look at. We will look at wages. We will look at inflation expectations of households and firms. Do they remain anchored? And we will look at underlying inflation. So far, if I look at the last figures published yesterday in the Euro area, headline inflation increased significantly in March to 2.6%. This is the first-round effect of energy, but core inflation without energy and food remained limited and even slightly decreased at 2.3%. So we will act without hesitation if needed and when needed. But we are not in a precipitation mode. We need to reach a sufficient level of data about the effect on underlying inflation, second-round, and also the negative effect on demand and growth.
How quickly can that headline inflation number come down without impacting second-round effects, particularly after a bout of inflation where there are sensitivities when there are higher prices?
Time will tell, and this is why we are very vigilant and data-driven. You know, the key word of our monetary strategy review last year was agility, and I love this word. Agility means that we must be nimble and humble and be ready to react as quickly as necessary.
Is that April? Would you react this month?
I've already said and I want to repeat that April would be, or to bet on April, would be premature at this date.
So the most likely time frame for the market seems to be June. Would you have enough data by then?
May I say, Karen, that I'm not a great fan of this calendar bets. Is it April, June? Is it later? We are not driven by calendar. We are driven by data. And again, our reaction function is extremely clear. We will look at the lasting possible effects of this shock, be it on underlying inflation as well as on demand, because it will have also a negative effect on demand.
Do you think that the ECB has been hawkish straight out of the gates because the market thinks you have been? What do you make of the communication so far and was that the right communication?
No, we said very clearly that we were ready to act, and President Lagarde stressed it rightly so. So did I, and so did most of us. But we also said that we would use the data, and there is a reality check. So markets have their own bets. These bets I don't have to comment, market expectations by the way. They are very volatile, extremely sensitive to all the news we have from the peace negotiations or from political commands here in the US. We are a bit more reality-oriented and medium-term oriented. The reality is we are, if I may say, we are independent, and this is very important. And we must be independent not only from political pressures but also from markets or from short-term trends.
