LIVE: Christine Lagarde speaks after ECB hikes rates

Well, thank you very much, Wolfgang, and good afternoon to all of you. The vice president, our new vice president, and I welcome you to our press conference. The governing council is committed to setting monetary policy to ensure that inflation stabilizes at our 2% target in the medium term. In line with this commitment, we today decided to raise the three key ECB interest rates by 25 basis points. The war in the Middle East is generating inflation pressures and the decision to raise rates is robust across a range of scenarios, mapping out how the shock might evolve and affect the medium-term outlook for the euro area. In the baseline of the new euro system staff projections, headline inflation is expected to average 3% in 2026, 2.3% in 2027, and 2% in 2028. For inflation excluding energy and food, the baseline foresees an average of 2.5% in 2026 and 2027 and 2.2% in 2028. Compared with March, staff have revised up their baseline projection for inflation in 2026 and 2027, owing to a higher path for energy prices, which to some extent is expected to feed into food, goods, and services inflation. The baseline sees economic growth at an average of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. This is a downward revision for 2026 and 2027 reflecting a more pronounced impact of the war on commodity markets, real incomes, and also confidence. The outlook remains uncertain with upside risks for inflation and downside risks for economic growth. The full implication of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock as well as the scale of its indirect and second round effects. This uncertainty is also reflected in the broad range of outcomes for inflation and growth in the updated illustrative scenarios put together by Euro system staff. These will be published with the staff projections on our website. With today's decision, we remain well positioned to navigate the uncertainty caused by the war. We will closely monitor the situation and follow a data dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of inflation outlook and the risks surrounding it in light of the incoming economic and financial data as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path. The decisions taken today are set out in a press release available on our website. So 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. Let me first look at the economic activity. Adjusting for a temporary factor in Ireland, the euro area economy grew in the first quarter, supported by domestic demand and exports. Yet the war in the Middle East is weighing on activity and surveys are pointing to a slowdown, especially in services. Manufacturing has held up so far. In part, this is because firms have been building up stocks to cope with supply chain pressures. It also reflects higher defense spending. The labor market remains resilient. Unemployment at 6.3% in April remains close to historical lows. The first quarter saw additional jobs being created, although at a slower pace than in the last quarter in 2025. Labor demand has cooled further and firms and households expect the labor market to weaken. Looking ahead, staff now expect domestic demand to be weaker than they projected in March as the war weighs on confidence and higher energy costs erode real incomes. At the same time, household balance sheets are solid overall and consumption should remain the main driver of growth. Higher energy costs and lower confidence will dent private investment in the short run, but it should be underpinned by firms investing in new digital technologies. Government spending more on defense and infrastructure should continue to support public investment. These factors are expected to provide some cushioning against the fallout from the war. The governing council highlights the urgent need to strengthen the euro area economy while maintaining sound public finances. Fiscal sustainability is a crucial anchor for broader economic stability. Fiscal responses to the energy price shock should be temporary, targeted, and tailored as emphasized in the European Commission 2026 European semester spring package. Reforms to enhance the euro area's growth potential and accelerate the energy transition to reduce reliance on fossil fuels are more vital than ever. Completing the savings and investment union is key to funding innovation, supporting the green and digital transition, and improving productivity. The digital euro and tokenized wholesale central bank money will enhance Europe's strategic autonomy, competitiveness, and financial integration and will boost innovation in payments. It is thus essential to swiftly adopt the regulation on the establishment of the digital euro. Simplifying and harmonizing rules across the EU single market will help European firms grow faster. Let me now look at inflation. Inflation rose to 3.2% in May from 3% in April. Energy price inflation ticked up to 10.9% in April, while food price inflation fell from 2.4% to 2%. Inflation excluding energy and food picked up to 2.5% from 2.2% in April as goods inflation edged up to 0.9% and services inflation increased from 3% to 3.5%. Domestic cost pressures eased in the first quarter supported by slower growth in wages and profits. The ECB's wage tracker and surveys on wage expectations continue to indicate that wage growth should ease over the year. However, it is becoming more expensive for firms to source other inputs and they therefore expect to put up their selling prices. Moreover, some indicators of underlying inflation have already been driven higher by the energy shock. Inflation expectations over shorter horizons remain well above levels before the outbreak of the war in the Middle East. At the same time, most measures of longer-term inflation expectations stand at around 2%, supporting the stabilization of inflation around target in the medium term. The increase in energy prices will lift inflation further over the summer and keep it well above target into the first half of 2027. It will also have an impact on food, goods, and services inflation. Inflation should then return to target in the second half of 2027, supported by falling energy prices and slower increases in other prices. However, the war in the Middle East remains a major source of uncertainty, and the longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second round effects. We will therefore closely monitor the size and persistence of the energy price increase and how it feeds through to price and wage setting, inflation expectations, and overall economic dynamics. Turning now to the risk assessment. The risks to the growth outlook are to the downside, mainly owing to the war in the Middle East, which has added to the volatile global policy environment. Prolonged disruption of energy supplies could increase energy prices further and for longer than currently expected. These factors would erode real incomes even more and make firms and households more reluctant to invest and spend. The drag on growth would intensify if the closure of major shipping routes were to cause acute shortages of key inputs that forced euro area firms to curtail output. A worsening of global financial market sentiment or a tighter supply of credit could dampen demand. Additional frictions in international trade could also further disrupt supply chains, reduce exports, and weaken consumption and investment. Other geopolitical tensions, in particular Russia's unjustified war against Ukraine, remain a major source of uncertainty. By contrast, growth could turn out to be higher if the economy and energy markets were to adapt more quickly than expected to the disruption caused by the war in the Middle East or if the war was resolved promptly and sustainably. Moreover, planned defense and infrastructure spending, reforms to enhance productivity, and euro area firms adopting new technologies may drive up growth by more than expected. A deeper integration of the single market would also boost growth beyond current expectations. The risks to the inflation outlook are to the upside. If energy prices were to rise by more and for longer than currently expected, euro area inflation would increase further. This could be reinforced and become more persistent if higher energy prices were to spill over by more than expected to other prices and to wages, if longer-term inflation expectations were to rise in response, or if global supply chains were disrupted more broadly. Ongoing trade tensions could also give rise to more fragmented global supply chains, curtail the supply of critical raw materials, and worsen capacity constraints in the euro area economy. Extreme weather events and the unfolding climate and nature crisis more broadly could drive up food prices by more than expected. By contrast, inflation could turn out to be somewhat lower if the economic effects of the war in the Middle East proved to be more short-lived than currently expected, or if indirect or second round effects prove less pronounced than anticipated. More volatile and risk-averse financial markets could weigh on demand and thereby lower inflation as well. So looking now at the financial and monetary conditions, financial conditions are broadly unchanged since our last meeting, but remain tighter than before. The cost of issuing market-based debt rose to 4% in April from 3.9% in March. Bank lending rates for firms remained at 3.6% in April and mortgage rates at 3.4%. The annual growth rate of bank lending to firms increased to 3.4% in April from 3.2% in March, while the growth rate of corporate bond issuance rose to 4.6%. Mortgage lending in April again grew by 3%. In line with the monetary policy strategy, the governing council thoroughly assessed the links between monetary policy and financial stability. Euro area banks are resilient, supported by strong capital and liquidity ratios, asset quality, and robust profitability. However, a sudden sharp drop in asset prices, potentially amplified by the non-bank financial sector, and deteriorating asset quality, particularly in energy and trade-sensitive sectors, would pose risks to financial stability. These risks increase the longer the current geopolitical conflict lasts. Macroprudential policy remains the first line of defense against the buildup of financial vulnerabilities, enhancing resilience and preserving macroprudential space. So in conclusion, the governing council today decided to raise the three key ECB interest rates by 25 basis points. We are committed to setting monetary policy to ensure that inflation stabilizes at our 2% target in the medium term. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it in light of incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path. In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilizes sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission. And we now stand ready to take your questions.

Thank you very much for your question and thank you for greeting the three of us and particularly Boris, our new vice president. So the decision that we took today to raise 25 basis points on our three interest rates was a unanimous decision without reservations. We did not discuss or debate any other alternative, and the one that was predicated on the euro system staff projections and the recommendations of our chief economist was unanimously endorsed. No discussion of others. Our reaction function has been very steady, repeated over the course of time. And I hope I will not offend you by repeating yet again that given the level of uncertainty that we are facing, we will decide on a meeting-by-meeting basis. We will be data dependent. There will be no preset rate path in our considerations, and as a result of that, it will be what it will be. Now this is not much by forward guidance, but as you know, under the present circumstances there is no such justification for the decision that we are making and that we will make in the future. I think I would add one thing because I've read here and there that the ECB will make an insurance decision, that it will be an insurance matter, that it will be a preemptive rate decision. It's not at all the way we had our discussion, really. Our discussion was predicated on obviously the major energy shock that we have observed since the beginning of March, that is enduring longer than what was expected by geopolitical experts, and which is beginning to see broadening throughout the economy with direct costs being obvious, with indirect costs also showing up. And as I said, we will be monitoring attentively any further consequences of this major energy shock. Second response in relation to this insurance allegation of ours, which it was not. We have updated our scenarios, but if you remember from last time around we had two scenarios which we published. We will be publishing a third scenario that will be available on our website, which we have decided to call the milder scenario. So staff from the euro system has worked on the update of the adverse and the severe scenarios, but they have also worked on a milder scenario in order to be on both sides of the baseline. And the decision that we took today to increase by 25 basis points all our interest rates is robust across the three scenarios: the two updated adverse and severe, but also the milder scenario, which obviously is more positive and something that we should not neglect but which is at this point in time unlikely to materialize. But we still thought that it was our duty to look at both sides. And on all accounts, our decision stands. And if we were not taking that very obvious monetary policy decision, then at the end of the medium term that we look out for projection purposes, we would be north of our target. So I hope I have covered your question.

Well, on the services inflation, as you will have seen, it has moved from 3% to 3.5%, which is a significant increase. Now obviously what we need to understand better is what is under the skin of that increase and how we can distinguish between what is the direct and indirect consequence of the energy prices significant increase or whether there is something else. At this point in time, we cannot yet say whether this services prices significant increase is attributable exclusively to direct and indirect. What we are confident in though is that we are not seeing yet second round effects, which would be largely attributable to wages, which play a significant contribution. I'm saying again that we will be monitoring closely all that in the months to come. Where we stand, and I just want to take you back to a speech that I gave back in March, which I know you've been following, my speech to the ECB Watchers conference in March. I distinguished between three different scenarios, which are an analytical frame in and of itself if you will, so I'm not going to consider that one is exactly scenario X, Y, or Z. But I said first of all, if the shock is limited and short-lived, it's a case where we see through. Now obviously, this situation... Second situation is the situation where the shock is large though not too persistent, in which case a measured adjustment is needed. The third scenario referred to in that ECB Watchers speech is where we expect inflation to deviate significantly and durably from target, in which case the response must be appropriately forceful. So I leave it to you to decide which of the three. I've already eliminated case number one, which is clearly not a situation where it's short-lived and rather small. This is not the case. The decision we've made is not a forceful decision either. 25 basis points is a decision which clearly signals and is necessary given the economic situation that we have, the uncertainty, given the inflation that we have, and the projections that have been produced by the euro system.

We did not discuss the neutral rate nor the range of neutral rate. As you know, there is a lot of work that has been done by staff in that respect which have given a range. Philip Lane has discussed that extensively in a speech recently, but we have not debated our positioning with reference to the neutral rate, which I'll remind you is a bit difficult to actually assess precisely because we are not in a situation where there are no shocks, which is typically what you need to have as sort of an environment within which you determine where you are neutral because you don't stimulate, you don't restrict. So this was not debated at all by the governing council. So you know, everybody has to do what they have to do. Our job is to apply the strategic review that we agreed. Our job is to follow carefully the reaction function that you are all familiar with and that we try to be as transparent about as possible so that we are predictable. And frankly, given the numbers we have, given the inflation outlook, given the risks to the upside on inflation, given the robustness of the decision against and across all scenarios, the bad one and the not so bad one, and the fact that in all circumstances... And if you add to that the fact that the forecast for growth is 0.8%, minus 0.1 relative to March, and 1.2 next year and 1.5 the following year... In this environment, much can be done by structural reforms, by encouraging the removal of obstacles to trade, saving, and investment, and so on. Thank you.

Thank you very much for your two questions. One is, of course we should not be complacent. I think that's a recurrent principle that we should always apply, as we should apply the principles of being data dependent, being analytical and rigorous about the analysis that we do of all the numbers that we receive. And this is what the euro system staff has done and this is what will be done going forward by the ECB staff when they produce the next projections. So it's not an issue of complacency. And honestly, you know, I'm not one to brag and I'm not full of vanity, but I would add that having maintained inflation pretty much at target over the last 12 months, we have not been complacent. We have done our job and we will continue doing so. On your second question, the characterization of robustness of the decision is obviously helpful when you do scenarios across the board. So if we had done the severe and adverse scenario and then decided it was robust, of course it is robust. But we decided on purpose to do scenarios on both sides of the baseline, and even in the milder scenario, the 25 basis points hike is completely warranted and justified. So this is what we've done.

Well, thank you very much for your two questions. So with reference to the baseline first of all, I have not compared and we have not gone into the exercise of comparing the baseline with the adverse or the severe scenario at this point in time. We have updated our baseline both on the account of inflation and on the account of growth as well, with the caveat of Ireland, which is a case in point of international companies organizing their business in such a way that it impacts the Irish numbers in an interesting way. So what we have done is that we've updated the baseline, and I think the best thing that can be done is to compare the first scenario prepared in March with the adverse scenario compared with June. I think that is more relevant than baseline versus last time around adverse. And as I told you in the earlier phase of our discussions today, we are beginning to see a broadening of inflation throughout the economy, and that is obviously in terms of direct effect but also in terms of indirect effect. Not yet at this point in the form of second round effects, but we are going to be extremely attentive. And when we see for instance that the delivery dates, the smoothness of supply is beginning to be impaired, obviously we will be attentive to those sort of auxiliary indicators that would help us understand where it is heading. One more point because I did speak about wages earlier. We do include a level of second round effect in our projections obviously, and the projections that we have for the three years, actually 2026, 2027, 2028, all anticipate compensation per employee at 3.2%, which in and of itself, if you compare that with the projection that we have on inflation, justifies the fact that the net income of workers will actually be positive and would lead us to assume that consumption will continue not only to be the main driver of growth as it is but will continue to grow probably more than other factors. We see other factors to fuel growth going forward. Now, yes, I did say that it's not an insurance policy interest rate decision, simply because it's a good monetary policy interest rate decision. When you have the latest reading at 3.2%, when you have the inflation outlook over our target, peaking at the end of 2026, continuing to be over target throughout most of 2027, returning to 2% in the autumn of 2027 and being at target in 2028 on the basis of market curves and all the rest of it, it is pretty obvious that we have to make a decision that is a sensible monetary policy decision. So I don't need to characterize it as credibility, insurance, or anything else for that matter. It's a monetary policy decision that stands and that is, as we say in the monetary policy statement, robust across all scenarios including the mild one.

Well, thank you very much for your question. We are of course delighted that Croatia is a member of the euro area, and I and all governing council members and members of the executive board are delighted to have the Croatia National Bank, I was going to say former governor, now being a member of the executive board and the new vice president of the ECB. It's a great representation and it brings diversity amongst the group, and it's really a blessing that Boris has joined us. But turning to inflation, of course we're concerned about inflation, but we are not just concerned about inflation in one member state or the other because our job at the ECB is to look at the whole of the euro area. And our concern, as I said earlier on, is that we see the energy price inflation, 10.9% at the moment, broadening throughout the economy, which is why we are making this decision today. Broadening inflation outlook, underlying inflation, all of that point in the direction of having to make a decision of increasing interest rates. So because our mission, our mandate is to restore price stability, we make those decisions and we are driven by that objective, price stability. Thank you.

Well, thank you very much. As I said, our mission, our mandate is price stability. We have defined price stability in our strategy review and for the purpose of making decisions at 2% in the medium term. When you see inflation picking up in the way it does, broadening throughout the economy, when you see inflation outlook north of that 2% target and only returning to 2% at the end of our projection horizon, when you see risks to the upside, to us this is inflation that needs to be taken into account and that needs to be addressed. So I don't know what other governors in whatever publication or interviews you refer to alleged that it would be higher inflation, but we do have inflation that is too high for our citizens, that is too high for the purpose of price stability as well, and we will address that because our commitment is price stability. Your second question was about the risk resulting from this decision. First of all, I would observe that the main risk would be not to take that kind of decision, because if you let inflation start running out without control, then it becomes a much more difficult situation to bring it back to the level of price stability that we have defined. So the good decision was actually to raise interest rates, to commit and to deliver on price stability so that people will make their investment decisions, their employment decisions, their wage negotiations, decisions in the light of that commitment to restore price stability as we will.

Thank you so much for your two questions. So in terms of inflation expectations, we look at three categories of expectations. We look at market-based measures, we look at survey-based measures, and we look at consumers' expectations, and we try to understand exactly where those expectations stand between the short term and the medium term that is relevant for our monetary policy decisions. And what we see at the moment is short-term inflation expectations that have risen in all three categories, more so from the consumers because that is typically the case. But when you look at the longer-term expectations, they are broadly anchored at our 2%, and whether you look at one-in-one, five-in-five, one-in-five, you have the whole category of intervals to look at, and on all those accounts, inflation expectations are broadly anchored. So you asked me about artificial intelligence at large, but it's clearly the most recent development of artificial intelligence, whether it's by Anthropic or by OpenAI or by other major developers and investors in artificial intelligence, or whether it's from other countries. We are seeing significantly new, faster, more intrusive developments. That is a fact. We also know that these developments are here to stay and that they will continue to be more in the coming months and probably on an ongoing basis. So that calls for two categories of responses. One that addresses our own central bank. Are we at the ECB and other national central banks around in the euro system well equipped to actually resist potential intrusion, potential hacking, potential negative intrusion that would be using those tools? And this is work that is underway and this is one that we take very seriously because obviously we are a central part of the financial world. The second, which is more under the remit of the SSM, has to do with how we help flag, call the attention of all the banks that we supervise to make sure that they too, and I know that they do, but that they too pay particular attention in order to protect themselves and make sure that possible intrusions that operate at a fast pace are not going to hurt them. So I think everybody is looking at this very carefully. We do not all have access to the latest tools of some of those developers that I have mentioned, but there are ways, not necessarily using the ultimate state-of-the-art latest version, but there are ways to actually protect ourselves, do the necessary patching, and make sure that we are as secure as possible. So all of that is taking place. So that's one category. I think there is another category that is worth discussing, which has to do with how governments, how sovereigns actually respond to these risks, of which I think we are seeing maybe the top of the iceberg and for which more significant risks should be anticipated and possibly joint framework work, joint governance should be discussed at a higher level. But for the moment, at our limited level as a central bank, we do what we can in response to these developments that are here to stay. Thank you.

If you look at our monetary policy statement, we say very specifically that with this 25 basis point increase of interest rates, we are well positioned to navigate the uncertainty and the developments going forward. So that stands very clearly in the MPS. As to the rest, we will be deciding meeting by meeting. We will be data dependent. We will have no preset predetermined rate path going forward, and that's the way we will be operating.