LIVE: ECB President Christine Lagarde Speaks to Reporters Following Governing Council Meeting | AF1G

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 we'll 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's 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% from 2.2% in April, as first quarter supported by slower growth in wages and profits. The ECB's wage tracker and surveys on ease over the year. However, it is moreover some indicators of underlying inflation the energy shock inflation expectations time. Most measures of longer-term inflation expecting the stabilization of inflation around target in the medium term over the summer and keep it well above seven. It will also have an impact supported in other prices. However, the more likely they are to drive up broader inflation. We will therefore closely monitor inflation expectations and over time. Turning now to the risk assessment. The risk to the volatile global policy environment. Energy prices further and for longer than currently expected. To invest and spend. The drag roots were to cause acute shortages of key inputs. Market sentiment or a tighter supply of credit could damp. Also further disrupt supply chains, reduce exports and weak. Against Ukraine remain a major source of uncertainty. Growth could turn out to be higher if the economy or if the war was resolved promptly and sustainably. Structure spending reforms to enhance productivity and the euro by more than expected. A deeper integration of the single market would also boost growth beyond. The risks now to the inflation outlook are to the more and for longer than currently expected. Europe be reinforced and become more persistent if higher energy prices were to spill over by more than expected to other prices in response or if global supply chains were disrupted more broadly. Supply chains, curtail the supply of critical raw materials, and worsen capacity constraints in the euro area. And the unfolding climate and nature crisis more broadly could drive up food prices by more than expected. By contrast, inflation 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 as well. So looking now at the financial and monetary conditions, 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 remain rates at 3.4%. The annual growth rate of bank loans increased to 3.4% in April from 3.2% and rose to 4.6%. Mortgage lending in April again grew by 3%. Strategy. The governing council thoroughly assessed the links between monetary policy and financial stability. Strong capital and liquidity ratios, quality and robust profitability, potentially amplified by the non-bank financial sector and deteriorating asset quality particularly in energy and trade. These risks increase the longer the current geopolitical conflict lasts. Defense against the buildup of financial vulnerabilities, enhancing resilience and preserving macrocredential space. 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 target; 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 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-committed. We stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilizes sustainably at medium-term target and to preserve the smooth functioning of monetary policy transmission. And we now stand ready to the newest member of the trio on stage. Welcome, Boris.

Thank you very much. Boris, 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 way of 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. It will be an insurance matter. 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 cost being obvious, with indirect cost 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 at this point in time is 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 price significant increase or whether there is something else. At this point in time, we cannot yet say whether this service 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 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 or Y. 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 we think that it is a large though not too persistent shock, in which case a measured adjustment is needed. Okay. The third 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 Eurosystem. Regard the neutral rate and the 2.5% range, it did not play a role in your thinking? There were quite a few economies who argued that a hike in the current environment would take you to this target. But the neutrally. The neutral rate was not discussed, 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 a sort of 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, the inflation outlook, the risk to the upside on inflation, 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 growth forecast as 0.8%, minus 0.1 relative to March, and 1.2 next year and 1.5 the following year, in such an environment, more can be done by structural reforms, by encouraging that obstacles to trade, saving, and invest, and so on, by policy. 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 Eurosystem 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 assent to 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, yes 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 sorts 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, 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 will continue 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 over our nugget and being at target in 2028, that policy decision stands. And that is as we say in all scenarios including the mild one. Thank you.

Thank you very much. As I said, our mission, our priority from our strategy review and our purpose is price stability. When you see inflation outlook north of target over the projection horizon, when you see risks to the upside, that needs to be taken into account and that needs to be addressed. We do have inflation that is too high and we will address that because our commitment is price stability. Let me assure you from this decision, first of all, I would observe that if you let inflation start running away, it will be difficult to bring it back to the target we have defined. So the good decision was that people will make their investment decisions, their employment decisions with confidence. As we will continue to do our job.

Two questions. So in terms of inflation expectations, we look at survey-based measures and we look at consumer expectations. They stand between the short term and longer term. Short-term inflation expectations have risen. Inflation expectations are broadly anchored. Over longer intervals to look at, they are broadly anchored. It's clearly the most recent other major developments and investors in our currency have significantly new faster. There will continue to be more in the coming months. And on the digital euro, we are preparing it. It will enhance Europe's strategic autonomy. On cybersecurity, we have responses. One that addresses our own operations, to actually resist potential intrusion. There is work that is underway, and this is one that we take very seriously. This is more under the remit of the SSM. They too pay particular attention to make sure that possible intrusion does not operate. We do not all have access to the latest technology, but we are always using the most secure state-of-the-art systems. So all of that is taking place. On sovereigns, how governments organize their finances, there could be bigger risks on the horizon, but for the moment at our limited level as a central bank, we are watching.

This is not the beginning of a cycle. But at the same time, there are other components that could play a bigger role. Under these circumstances, the new framework is that we say very specifically that with this 25 basis point hike, we are well positioned to navigate the uncertainty and the developments going forward. We will be deciding meeting by meeting. We will be data dependent. There is no predetermined rate path going forward. We will be back here on the 23rd of July.