In a today address to the European Parliament, ECB President Christine Lagarde noted that economic activity indicators have shown steady improvement in recent months, coinciding with diminished concerns over energy shortages and price hikes. However, she cautioned that accumulated price pressures are still spreading throughout the economy, albeit with some delay.

Lagarde observed, “Wage pressures have strengthened on the back of robust labor markets and employees aiming to recoup some of the purchasing power they have lost to high inflation.” She added that due to inflation remaining “too high for too long,” the ECB Governing Council decided to increase the three key interest rates by 50 basis points last week, demonstrating their commitment to returning inflation to the 2% medium-term target.

In light of the heightened uncertainty, Lagarde emphasized the importance of a “data-dependent” approach to policy rate decisions, stating, “Our policy rate decisions will be determined by our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.”

Full speech of ECB Lagarde here.

ECB Governing Council member Peter Kazimir has asserted that the recent events in financial markets have not altered his stance on the necessity of continuing with monetary tightening. The Slovak central bank governor acknowledged the delicate nature of the current situation but emphasized that the end goal has not yet been reached.

Kazimir said, “even the current events on the financial markets do not change my view that we need to continue,” with monetary tightening.

“I am very well aware of the delicacy of the situation … but we are not yet at the finish line,” he added.

He said underlying inflation is “stubbornly sticky”. “There are risks to inflation on both sides, but in my view, upward risks are much greater.”

Nevertheless, he also noted it was useless to speculate what ECB could do at next meeting on May 4. ECB raised interest rate by 50bps yesterday, but omitted tightening reference in the accompanying statement.

ECB Governing Council member Francois Villeroy de Galhau told BFM Business radio that yesterday’s 50bps sent a “signal of confidence that is strong and dual” to the public.

“It reflects both confidence in our anti-inflation strategy and confidence in the solidity of European and French banks,” he said.

Regarding recent banking crisis, Villeroy, also the Bank of France Governor, noted that “French and European banks are very solid,” and they are “not in the same situation as US banks”.

ECB had the “tools to ensure the liquidity of banks”, but according to him, it’s unlikely that they have to be used.

ECB raises the three key interest rates by 50bps today. After that, the main refinancing, marginal lending facility and deposit facility rates will be 3.50%, 3.75%, and 3.00% respectively.

There was no reference to further tightening in upcoming meetings. Instead the governing council will continue with a “data-dependent approach”, with decisions determined by inflation outlook, dynamics of underlying inflation, and strength of monetary policy transmission.

In the new economic projections, headline inflation forecast was revised down across the horizon. But core inflation forecast was revised up in 2023. GDP growth forecast is also revised up in 2023.

• Headline inflation is forecast to average 5.3% in 2023, 2.9% in 2024, and 2.1% in 2025. The estimate was downgraded from December’s 6.3% in 2023, 3.4% in 2024, and 2.3% in 2025.
• Core inflation is projected to average 4.6% in 2023, 2.5% in 2025, and 2.2% in 2025. Comparing to December projections of 4.2% in 2023, 2.8% in 2024, and 2.4% in 2025.
• GDP growth is forecast to average at 1.0% in 2023, 1.6% in 2024, and 1.6% in 2025, comparing to December’s forecast of 0.5% in 2023, 1.9% in 2024, and 1.8% in 2025.

But the central noted that the macroeconomic projections were finalized before recent emergence of financial market tensions. Hence, there is additional uncertainty around the above baseline assessments.

Full statement here.