On Inflation

Since our meeting in September 2023 inflation has fallen by more than 2.5% and inflation outlook has improved markedly.

Underlying inflation has also eased reinforcing the signs that price pressures have weakened and inflation expectations have declined at all horizons.

At the same time despite the progress of the recent quarters domestic price pressures remain strong as wage growth remains elevated and inflation is likely to stay above target well into next year

Projections for both headline and core inflation has been revised up for 2024 and 2025 compared with March projections
Projections for headline inflation is 2.5% in 2024, 2.2% in 2025, 1.9% in 2026
Projections for core inflation (excluding energy and food) is 2.8% in 2024, 2.2% in 2025, 2.0% in 2026

We are determined to ensure that inflation returns to our 2.0% medium term target in a timely manner.

Annual inflation rose 2.2% in May from 2.4% in April according to EuroStats flash estimate.
Food price inflation declined to 2.6%, energy price inflation increased 0.3% after recording negative annual rates for a year. Goods price inflation continued to decrease in May to 0.8%. By contrast services price inflation rose markedly to 4.5% from 3.7% in April.

Most measures of underlying inflation declined further in April the last month for which data are available confirming the picture of gradually diminishing price pressures.

However domestic inflation remains high. Wages are still rising at an elevated pace making up for the past inflation surge.

Owing to the staggered nature of the wage adjustment process and an important role of one off payments labor costs will likely fluctuate over near term as seen in the pick up in negotiated wages in the first quarter.

At the same time forward looking indicators signal that wage growth will moderate over the course of the year.
Profits are absorbing part of the pronounced rise in unit labor costs which reduces its inflation re-effects.

Inflation is expected to fluctuate around current levels for the rest of the year including due to energy related base effects and it is then expected to decline towards our target over the second half of the next year owing to weaker growth in labor costs, the unfolding effects of our restrictive monetary policy and a fading impact of the energy prices and the pandemic.

Measures of longer term inflation expectations have remained broadly stable with most stunning at around 2%.
Inflation could turn out higher than anticipated if wages or profits increase by more than expected.

Upside risks to inflation also stem from the heightened geopolitical tensions which could push energy prices and freight costs higher in the near term and disrupt global trade.

Moreover, extreme weather events and unfolding climate crisis more broadly could drive up food prices.

On contrast inflation may surprise on downside if monetary policy dampens demand more than expected or if the economy environment in the rest of the world worsens unexpectedly.

On Economy

Economic growth is expected to pick up to 0.9% in 2024, 1.4% in 2025, 1.6% in 2026

After five quarters of stagnations the euro area economy grew by 0.3% over the first quarter of 2024.
The services sector is expanding. Manufacturing sector is showing signs of stabilization at low levels.
We expect the economy to continue to recover as higher wages and improved terms of trade push up real incomes

Strong export should also support growth over coming quarters as global demand for goods and services rises.

Finaly, monetary policy should exert less of a drag on demand over time.

Risks to economic growth are balanced in near term but remain tilted to the downside over medium term.

Weaker world economy or an escalation in trade tensions between major economies would weigh on euro area growth.
War in Ukraine and conflict in middle east are major sources of geopolitical risk.

This may result in forms of households becoming less confident about future and global trade being disrupted.

Growth could also be lower if the effect of monetary policy turn out stronger than expected.

Growth could be higher if inflation comes down more quickly than expected and rising confidence and real incomes mean that spending increases by more than anticipated or if the world economic growth more strongly than expected.

On Employment

Employment rose by 0.3% in the first quarter of this year with around 500 000 new jobs created and surveys point to continued job growth in the near term.

The unemployment rate edged down to 6.4% in April, its lowest level since the start of the euro.

Companies are still posting many job vacancies though slightly fewer than before.

On Rates

We are determined to ensure that inflation returns to our 2.0% medium term target in a timely manner.

We will keep policy rates sufficiently restrictive for as long as necessary to archive this aim.

We will continue to follow a data-dependent and meeting-by-meeting approach to determining appropriate level and duration of restriction.

In particular our interest rate decision will be based on assessment of inflation outlook in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.

We are not pre-committing to a particular rate path.