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We are nearing the end of the year, which means that you will soon reach the midway point of this legislative term. For my part, I have just completed the first two years of my mandate at the ECB.
I’m sure that, on taking office, none of us thought that a global pandemic would be at the top of our agendas. But in the face of turbulence, we came together as Europeans and mounted an unprecedented response to protect people’s lives and livelihoods.
The challenge is not over yet. Not only the course of the pandemic, but also the decisions taken by policymakers will continue to determine the strength of the recovery. And that is why our regular hearings are so important.
My remarks today will focus on the outlook for the euro area and the relevance of the cost of housing for inflation – as requested by this Committee.
I will do this with the help of a small innovation I introduced: you should all have received a two-page document which visualises the content in this statement.[1] At your request, I will conclude by discussing how to effectively discharge the ECB’s accountability obligations.
Economic activity continued to recover strongly in the third quarter: quarterly gross domestic product (GDP) growth stood at 2.2 per cent and GDP is still expected to exceed its pre-pandemic level around the end of the year.
After the great financial crisis, euro area GDP took seven years to return to its pre-crisis level. This time, thanks to the strong and combined fiscal and monetary policy responses, we expect it to exceed its pre-pandemic level in less than two years.
At the same time, growth momentum is moderating to some extent owing to supply bottlenecks and the rise in energy prices.
Consumer spending is solid, but shortages of materials, equipment and labour are weighing on manufacturing production, weakening the near-term outlook. Although the duration of supply constraints is uncertain, they are likely to persist for several months and gradually ease only during 2022.
Supply bottlenecks are not the only source of downside risk to the growth outlook. Higher energy prices could also dampen growth by limiting purchasing power and holding back the rebound in consumption. On the upside, households still have considerable excess savings which could boost activity levels if deployed.
Turning to inflation, the rate increased by more than we had anticipated in September, standing at 4.1 per cent in October. The upswing in inflation is being driven by three primary forces.
The first of these is energy prices. In October energy inflation accounted for just over half of overall headline inflation. The second is that the recovery in demand related to the reopening of the economy is outpacing constrained supply and this is pushing up prices. And the third is that the reversal of the temporary cut in German VAT last year is mechanically driving up current headline inflation figures.
The latter factor will fall out of the inflation calculation from January 2022 but the other two may last longer. Current futures prices point towards a noticeable easing of energy prices in the first half of 2022. As the recovery continues and supply bottlenecks unwind, we can expect the price pressure on goods and services to normalise.
As a result, we still see inflation moderating in the next year, but it will take longer to decline than originally expected.
If energy prices keep rising or supply constraints persist, inflation may remain higher for longer than we currently anticipate. This could feed into higher wages and subsequently higher prices. But so far, we see no evidence of this in the data for negotiated wages. We do see wage growth next year potentially rising somewhat more than this year, but the risk of second-round effects remains limited.
Overall, we continue to foresee inflation in the medium term remaining below our new symmetric two per cent target.
Growth and medium-term inflation dynamics still depend on favourable financing conditions for all sectors of the economy. Such conditions remain favourable and bank lending rates to firms and households remain at historically low levels.
At our October meeting the Governing Council continued to judge that favourable financing conditions could be maintained with the stance endorsed in September.
Regarding policy interest rates, in our forward guidance we clearly articulated the three conditions that need to be satisfied before rates will start to rise. Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.
Meanwhile our asset purchases under the pandemic emergency purchase programme continue to safeguard favourable financing conditions for all sectors of the economy. At a time when purchasing power is already being squeezed by higher energy and fuel bills, an undue tightening of financing conditions is not desirable, and would represent an unwarranted headwind for the recovery.
As for the further calibration of bond purchases, we will announce our intentions in December. Even after the expected end of the pandemic emergency, it will still be important that monetary policy – including the appropriate calibration of asset purchases – supports the recovery throughout the euro area and the sustainable return of inflation to our target of two per cent....
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