Transcription
The governing council today decided to keep the three key ECB interest rates unchanged. Inflation is currently at around our 2% medium-term target and our assessment of the inflation outlook is broadly unchanged. The new ECB staff projections present a picture of inflation similar to that projected in June. They see headline inflation averaging 2.1% in 25, 1.7% in 26, and 1.9% in 27. For inflation, excluding energy and food, they expect an average of 2.4% in 25, 1.9% in 26, and 1.8% in 27.
The economy is projected to grow by 1.2% in 25, revised up from the 0.9% expected in June. The growth projection for 26 is now slightly lower at 1%, while the projection for 27 is unchanged at 1.3%.
We are determined 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. In particular, our interest rate decisions will be based on our assessment of the 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.
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. So looking at the economy, the economy grew by 0.7% in cumulative terms over the first half of the year on account of the resilience in domestic demand. The quarterly pattern showed stronger growth in the first quarter and weaker growth in the second quarter, partly reflecting an initial frontloading of international trade ahead of expected tariff increases and then a reversal of that effect. Survey indicators suggest that both manufacturing and services continue to grow, signaling some positive underlying momentum in the economy. Even if demand for labor is softening, the labor market remains a source of strength with the unemployment rate at 6.2% in July. Over time, this should boost consumer spending, especially if, as foreseen in the soft projections, people save less of their income. Consumer spending and investment should benefit from our past interest rate cuts feeding through to financing conditions. Investment should also be underpinned by substantial government spending on infrastructure and defense. Higher tariffs, a stronger euro, and increased global competition are expected to hold growth back for the rest of the year. However, the effect of these headwinds on growth should fade next year. While recent trade agreements have reduced uncertainty somewhat, the overall impact of the change in the global policy environment will only become clear over time.
The governing council considers it crucial to urgently strengthen the Euro area and its economy in the present geopolitical environment. Fiscal and structural policies should make the economy more productive, competitive, and resilient. One year on from the release of Mario Draghi's report on the future of European competitiveness, it remains essential to follow up on its recommendations with further concrete action and to accelerate implementation in line with the European Commission's road map. Governments should prioritize growth enhancing structural reforms and strategic investment while ensuring sustainable public finance. It is critical to complete the savings and investment union and the banking union to an ambitious timetable and to rapidly establish the legislative framework for the potential introduction of our digital euro.
Looking now at inflation. Annual inflation remains close to our target, edging up to 2.1% in August from 2% in July. Energy price inflation was minus 1.9% after minus 2.4% in July, while food price inflation declined to 3.2% from 3.3%. Inflation, excluding energy and food, stayed constant at 2.3%. Services inflation edged down to 3.1% from 3.2% in July, while goods inflation was unchanged at 0.8%. Indicators of underlying inflation remain consistent with our 2% medium-term target. Year-on-year growth in compensation per employee was 3.9% in the second quarter, down from 4% in the previous quarter and 4.8% in the second quarter of last year. Forward-looking indicators, including the ECB's wage tracker and surveys on wage expectations, suggest that wage growth will moderate further. Along with productivity gains, this will help keep a lead on domestic price pressures even as profit recover from low levels.
Looking ahead, the staff projections see food inflation dropping from 2.9% in 25 to 2.3% in 26 and 27. Energy price inflation is expected to remain volatile but rise over the projection horizon, in part because of the start of the EU emission trading system too in 2027. Inflation excluding energy and food is expected to fall from 2.4% in 25 to 1.9% in 26 and 1.8% in 27, owing to the stronger euro and declining labor cost pressure. Most measures of longer-term inflation expectations continue to stand at around 2%, supporting the stabilization of inflation around our target.
So moving now to the risk assessment. Thank you. Risks to economic growth have become more balanced. While recent trade agreements have reduced uncertainty, a renewed worsening of trade relations could further dampen exports and drag down investment and consumption. A deterioration in financial market sentiment could lead to tighter financing conditions, greater risk aversion, and weaker growth. Geopolitical tensions such as Russia's unjustified war against Ukraine and the tragic conflict in the Middle East remain a major source of uncertainty. By contrast, higher than expected defense and infrastructure spending together with productivity enhancing reforms would add to growth. An improvement in business confidence could stimulate private investment. Sentiment could also be lifted and activities spurred if geopolitical tensions diminished or if the remaining trade disputes were resolved faster than expected.
The outlook for inflation remains more uncertain than usual as a result of the still volatile global trade policy environment. A stronger euro could bring inflation down further than expected. Moreover, inflation could turn out to be lower if higher tariffs lead to lower demand for Euro area exports and induce countries with overcapacity to further increase exports to the Euro area. Trade tensions could lead to greater volatility and risk aversion in financial markets, which would weigh on domestic demand and would thereby also lower inflation. By contrast, inflation could turn out to be higher if a fragmentation of global supply chains pushed up import prices and added to capacity constraints in the domestic economy. A boost in defense and infrastructure spending could also raise inflation over the medium term. Extreme weather events and the unfolding of climate crisis more broadly could drive up food prices by more than expected.
So looking at the financial and monetary conditions since our last meeting, short-term market rates have increased while longer-term rates have remained broadly unchanged. However, our past interest rate cuts continued to lower corporate borrowing costs in July. The average interest rate on new loans to firms moved down to 3.5% in July from 3.6% in June. The cost of issuing market-based debt was unchanged at 3.5%. Loans to firms grew by 2.8%, slightly more strongly than in June, while the growth of corporate bond issuance rose to 4.1% from 3.4%. The average interest rate on new mortgages was again unchanged at 3.3% in July, while growth in mortgage lending picked up to 2.4.4% from 2.2%.
So in conclusion, the governing council today decided to keep the three key ECB interest rates unchanged. We are determined to ensure that inflation stabilizes at our 2% target in the medium term. We will follow a data dependent and 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 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. And 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.