Christine Lagarde, Boris Vujčić: Monetary policy statement (with Q&A)

The European Central Bank (ECB) Governing Council decided to maintain the three key interest rates unchanged during its recent monetary policy statement. The decision comes amidst high uncertainty surrounding the economic impact of the ongoing conflict in the Middle East, which has led to significant volatility in energy prices. The ECB remains committed to ensuring that inflation stabilizes at its two percent target in the medium term.

The Vice-President and ECB President welcomed the press conference, stating that recent economic data suggests some improvement in activity during the second quarter. However, the conflict has continued to hinder growth. Economic activity in the services sector has shown partial recovery, driven by the increasing contribution of AI-related digital services. Manufacturing has held up well, supported by higher defense spending and the buildup of stocks to mitigate supply chain risks.

Unemployment remained low at 6.2 percent in May, but job postings have continued to decline, indicating a weaker labor market than before the conflict. Forward-looking indicators suggest that growth will remain modest in the near term, with the energy shock and related uncertainties weighing on the economy. Nonetheless, the ECB acknowledges that the fundamental drivers of medium-term growth remain intact.

Private consumption, investment in new digital technologies, government spending on defense and infrastructure, and a recovery in exports are expected to contribute to overall growth momentum. The ECB emphasizes the need for urgent action to strengthen the euro area economy while maintaining sound public finances. Simplifying and harmonizing rules across the EU's Single Market, accelerating the energy transition, and completing the savings and investments union are crucial building blocks, according to the Governing Council.

Fiscal responses to the energy shock should be temporary, targeted, and tailored to specific needs. The recent vote in the European Parliament on the digital euro was a significant milestone, with the shared objective of reaching agreement on the Single Currency Package by the end of the year. The digital euro aims to complement physical cash, providing a digital payment method for any transaction within the euro area.

Inflation declined to 2.8 percent in June from 3.2 percent in May, with energy price inflation falling to 8.5 percent from 10.8 percent in May. Food price inflation decreased from 1.9 percent to 1.5 percent, while inflation excluding energy and food eased to 2.4 percent from 2.6 percent in May. The energy shock continues to contribute to higher prices, as firms source more expensive inputs and expect to pass on increased selling prices.

While underlying inflation has remained contained, the full effects of the energy shock have yet to materialize.

The ECB's wage tracker and surveys on wage expectations indicate moderate wage growth over the coming quarters. Rising labor productivity has helped contain growth in unit labor costs. Inflation expectations over shorter horizons remain elevated, with most measures around 2 percent, supporting the stabilization of inflation around the target in the medium term.

However, the energy shock's impact on inflation is expected to persist into the first half of 2027. The ECB will closely monitor the size and persistence of the energy price increase and its effects on price and wage-setting, inflation expectations, and overall economic dynamics. The geopolitical situation remains fragile, with renewed setbacks in the conflict potentially leading to further disruptions in energy supplies, higher real incomes, spending, and investment risks.