In an interview with La Tribune Dimanche, fielding the topic of a possible recession risk in Europe, ECB President Christine Lagarde didn’t offer a direct response but instead focused on the preparations and countermeasures Europe has adopted. She highlighted, “This allows us to look towards the coming winter, if not calmly, then at least with a lot more confidence,” emphasizing the role of the Next Generation EU program, structural reforms, and the replenishment of over 90% of gas reserves.

Germany, a powerhouse of the European economy, was also discussed. Lagarde candidly noted that Germany’s previously successful economic model, which leveraged cheap energy supplies and significant export opportunities, especially to China, is undergoing transformation. She admitted that Germany is “one of the factors that is indeed weighing on the outlook for European growth.”

In addressing concerns about whether the ECB harbors a pessimistic view on the short-term economic horizon for Europe, Lagarde was clear, stating, “There are three reasons why we are not pessimistic.” She pointed to an expected rise in growth figures next year, a significant reduction in inflation, and a historically high employment rate in Europe that seems to be holding steady.

However, one of the challenges the European businesses face revolves around salary negotiations and wage structures. Lagarde posed, “The big question right now concerns businesses. Will they accept absorbing part of the salary increases that will be negotiated this year and next in their margins – which didn’t change much in 2022?”

Full interview of ECB Lagarde here.

In an interview with Jutarnji List, ECB Executive Board Isabel Schnabel underlined the unpredictability surrounding the current inflation trajectory, cautioning against premature optimism despite recent encouraging data.

Schnabel stated, “We cannot say that we are at the peak (interest rates) or for how long rates will need to be kept at restrictive levels.”

She emphasized the importance of closely monitoring three key metrics to make future monetary policy decisions: inflation outlook, dynamics of underlying inflation, the efficacy of monetary policy transmission. Encouragingly, she noted that “all of them are moving in the right direction.”

However, the Board member didn’t shy away from highlighting possible headwinds. She pointed out, “I still see upside risks to inflation,” flagging potential supply-side shocks and stronger-than-anticipated wage growth, which could be offset by lower productivity growth. Firms might also face difficulty in absorbing these increased costs, which, if realized, could necessitate further hikes in interest rates.

While Schnabel acknowledged the downward trend in inflation as “encouraging,” she emphasized that it still remains considerably above the ECB’s 2% target. The aim, she said, should be to hit this target by 2025 to ensure inflation expectations “firmly anchored”. However, she cautioned about the challenges in reaching this goal, noting that the “last kilometre” may be the most challenging.

The recent surge in oil prices was another point of concern for Schnabel, suggesting that inflation could face upward pressures from unforeseen supply shocks, especially in sectors like energy and food. She added a call for vigilance, urging that “we must not be complacent, and we should not declare victory over inflation prematurely.”

Full interview of ECB Schnabel here.

ECB Governing Council member Francois Villeroy de Galhau, in an interview with the German newspaper Handelsblatt published yesterday, weighed in on the current debate surrounding ECB’s interest rates. Stating his view clearly, Villeroy remarked, “Today, I think there’s no justification for an additional increase in the ECB rates.”

Rather than focusing on the peak in rates, Villeroy believes the dialogue should shift towards the concept of a rate “plateau.” In his words, “we’ll remain on this plateau as long as necessary.”

Villeroy also provided reassurance regarding the economic outlook of the eurozone. Contrary to the hard landing fears that loomed last winter, he noted, “We are not facing the worst-case scenario.” Elaborating further, he added, “I believe our monetary policy can and should now aim for a soft landing for the euro zone: We’ll exit inflation, and we’ll probably do so without a recession.”

Commenting on the broader market sentiments, Villeroy observed that expectations, both in Europe and US, have historically been “a little too optimistic regarding a future rate cut.”

ECB Governing Council member Peter Kazimir said today, “I strongly believe that our rate hike at the last meeting was the last one” The focus, he outlined, now shifts to the upcoming December and March forecasts, as “only real data can persuade us that we’re at the peak.”

Kazimir addressed inflation concerns, observing that, “We see the overall inflation and also core inflation on a downward trend, though this is lasting a bit longer than we’d wanted.” He further highlighted the ripple effects of past rate hikes, pointing out that they “have an increasingly significant impact on the real economy.”

Shedding light on the broader economic repercussions, he mentioned that “Financing conditions are tightening and are weakening demand for investments, in production and affecting overall economic growth.” With this context, Kazimir emphasized the urgency to manage inflation effectively and swiftly.

On the topic of ECB’s PPEP reinvestments, Kazimir treaded cautiously, suggesting the bank was “ready for debate” but reiterated the importance of maintaining balance. The topic of altering the balance sheet’s reduction pace will be broached only when the Council is confident further rate hikes won’t be necessary.