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”MNI Connect” investoru diskusija ar ECB Padomes locekli, Latvijas Bankas prezidentu Mārtiņu Kazāku – par eirozonas monetārās politikas attīstību

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MNI Connect
Video Conference
Governor of Latvijas Banka
Member of the ECB's Governing Council
Mārtiņš Kazāks, PhD
The short-term outlook for Euro area activity remains subdued and weak.
Main
takeaways
Inflation moderating from earlier peaks, reflecting the fading impact of
previous upward shocks. Need to watch out for domestic price pressures:
profit margins to soften and a clear peak in wage growth still to be seen.
Monetary policy transmission is strong, bank lending shows further
tightening.
Global economic activity has proven to be resilient; geopolitics is the
main risk contributing to the fragmentation of the global economy.
Monetary policy:
1) Ensure that interest rates are at sufficiently restrictive levels for as
long as necessary; the level and duration is determined in a data-
dependent manner, assessing the inflation outlook, the dynamics of
underlying inflation and the strength of transmission;
2) Discussion on rate cuts is premature;
3) Balance sheet to be reduced in a gradual and orderly manner, but no
reason to linger on
Bloomberg 1-year ahead recession probability index (in %) and
changes in probability since May, 2023 (% and % points)
-10
10
30
50
70
90
110
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
UK US EA
45
65 65
65
50
60
-20
-10
0
10
20
30
40
50
60
70
80
EA US UK
Change since
May-23
Recession
probability in
May-23
Recession
probability, latest
(November, 2023)
3 Source: Bloomberg, Latvijas Banka staff calculations.
Global economic growth momentum is weak: although recession fears
have picked up lately, they remain below peak level reached last year
EA PMI (balance of answers)
30
35
40
45
50
55
60
65
11/21 02/22 05/22 08/22 11/22 02/23 05/23 08/23 11/23
Composite Manufacturing Services
EA GDP (%; q-o-q), Eurocoin (%; m-o-m) and
sentiment (point) indicators
4
* ESI divided by two to be on the same scale as PMISources: S&P Global, Eurostat, EC,
ECB, Eurocoin and Latvijas Banka's calculations.
Growth slowed in the recent quarters; rebound expected later
next year as real incomes boost demand... soft landing?
30
35
40
45
50
55
60
65
70
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
02/22 06/22 10/22 02/23 06/23 10/23 02/24 06/24
GDP Sep MPE Jun BMPE
Eurocoin Composite PMI (rhs) ESI (rhs)*
Relationship between unemployment and wage
growth in EA (1Q2012 - 4Q2022)
Compensation per employee in EA countries
(annual % change)
5 Sources: Eurostat and Latvijas Banka's calculations.
Philips curve waking up?
Tight labour market and rising costs maintain wage demands
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
DE EA FR EA IT
Q2 2023
0
1
2
3
4
5
6
6 8 10 12 14
Compensation
per
employee
(annual
%
change)
Unemployment rate (%)
Q1 2012-Q1 2021
Q3 2021-Q2 2023
Headline, core and energy inflation (%) and changes in inflation since May, 2023 (% points)
-20
-10
0
10
20
30
40
50
-5
0
5
10
15
20
2008 2009 2011 2013 2014 2016 2018 2019 2021 2023
Headline inflation
Core inflation
Energy rhs
6 Source: Eurostat.
Energy prices have dropped, but inflation dynamics likely to
remain bumpy
2.4
3.6
-11.5
-3.7
-1.8
-9.7
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
Headline inflation Core inflation Energy
Annual rate, November 2023
Changes since May 2023
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MNI Connect

  • 1. MNI Connect Video Conference Governor of Latvijas Banka Member of the ECB's Governing Council Mārtiņš Kazāks, PhD
  • 2. The short-term outlook for Euro area activity remains subdued and weak. Main takeaways Inflation moderating from earlier peaks, reflecting the fading impact of previous upward shocks. Need to watch out for domestic price pressures: profit margins to soften and a clear peak in wage growth still to be seen. Monetary policy transmission is strong, bank lending shows further tightening. Global economic activity has proven to be resilient; geopolitics is the main risk contributing to the fragmentation of the global economy. Monetary policy: 1) Ensure that interest rates are at sufficiently restrictive levels for as long as necessary; the level and duration is determined in a data- dependent manner, assessing the inflation outlook, the dynamics of underlying inflation and the strength of transmission; 2) Discussion on rate cuts is premature; 3) Balance sheet to be reduced in a gradual and orderly manner, but no reason to linger on
  • 3. Bloomberg 1-year ahead recession probability index (in %) and changes in probability since May, 2023 (% and % points) -10 10 30 50 70 90 110 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 UK US EA 45 65 65 65 50 60 -20 -10 0 10 20 30 40 50 60 70 80 EA US UK Change since May-23 Recession probability in May-23 Recession probability, latest (November, 2023) 3 Source: Bloomberg, Latvijas Banka staff calculations. Global economic growth momentum is weak: although recession fears have picked up lately, they remain below peak level reached last year
  • 4. EA PMI (balance of answers) 30 35 40 45 50 55 60 65 11/21 02/22 05/22 08/22 11/22 02/23 05/23 08/23 11/23 Composite Manufacturing Services EA GDP (%; q-o-q), Eurocoin (%; m-o-m) and sentiment (point) indicators 4 * ESI divided by two to be on the same scale as PMISources: S&P Global, Eurostat, EC, ECB, Eurocoin and Latvijas Banka's calculations. Growth slowed in the recent quarters; rebound expected later next year as real incomes boost demand... soft landing? 30 35 40 45 50 55 60 65 70 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 02/22 06/22 10/22 02/23 06/23 10/23 02/24 06/24 GDP Sep MPE Jun BMPE Eurocoin Composite PMI (rhs) ESI (rhs)*
  • 5. Relationship between unemployment and wage growth in EA (1Q2012 - 4Q2022) Compensation per employee in EA countries (annual % change) 5 Sources: Eurostat and Latvijas Banka's calculations. Philips curve waking up? Tight labour market and rising costs maintain wage demands -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 DE EA FR EA IT Q2 2023 0 1 2 3 4 5 6 6 8 10 12 14 Compensation per employee (annual % change) Unemployment rate (%) Q1 2012-Q1 2021 Q3 2021-Q2 2023
  • 6. Headline, core and energy inflation (%) and changes in inflation since May, 2023 (% points) -20 -10 0 10 20 30 40 50 -5 0 5 10 15 20 2008 2009 2011 2013 2014 2016 2018 2019 2021 2023 Headline inflation Core inflation Energy rhs 6 Source: Eurostat. Energy prices have dropped, but inflation dynamics likely to remain bumpy 2.4 3.6 -11.5 -3.7 -1.8 -9.7 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 Headline inflation Core inflation Energy Annual rate, November 2023 Changes since May 2023
  • 7. 7 In terms of momentum, there has been a nice and consistent downward trend since spring Inflation momentum (%; y-o-y and 3m/3m annualized; SA) 0 2 4 6 8 10 12 14 16 18 05/22 12/22 07/23 Momentum_HICP Total 7 Source: SDW, Latvijas Banka staff calculations. -30 -20 -10 0 10 20 30 40 50 60 70 05/22 12/22 07/23 Momentum_energy Energy 0 2 4 6 8 10 12 14 16 18 05/22 12/22 07/23 Momentum_core Core inflation 0 2 4 6 8 10 12 14 16 18 05/22 12/22 07/23 Momentum_food Food 0 2 4 6 8 10 12 14 16 18 05/22 12/22 07/23 Momentum_NEIG NEIG 0 2 4 6 8 10 12 14 16 18 05/22 12/22 07/23 Momentum_Services Services
  • 8. Gross profit margin of NFCs in EA (% of value added) 25 30 35 40 45 50 2013 2015 2017 2019 2021 2023 Germany Spain France Italy Profit share of value added (nominal gross operating surplus / nominal value added) 0.35 0.40 0.45 0.50 0.55 0.60 2013 2015 2017 2019 2021 2023 All activities Construction Industry (except construction) Retail, transport, accommodation and food services Sources: Eurostat and Latvijas Banka's calculations. Latest data: Q2 2023. Notes: when calculating profit share, taxes are not subtracted from profit due to lack of data. Actual profit share is lower. No clear decline in profit margins visible yet 8
  • 9. Euro area outstanding loan stock (tn €) and growth rates (y-o-y %) by sector Easing of credit standards by sector (net % of reporting banks) 9 Source: ECB’s Statistical Data Warehouse, ECB`s Bank Lending Survey. Banks report a further tightening of credit standards and a decline in loan demand -2 0 2 4 6 8 10 12 14 0 5 10 15 20 2020 2021 2022 2023 Loan stock, households Loan stock, non-financial corporations Growth rate, non-financial corporations (right) Growth rate, households (right) Growth rate, total (right) -35 -30 -25 -20 -15 -10 -5 0 5 10 15 Q1 2019 Q3 Q1 2020 Q3 Q1 2021 Q3 Q1 2022 Q3 Q1 2023 Q3 Observed, non-financial corporations Observed, households (housing) Forecasted, non-financial corporations Forecasted, households (housing) Easing Tightening
  • 10. 10Y government bond nominal yields (%) Government bond real yields* (%) 10 *Calculated as difference between GDP weighted nominal yield and corresponding euro area inflation swap rate. Source: Bloomberg. Interest rates in restrictive territory helping to slow inflation towards its 2 percent target -5 -4 -3 -2 -1 0 1 2 3 4 2020 2021 2022 2023 Euro zone 2Y US 2Y Euro zone 10Y US 10Y -1 0 1 2 3 4 5 2020 2021 2022 2023 IT ES FR DE US
  • 11. Market-based measure of inflation expectations (%) 11 Source: Bloomberg. Long-term inflation expectations: anchored * The value for Q4 is calculated based on data available until 29.11.2023 0 1 2 3 Q4 2005 Q2 2007 Q4 2008 Q2 2010 Q4 2011 Q2 2013 Q4 2014 Q2 2016 Q4 2017 Q2 2019 Q4 2020 Q2 2022 Q4 2023* EA 5y5y US 5y5y EA 1y1y ECB target
  • 12. 12 Monetary policy – maintaining a steady hand, but keeping an eye on risks (on both sides) Given current economic outlook and medium term-projection baseline, no need for rate cuts in 1H 2024, but, if the outlook changes, and the balance of risks for price stability shifts, also our decisions on rates might change. Interest rates have reached levels that are contributing forcefully to inflation normalization. Fiscal-Monetary policy mix remains important. Excessively expansionary fiscal policy runs risks to price stability, higher rates will have to be maintained for longer. But mind Germany... Short-term rates have normalized, but the whole yield curve has not (yet), reduction of Eurosystem’s balance sheet needed. Focus now on the speed and extent of monetary tightening as the impact of past rate hikes works through the financial system.
  • 13. 13 Source: Bloomberg. Flatter yield curve – one of the side effects of the large Eurosystem balance sheet Euro area yield curve (%) -1 0 1 2 3 4 5 3M 6M 12M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Before APP (01.03.2015) Before rate rise (01.07.2022) Now (29.11.2023)
  • 14. 14 Structural budget balance of the general government in the euro area countries (% of GDP, 2015-2025) *EC projections. Source: AMECO database. Monetary policy is never the only game in town -10 -8 -6 -4 -2 0 2 4 6 8 2015 2016 2017 2018 2019 2020 2021 2022 2023* 2024* 2025* Euro area countries (range from min to max) Euro area average