Christine Lagarde: Hearing of the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement (via video conference) by Ms Christine Lagarde, President of the
European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs
of the European Parliament, Frankfurt am Main, 7 February 2022.
* * *
Accompanying charts: www.bis.org/review/r220210b_charts.pdf
On this day in 1992, the leaders of twelve European countries decided to transform the European
Community into the European Union by signing the Maastricht Treaty. Thirty years on, Europe
continues to benefit from many of the accomplishments of that Treaty.
The Treaty established European citizenship, including the right to move and settle freely in the
EU. It granted this Parliament extended powers through its right of co-decision and strengthened
Europe's voice in the world through a common defence and security policy. And, perhaps most
importantly, the Treaty laid the foundation for our economic and monetary union, leading to the
introduction of the euro and the establishment of the ECB.
As we are celebrating 20 years of euro banknotes and coins this year, there is no doubt that the
single currency has been a success. It has brought stability and made us more resilient in the
face of the multiple adverse shocks we have experienced.
Over the past 20 years, the ECB has ensured price stability, with an average inflation rate of 1.7
per cent since early 1999. We are determined to continue doing so.
In my remarks today, I will therefore first update you on the latest assessment of the economic
situation in the euro area and present our monetary policy stance. I will do so with a firm
determination that clear communication - the topic you have chosen for today's hearing - is
crucial for our policy, for our credibility and for the trust people have in us.
1
Already during my first hearing back in December 2019, I outlined my aspiration to improve our
communication practices so that markets, elected representatives like yourselves and the wider
public better understand how we reach our decisions, what motivates them, and how they affect
people's daily lives.
Following on from our strategy review, we are now using clearer, more narrative-driven language,
together with relatable visuals. As at the last hearing, I will thus explain the key macroeconomics
developments discussed in this statement with the help of the charts in the accompanying
twopage document.
The euro area economy and monetary policy
When we last met in November, I stated that growth momentum was moderating. Indeed, recent
data confirm that quarterly growth slowed to 0.3 per cent in the final quarter of 2021, which still
allowed gross domestic product (GDP) to recover to its pre-pandemic level. The moderation in
growth momentum has resulted mainly from the rapid spread of the Omicron variant. The
associated containment measures have dampened activity, particularly in consumer services
such as travel, tourism, hospitality and entertainment.
The current pandemic wave and associated restrictions are likely to continue to have a negative
impact on growth at the start of this year. Two other factors which we discussed at the previous
hearing - namely supply bottlenecks and high energy costs - are also expected to dampen
economic activity in the near term.
However, the economic impact of the current pandemic wave appears to be less damaging to
activity than previous ones. Moreover, the aforementioned bottlenecks will still persist for some
time, but there are signs that they may be starting to ease. This will allow the economy to pick up
strongly again later this year.
Inflation has risen sharply in recent months and it further surprised on the upside in January, with
the rate increasing to 5.1 per cent from 5.0 per cent in December. Inflation is likely to remain high
in the near term. Energy prices continue to be the main reason for the elevated rate of inflation.
Their direct impact accounted for over half of headline inflation in January and energy costs are
also pushing up prices across many sectors. Food prices have also increased, owing to
seasonal factors, elevated transportation costs and the higher price of fertilisers. In addition,
price rises have become more widespread, with the prices of a large number of goods and
services having increased markedly.
Financing conditions for the economy have remained favourable. While market interest rates
have increased since December, bank funding costs have so far remained contained. Bank
lending rates to firms and households continue to stand at historically low levels.
Turning to the risk assessment, we continue to see the risks to the economic outlook as broadly
balanced over the medium term. Uncertainties related to the pandemic have abated somewhat.
At the same time, geopolitical tensions have increased and persistently high costs of energy
could exert a stronger than expected drag on consumption and investment. The pace at which
supply bottlenecks are resolved is also a further risk to the outlook for growth and inflation.
Compared with our expectations in December, risks to the inflation outlook are tilted to the
upside, particularly in the near term. If price pressures feed through into higher than anticipated
wage rises or the economy returns more quickly to full capacity, inflation could turn out to be
higher.
In a few weeks, the March ECB staff projections will provide an updated assessment, taking the
most recent data into account. This will help the Governing Council better appraise the
implications of the surprisingly high December and January inflation figures for the medium-term
outlook.
In particular, we will carefully examine how higher energy prices will transmit through the
economy and affect the outlook overall. Two channels could be at play, pulling inflation dynamics
in different directions. On the one hand, rising energy costs can drive up prices directly, by
increasing the cost of production, as well as indirectly, by having second-round effects on
wages. On the other hand, they can have a negative impact on the incomes of households and
the earnings of companies, thereby reducing economic activity and dampening the inflation
outlook. In the past, the euro area has been particularly vulnerable to the second channel, as
surges in energy prices weakened the spending power of households, and reduced inflation over
the medium term.
Obviously, in our assessment of the inflation outlook, we have to bear in mind that demand
conditions in the euro area do not show the same signs of overheating that can be observed in
other major economies. This increases the likelihood that the current price pressures will
subside before becoming entrenched, enabling us to deliver on our two per cent target over the
medium term.
Indeed, while moving up over recent months, indicators of longer-term inflation expectations are
consistent with this expectation. Survey-based measures point to inflation returning to two per
cent by 2023 and remaining close to this level thereafter; and market-based indicators stabilise
around levels somewhat below two per cent. The solid anchoring of long-term inflation
expectations in the euro area is a reassuring development, coming after a long period when they
were subdued.
To sum up, the euro area economy has continued to recover, although growth is expected to
remain subdued in the first quarter. While the outlook for inflation is uncertain, it is likely to remain
elevated for longer than previously expected, but to decline in the course of this year.
In our meeting last week, we confirmed the decisions we took in December. Accordingly, we will
continue reducing the pace of our asset purchases step by step over the coming quarters, and
will end net purchases under the pandemic emergency purchase programme at the end of
March.
In view of the current uncertainty, we need more than ever to maintain flexibility and optionality in
the conduct of monetary policy. Our monetary policy is always data-dependent, and this is all the
more important in the situation that we are facing at the moment. We will remain attentive to the
incoming data and carefully assess the implications for the medium-term inflation outlook.
Those implications are key parameters in our forward guidance. Our forward guidance has
several dimensions. There is a defined sequencing between the end of our net asset purchases
and the lift-off date. A rate hike will not occur before our net asset purchases finish. Moreover,
there are three conditions that will have to be met before the Governing Council feels sufficiently
confident that a tilt in our policy rate is appropriate. All the three conditions are meant as
safeguards against a premature increase in interest rates. Finally, any adjustment to our policy
will be gradual.
Conclusion
Let me conclude.
Former Commission President Jacques Delors described the process leading up to the
Maastricht Treaty as one requiring "great determination, rockhard solidarity and a little daring
2
from time to time".
The leaders of Europe have once again demonstrated these qualities with their policy response
to the pandemic crisis. And as we emerge from the pandemic, we need to continue down this
path.
The ECB will play its part and show the determination needed to ensure price stability. You may
rest assured that our commitment to deliver on this remains absolutely unwavering, as does our
resolution to explain, to convince, but also to listen and better understand people's concerns. Our
regular exchanges with you, their elected representatives, are crucial in that regard.
With this in mind, I very much look forward to today's discussion with you.
1
See Introductory statement by Christine Lagarde, President of the ECB, at the ECON committee of the European
Parliament, 2 December 2019.
2
See Presentation by President Jacques Delors at the European Parliament, 12 February 1992.