Christine Lagarde: Hearing at the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement (via videoconference) by Ms Christine Lagarde, President of the European
Central Bank, before the Hearing at the Committee on Economic and Monetary Affairs of the
European Parliament, Frankfurt am Main, 18 March 2021.
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Madam Chair,
Honourable members of the Economic and Monetary Affairs Committee,
Ladies and gentlemen,
It is a pleasure to be with you again today for the third regular hearing of the year.
In my confirmatory hearing before this Committee back in September 2019, I set out a goal: to
ensure that the ECB engaged in a reflection on whether its monetary policy framework was
1
sufficiently robust to meet future challenges.
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With the successful conclusion of our strategy review in July, I believe we have achieved that
goal. The review took the ECB's mandate and primary objective of price stability, which is
conferred by the Treaty, as a given. At the same time, we thoroughly looked at key aspects of
citizens' lives. We have recommended a roadmap to include the costs of owner-occupied
housing in the Harmonised Index of Consumer Prices to better represent the inflation rate that is
relevant for households. We have also developed a climate-related action plan to address the
profound implications of climate change for price stability. Finally, we have modernised our
external communication to make it more understandable to all citizens.
The review has been an 18-month-long journey involving an immense collective effort by staff
across the Eurosystem, and I am particularly happy that this work has now been published in 18
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Occasional Papers which were made available to the public on our website last week. I would
also like to reiterate my gratitude to this Committee for the important input it provided during the
strategy review process.
In my remarks today, I will outline some of the key elements of our new strategy and provide an
update on the outlook for the economy and for inflation, together with some reflections on our
current monetary policy stance. Then, at the explicit request of this Committee, I will discuss the
topic of financial dominance.
The ECB's new monetary policy strategy in practice
Starting with our price stability objective, the new strategy incorporates two key innovations.
First, we have adopted what I would call a simple and clear symmetric inflation target of two per
cent over the medium term. It is simple, easy to communicate and clear because it gives a
welldefined yardstick to help us steer our monetary policy. And it is symmetric because both negative
and positive deviations of inflation from the target are equally undesirable. We are convinced that
this new formulation will avoid misperceptions about our reaction function when medium-term
inflation is above or below the target and that it will better anchor inflation expectations.
The second important change is the recognition that, to maintain symmetry, the Governing
Council needs to take into account the implications of the effective lower bound on nominal
interest rates. In proximity to the lower bound, an especially forceful or persistent monetary policy
response will be required.
In July we also revised our forward guidance on interest rates to bring it into line with the new
strategic framework. The new formulation stipulates that the Governing Council will not consider
raising rates unless three conditions have been met: first, we need to see inflation reaching two
per cent well ahead of the end of the projection horizon; second, after convergence, inflation
should be seen to be stabilising durably at the target through the end of the projection horizon;
and third, realised progress in underlying inflation should, in our judgement, be sufficiently
advanced to be consistent with inflation stabilising at two per cent over the medium term.
Achieving these conditions may imply a transitory period in which inflation is moderately above
our target.
Against the background of our new strategy, let me now focus on recent economic
developments. In summary, it is evident that the economic recovery in the euro area is
increasingly advanced. This is partly due to successful vaccination campaigns across Europe,
which have prompted the easing of restrictions. This, in turn, has supported the rebound in
economic activity, particularly in the services sector, which was hardest hit by the containment
measures.
Consequently, the euro area economy rebounded by 2.2 per cent in the second quarter of the
year, which was more than had been anticipated. We expect continued strong growth in the
second half of 2021, enabling euro area output to exceed its pre-pandemic level by the end of the
year. This positive short-term outlook is reflected in the September ECB staff projections, which
foresee annual real GDP growth at 5.0 per cent in 2021, 4.6 per cent in 2022 and 2.1 per cent in
2023. The growth outlook continues to be uncertain and heavily dependent on the evolution of the
pandemic, but risks to growth are broadly balanced.
Turning to inflation developments, which you have selected as a topic for this hearing, euro area
inflation rose to 3.0 per cent in August and we expect it to rise further this autumn.
Nonetheless, we continue to view this upswing as largely temporary. A range of factors are
currently pushing up inflation. Chief among them are the strong increase in oil prices since
around the middle of last year, the reversal of the temporary VAT reduction in Germany, and cost
pressures arising from temporary shortages of materials and equipment. The impact of these
factors should dissipate in the course of next year. Although underlying price pressures have
edged up over the summer, this is consistent with the opening up of the economy, which
remains some distance away from operating at full capacity. As a result, the September ECB
staff projections foresee annual inflation at 2.2 per cent in 2021 then moderating to 1.7 per cent in
2022 and 1.5 per cent in 2023.
While inflation could prove weaker than foreseen if economic activity were to be affected by a
renewed tightening of restrictions, there are some factors that could lead to stronger price
pressures than are currently expected. For example, if the temporary shortages of materials and
equipment constrain production more persistently than we currently foresee, they could feed
through more strongly along the pricing chain. Persistently high inflation could also result in
higher than anticipated wage demands. But we are seeing limited signs of this risk so far, which
means that our baseline scenario continues to foresee inflation remaining below our target over
the medium term.
Favourable financing conditions are essential for the economy to continue its recovery and for
inflation to converge durably to our target. We saw market interest rates ease over the summer
but recently they have reversed this decline somewhat. However, bank lending conditions have
remained very accommodative. Overall, this has left financing conditions for the economy
remaining very favourable.
Thus, following a joint assessment of the inflation outlook and financing conditions, the Governing
Council decided earlier this month to set a moderately slower pace of net asset purchases under
the pandemic emergency purchase programme. We remain entirely committed to preserving
these favourable financing conditions, which are necessary for a robust recovery that will restore
inflation to its pre-pandemic level.
Financial stability considerations in our new monetary policy strategy
I will now turn to the second topic which you have selected for this hearing, namely the risk of
financial dominance.
Financial dominance occurs when central banks delay the removal of monetary policy
accommodation for longer than appropriate, in order to avoid market turmoil. Let me be clear on
this. The ECB has a very clear primary mandate which is stipulated in the Treaty: price stability.
As stipulated by the Treaty, any other consideration should be subordinate and without prejudice
to delivering on our primary mandate.
Regarding the stability of the financial sector, our new strategy explicitly considers the
interactions of price stability and financial stability, reflecting our belief that each is a precondition
for the other.
To start with, the strategy recognises that macroprudential policy, along with microprudential
supervision, is the first line of defence against the build-up of financial imbalances. Indeed,
effective macroprudential policy can address such risks more directly in a targeted fashion, and
thereby reduce the burden that would be placed on monetary policy.
Nonetheless, given that the macroprudential framework in the euro area is incomplete, and given
the interaction between macroprudential and monetary policy, the Governing Council monitors
and analyses financial stability risks and their potential to jeopardise price stability over the long
haul. Indeed, a careful analysis of the potential side effects of our monetary policy for the health
and stability of financial intermediaries is an integral part of the proportionality assessment that
we regularly conduct to test whether the policy measures in place remain appropriate.
Let me give you a concrete example of how we consider the linkages between financial stability
and price stability. Household mortgages have been excluded from the pool of loans considered
eligible for use as collateral under the targeted longer-term refinancing operations (TLTROs).
These operations allow us to support bank lending - a key condition in the current circumstances
for a durable return of inflation to the target - while containing the risk that credit extension might
fuel unsustainable house price increases.
In synthesis, a systematically proportionate response to shocks is a precondition for minimising
financial stability risks and, as a result, threats of financial dominance. At the same time, a
coordinated macroprudential policy response across the euro area remains vital to strengthen
the impact of policy actions and to support monetary policy.
Conclusion
Let me conclude. Our new strategy addresses the challenges that have emerged since the ECB
announced the outcome of its previous strategy review in 2003, including the decline in the
equilibrium real interest rate, the expectation that this rate will remain low and the deflationary
bias induced by the effective lower bound.
And it also responds to other structural changes in the economy - an important one being
climate change, as this Parliament has continuously reminded us in its Resolutions on the ECB
Annual Reports. The Governing Council agreed on the need to take climate change risks into
account when designing and implementing our monetary policy. That will help us make better
decisions. The detailed action plan sets out an ambitious timeline and outlines a wide range of
actions, encompassing many areas of the ECB's activity, and ultimately aims to consistently
integrate climate change considerations in all aspects of the ECB's monetary policy.4
Moreover, to further enhance our transparency and ensure that we are aware of citizens'
expectations and concerns in relation to our policies, we have modernised our communication
policy and we will make outreach events a structural feature of our interaction with the public. But
our efforts to ensure that we are accountable to European citizens do not stop there. This
Parliament will continue to be our main interlocutor and your role in making sure that the people's
voices are heard by the ECB and that the ECB's voice is heard by the people remains crucial to
foster understanding of and trust in our policies.
Finally, two years after my first appearance before this Committee, I remain fully convinced of the
need for an "open mind" to ensure that the ECB keeps delivering on its mandate in rapidly
changing circumstances. We therefore intend to assess the appropriateness of our monetary
policy strategy periodically, with the next assessment expected in 2025.
Thank you for your attention. I now stand ready to take your questions.
1
See Lagarde, C. (2019), "Opening Statement by Christine Lagarde to the Economic and Monetary Affairs
Committee of the European Parliament", September.
2
See www.ecb.europa.eu/home/search/review/html/index.en.html
3
See www.ecb.europa.eu/pub/html/strategy_review.en.html
4
See ECB (2021),"ECB presents action plan to include climate change considerations in its monetary policy
strategy", ECB press release, July.