Christine Lagarde: Introductory statement at ECB press conference
Introductory statement by Ms Christine Lagarde, President of the European Central Bank, at a
press conference with ECB Vice President Luis de Guindos, Frankfurt am Main, 3 February
2022.
* * *
Good afternoon, the Vice-President and I welcome you to our press conference.
The euro area economy is continuing to recover and the labour market is improving further,
helped by ample policy support. But growth is likely to remain subdued in the first quarter, as the
current pandemic wave is still weighing on economic activity. Shortages of materials, equipment
and labour continue to hold back output in some industries. High energy costs are hurting
incomes and are likely to dampen spending. However, the economy is affected less and less by
each wave of the pandemic and the factors restraining production and consumption should
gradually ease, allowing the economy to pick up again strongly in the course of the year.
Inflation has risen sharply in recent months and it has further surprised to the upside in January.
This is primarily driven by higher energy costs that are pushing up prices across many sectors,
as well as higher food prices. Inflation is likely to remain elevated for longer than previously
expected, but to decline in the course of this year.
The Governing Council therefore confirmed the decisions taken at its monetary policy meeting
last December, as detailed in the press release published at 13:45 today. 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 (PEPP) 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. The Governing Council stands ready to adjust all of
its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over
the medium term.
I will now outline in more detail how we see the economy and inflation developing, and will then
talk about our assessment of financial and monetary conditions.
Economic activity
Economic growth weakened to 0.3 per cent in the final quarter of last year. Nevertheless, output
reached its pre-pandemic level at the end of 2021. Economic activity and demand will likely
remain muted in the early part of this year for several reasons. First, containment measures are
affecting consumer services, especially travel, tourism, hospitality and entertainment. Although
infection rates are still very high, the impact of the pandemic on economic life is now proving less
damaging. Second, high energy costs are reducing the purchasing power of households and the
earnings of businesses, which constrains consumption and investment. And third, shortages of
equipment, materials and labour in some sectors continue to hamper the production of
manufactured goods, delay construction and hold back the recovery in parts of the services
sector. There are signs that these bottlenecks may be starting to ease, but they will still persist
for some time.
Looking beyond the near term, growth should rebound strongly over the course of 2022, driven by
robust domestic demand. As the labour market is improving further, with more people having
jobs and fewer in job retention schemes, households should enjoy higher income and spend
more. The global recovery and the ongoing fiscal and monetary policy support also contribute to
this positive outlook. Targeted and productivity-enhancing fiscal measures and structural
reforms, attuned to the conditions in different euro area countries, remain key to complement our
monetary policy effectively.
Inflation
Inflation increased to 5.1 per cent in January, from 5.0 per cent in December 2021. It 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. Most measures of underlying inflation have risen over
recent months, although the role of temporary pandemic factors means that the persistence of
these increases remains uncertain. Market-based indicators suggest a moderation in energy
price dynamics in the course of 2022 and price pressures stemming from global supply
bottlenecks should also subside.
Labour market conditions are improving further, although wage growth remains muted overall.
Over time, the return of the economy to full capacity should support faster growth in wages.
Market-based measures of longer-term inflation expectations have remained broadly stable at
rates just below two per cent since our last monetary policy meeting. The latest survey-based
measures stand at around two per cent. These factors will also contribute further to underlying
inflation and will help headline inflation to settle durably at our two per cent target.
Risk assessment
We continue to see the risks to the economic outlook as broadly balanced over the medium
term. The economy could perform more strongly than expected if households become more
confident and save less than expected. By contrast, although uncertainties related to the
pandemic have abated somewhat, geopolitical tensions have increased. Furthermore,
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 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.
Financial and monetary conditions
Market interest rates have increased since our December meeting. However, bank funding costs
have so far remained contained. Bank lending rates for firms and households continue to stand
at historically low levels and financing conditions for the economy remain favourable. Lending to
firms has picked up, supported by both short and longer-term loans. Robust demand for
mortgages is sustaining lending to households. Banks are now as profitable as they were before
the pandemic and their balance sheets remain solid.
According to our latest Bank Lending Survey, loan demand by firms increased strongly in the last
quarter of 2021. This was driven by both higher working capital needs, stemming from supply
bottlenecks, and increased financing of longer-term investment. In addition, banks continue to
hold an overall benign view of credit risks, mainly because of their positive assessment of the
economic outlook.
Conclusion
Summing up, the euro area economy continues to recover, but growth is expected to remain
subdued in the first quarter. While the outlook for inflation is uncertain, inflation is likely to remain
elevated for longer than previously expected, but to decline in the course of this year. We will
remain attentive to the incoming data and carefully assess the implications for the medium-term
inflation outlook. We stand ready to adjust all of our instruments, as appropriate, to ensure that
inflation stabilises at its two per cent target over the medium term.
We are now ready to take your questions.