Christine Lagarde: IMFC statement
Statement by Ms Christine Lagarde, President of the European Central Bank, at the
forty-seventh meeting of the International Monetary and Financial Committee, IMF
Spring Meetings, Washington DC, 14 April 2023.
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Introduction
Since the October meeting, the global economic outlook has improved on the back of a
gradual easing of global supply bottlenecks, declining energy prices, and the recovery
of the Chinese economy following the lifting of pandemic-related containment
measures. Global inflation has also been declining since it peaked in summer 2022,
supported by easing supply constraints, as well as by the tightening of monetary policy
among advanced economies. However, the recovery prospects for the global economy
remain fragile amid continued uncertainty, fuelled by Russia's unjustified war against
Ukraine, and the possibility that pressures in global energy and food markets may
reappear, leading to renewed price spikes and higher inflation. Resilient labour markets
and strong wage growth, especially in advanced economies, suggest that underlying
inflationary pressures remain strong. At the same time, other factors that may
accelerate disinflation include: persistently elevated financial market tensions, falling
energy prices, and a weakening of demand, owing also in part to a stronger
deceleration of bank credit or a stronger than projected transmission of monetary policy.
As inflation is projected to remain too high for too long, the Governing Council of the
ECB decided in March to raise the key ECB interest rates by 50 basis points, bringing
the total increase since July 2022 to 350 basis points. These increases underline our
determination to ensure the timely return of inflation to our two per cent medium-term
target. The elevated level of uncertainty reinforces the importance of a data-dependant
approach to our policy rate decisions, which will be determined by our assessment of
the inflation outlook in light of the incoming economic and financial data, the dynamics
of underlying inflation, and the strength of monetary policy transmission. The asset
purchase programme portfolio has been declining at a measured and predictable pace
since March 2023, as the Eurosystem is no longer reinvesting all of the principal
payments from maturing securities. Regarding the pandemic emergency purchase
programme, the Governing Council intends to reinvest all principal payments from
maturing securities purchased under it until at least the end of 2024 and will continue
applying flexibility in reinvesting redemptions.
We are monitoring current market tensions closely and stand ready to respond as
necessary to preserve price stability and financial stability in the euro area. The euro
area banking sector is resilient, with strong capital and liquidity positions. In any case,
our policy toolkit fully equips us to provide liquidity support to the euro area financial
system if needed and to preserve the smooth transmission of monetary policy.
Economic activity
Growth in euro area GDP slowed progressively over the course of last year and
stagnated in the fourth quarter. Employment growth also slowed in 2022, but remained
resilient in the fourth quarter despite the moderation in economic activity, while the
unemployment rate remained at a record low level. Survey data into the first quarter of
this year suggested some improvement in activity and confidence in the first quarter of
2023. Under the baseline scenario in the ECB staff projections (which were finalised
before the emergence of financial market tensions in mid-March 2023), the euro area
economy looks set to recover over the coming quarters as the labour market remains
strong, supply bottlenecks are resolved, and inflation moderates.
Risks to the growth outlook are tilted to the downside. Persistently elevated financial
market tensions could tighten broader credit conditions more strongly than expected
and dampen confidence. Russia's unjustified war against Ukraine and its people
continues to be a significant downside risk to the economy and could again push up the
costs of energy and food. Euro area growth could also be dragged down if the world
economy weakened more sharply than expected. However, if companies can adapt
more quickly to the challenging international environment, this, coupled with the
fadingout of the energy shock, could support higher growth than currently expected.
Government support measures to shield the economy from the impact of high energy
prices should be temporary, targeted, and tailored to preserving incentives to consume
less energy. As energy prices fall and risks around the energy supply recede, it is
important to start rolling back these measures promptly and concertedly. Falling short of
these principles can drive up medium-term inflationary pressures, which would call for a
stronger monetary policy response. Moreover, fiscal policies should be oriented towards
making economies more productive and gradually reducing high public debt. Finally,
countries should implement structural policies for intensifying their efforts to green and
digitalise their economies.
Inflation
Euro area headline inflation declined from its October peak, reflecting a drop in energy
inflation. Downward base effects, an easing of energy commodity prices, and the
impact of government measures to shield consumers from high energy prices all
contributed to this decline. By contrast, food and core inflation rates continued to rise,
partly as a result of the past surge in energy and other input costs still feeding through
to consumer prices. Pent-up demand related to the reopening of the economy and the
lagged impact of supply bottlenecks also continue to push prices up. At the same time,
employees demanding compensation for the loss in purchasing power amid tight labour
markets has translated into higher wage growth, while many firms in sectors facing
constrained supply and resurgent demand raised their profit margins.
We expect euro area inflation to continue to fall, as lagged price pressures fade out and
tighter monetary policy increasingly dampens demand. However, historically high wage
growth, related to tight labour markets and compensation for high inflation, will support
core inflation over the projection horizon, as it gradually returns to rates around our
target. This outlook remains surrounded by considerable uncertainty, with both upside
and downside risks. Stronger than expected pipeline pressures or higher than
anticipated increases in wages or profits could drive up inflation, while financial market
tensions and falling energy prices could lead to faster disinflation. At the same time,
most measures of longer-term inflation expectations currently stand at around two per
cent, although they warrant continued monitoring.
Euro area banking sector, non-bank financial sector and financial
stability
Euro area banks remain resilient in the current market environment thanks to strong
capital and liquidity positions. Since the start of the ECB's policy rate hiking cycle, euro
area bank profitability has been boosted by higher interest margins, while the change in
impairments and provisions has been rather muted so far. However, in the current
environment of tightening financing conditions including for banks, credit risks have
increased, and lending dynamics have substantially weakened, which may weigh on
future bank profitability.
The decrease in bank lending to firms has, in general, not been offset by an increased
recourse of firms to market-based financing, despite a bout of corporate bond issuance
in the fourth quarter of 2022. Looking ahead, the decline in the asset purchase
programme portfolio will increase the share of debt issuance that needs to be absorbed
by investors. Based on their past behaviour, investment funds appear able to absorb
part of such an increase. At the same time, in spite of some reduction in exposure to
higher-risk assets, structural vulnerabilities in the non-bank financial sector remain
elevated. Risks in that sector may arise especially from liquidity mismatch and leverage,
which could adversely affect market conditions should risks materialise. Priority should
be given to policies that help build resilience by reducing liquidity mismatch, mitigating
risk from non-bank financial sector leverage, and enhancing liquidity preparedness in
the broader non-bank financial sector.
International support for Ukraine and most vulnerable countries
We welcome the IMF's continued support for Ukraine, including the recently approved
fully fledged lending arrangement. Together with strong international support, the
arrangement will be essential for addressing Ukraine's immediate financial needs and in
catalysing additional financial assistance. We note that all adjustments to the IMF's
lending policies and toolkit are uniformly applicable to those meeting the relevant
criteria from the Fund's broad membership.
In view of rising debt vulnerabilities, support for vulnerable countries remains high on
the international agenda. We welcome the first successful conclusion of debt
restructuring under the G20-Paris Club Common Framework last year and encourage
debt treatments of other applicant countries to be finalised promptly. Efficient creditor
coordination and debt transparency remain key.
We note strong demand for Resilience and Sustainability Trust (RST) financing,
following its successful launch in late 2022, and welcome the good progress achieved.
Initiatives to ensure the resource adequacy of the RST and the Poverty Reduction and
Growth Trust should maintain the reserve asset character of claims on the loan and
deposit accounts of these trusts. This is essential for contributions made by EU national
central banks. However, we note that the channelling of special drawing rights by EU
national central banks to multilateral development banks or individual countries would
not be compatible with the EU's legal framework.
Supporting international cooperation and strengthening the global
economy
Recent global shocks and geopolitical tensions have advanced the debate about
reconfiguring global supply chains. While the increased resilience associated with less
complex supply chains is desirable, a less integrated world economy also entails costs.
It weakens the diversification of global production and, in particular, the efficient
allocation of resources globally, which has an adverse impact on welfare across the
world. Geopolitical fragmentation may also affect the global economy via financial
channels. The availability of external financing may be impeded, and lower foreign
direct investment would hinder the diffusion of technology and thus productivity growth.
All of these developments require our immediate attention; however, we are not losing
sight of longer-term challenges and are keeping up our efforts to address the existential
crisis of climate change. As part of our action plan to incorporate climate change
considerations in our monetary policy framework, we decided to tilt corporate bond
holdings towards issuers with better climate performance, through the reinvestment of
redemptions starting in October 2022. Our climate-related financial disclosures showed
last month that this effort was helping reduce the carbon footprint of our corporate
sector portfolios. In addition, we are adjusting the collateral framework, introducing
climate-related disclosure requirements, and enhancing risk management practices.
Recently, we have also issued statistical indicators for climate-related analysis.
Moreover, tackling climate-related and environmental risks is one of the ECB's key
supervisory priorities for 2023-25. Supervisors have set institution-specific remediation
timelines for achieving full alignment with supervisory expectations by the end of 2024
and will follow up on the deficiencies identified in stress tests and thematic reviews
performed in 2022.
The investigation phase of the digital euro project is on track. In the autumn, we expect
to decide on the next project phase, in which the appropriate technical solutions and
business arrangements necessary to provide a digital euro would be developed and
tested. While a digital euro would focus first on the domestic retail payments market in
Europe, we are already discussing at the international level the potential of
crosscurrency and cross-border payments made in retail central bank digital currency
(CBDC). There is agreement that CBDC should eventually contribute to improving
cross-border payments. As global work on CBDC accelerates, international cooperation
in this field will become even more important.