Christine Lagarde: Introductory statement - European Parliament
plenary debate on the ECB Annual Report
Introductory statement by Ms Christine Lagarde, President of the European Central Bank, at
the plenary session of the European Parliament, Strasbourg, 14 February 2022.
* * *
Today's debate is an important pillar of the ECB's accountability relationship with this Parliament.
It is crucial for the ECB to explain its actions to the public, and to you as their elected
representatives. But, as I have said before, we need to be equally focused on listening. It is in this
spirit that I have read your Report and I look forward to hearing your views during today's debate.
I will first outline our view of the current economic situation in the euro area and explain our
monetary policy stance. I had the opportunity to discuss these issues last week in the context of
the regular dialogue with the Committee on Economic and Monetary Affairs (ECON). I will then
briefly discuss how the ECB's new strategy addresses some of the key points described in your
Report, and ensures that our monetary policy strategy is fit for purpose, both today and in the
future.
The euro area economy and the ECB's monetary policy
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, 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 - as you also highlight in your Report - 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 - which you also acknowledge in your Report - 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 the Governing Council meeting earlier this month, 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.
Making our monetary policy strategy fit for purpose, both today and in the future
Let me now turn to the topic of how we are making our monetary policy strategy fit for today, as
well as future challenges.
Last year, the ECB and the Eurosystem concluded their first strategy review in almost two
decades. I would like to reiterate my gratitude to the ECON Committee for its valuable input, and I
am very pleased to read in your Report that you welcome the outcome.
Our new strategy will ensure we have a strong foundation to guide us in the conduct of monetary
policy in the years to come. We are now working hard to put it into practice. I will briefly discuss
three areas highlighted in your Report in which the review is having an impact on our daily work.
The first area is how we take our monetary policy decisions.
In your Report, you highlight the importance of ensuring the necessity, suitability and
proportionality of all our monetary policy measures. Indeed, before taking any decision the
Governing Council conducts a careful evaluation of the effectiveness, efficiency and
proportionality of its actions, including their potential side effects, based on an integrated
assessment of all relevant factors. This assessment builds on a revised analytical framework
which brings together the economic analysis and the monetary and financial analysis.
Our new strategy also recognises financial stability as a precondition for price stability and vice
versa. In line with this, we undertook our first in-depth assessment of the interrelation between
monetary policy and financial stability at our December meeting and we will continue to do so
twice a year going forward.
The second area is how we account for the impact of climate change.
I am pleased that your Report welcomes our action plan on how to incorporate climate change
considerations in our monetary policy framework. And I am equally pleased to tell you that the
implementation of the climate change action plan is on track.
The milestones for 2022 include a detailed plan for disclosure requirements in the collateral
framework and asset purchases, a pilot stress test on the Eurosystem balance sheet, and
proposals to adapt the framework of our corporate bond purchase programmes.
We are also working together with other central banks across the euro area on new exploratory
climate-related statistical indicators and we are adapting our macroeconomic models. Integrating
climate-related indicators and risks is essential to better understand how climate change is
affecting the economy, the inflation outlook, monetary policy transmission and financial stability.
The third area is how we communicate and engage with the people we serve, and whom you
represent.
Good communication is crucial for our policy, for our credibility and for the trust people have in
us. But communicating well to different audiences is challenging, in particular in the euro area. I
welcome that the Report encourages us to make further progress on this front.
Our aim is to ensure that markets, elected representatives like yourselves, and the wider public
better understand how we reach our decisions, the reasons behind these decisions, and how
these decisions affect people's daily lives. In other words, we need to be clear about what we call
the "three A's".
First, we must be clear about our aim. Our new symmetric inflation target of two per cent over
the medium term is simple, clear and easy to convey to the wider public.
Second, we must be clear about our assessment. We need to clearly explain how we process
incoming economic and financial data, what we judge to be short-term movements, and what we
consider influential factors relevant for our medium-term horizon.
Third, we must be clear about our actions. Our audience should be able to understand what we
are trying to achieve with our measures, as well as why they are effective, efficient and remain
proportionate to our aim.
Clearly communicating these three A's to different audiences often means being more simple
and straightforward. But being more simple does not mean being simplistic. It means being more
inclusive when we talk. Following on from our strategy review, we are using clearer, more
narrative-driven language, together with visuals people can relate to.
Finally, in all our communication, we need to be open about what we can and cannot do as a
central bank. For example, our monetary policy cannot fill pipelines with gas, clear backlogs at
ports or train more lorry drivers.
Conclusion
Let me conclude.
We are very aware that many people across the euro area are concerned about the rising cost of
living at the moment - as you also highlight in the Report. And the burden is primarily borne by
those with lower incomes, who must face the day-to-day hardship of having to cope with higher
prices.
We remain committed to delivering on our price stability mandate - as we have done over the
past 20 years. Our target is an inflation rate of 2 per cent over the medium term. To achieve this,
we will take action at the right time.
But it is also our task to openly engage with people's concerns with regards to monetary policy.
As I said when I first spoke to you here two years ago, the ongoing dialogue between the ECB
and the European Parliament is the key channel for this. Independence and accountability are
two sides of the same coin for the ECB: one cannot exist without the other.
With that in mind, I look forward to our exchange this afternoon, and to the final resolution on the
ECB's Annual Report.