Christine Lagarde: Hearing of the Committee on Economic and
Monetary Affairs of the European Parliament
Speech 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, Brussels, 5 June 2023.
* * *
It is a pleasure to be with you again today for our second regular hearing this year and
immediately after celebrating the ECB's 25th anniversary.
I am delighted that several members of this Parliament were able to join the
celebrations in Frankfurt a few days ago, reflecting the close and fruitful dialogue our
institutions have always maintained. Since the ECB's creation in 1998, members of its
Executive Board have attended over 100 hearings before this Parliament. This
engagement has been central to the ECB's accountability and has contributed to the
euro becoming a currency that our fellow citizens trust.
Let us now turn our attention to the current matters at hand. Let me start by providing a
brief overview of the economic outlook before going on to discuss our latest monetary
policy decisions.
Economic outlook
Growth in the euro area nearly stalled in early 2023. Activity is being supported by lower
energy prices, easing supply bottlenecks and fiscal policy support to firms and
households.
As the energy crisis fades, governments should roll back the related support measures
promptly and in a concerted manner to avoid driving up medium-term inflationary
pressures, which would call for a stronger monetary policy response. The ECB
welcomes the European Commission's recommendation to Member States to wind
down in 2023 the fiscal measures taken in response to the energy price shock.
Domestic demand, especially consumption, remains weak.
Business and consumer confidence indicators point to weak activity in the second
quarter and remain lower than before Russia's unjustified war against Ukraine and its
people. We see a divergence across sectors of the economy. The manufacturing sector
is still working through a backlog of orders, but its prospects are worsening. Meanwhile,
the services sector remains resilient, owing in particular to the reopening of the
economy after the pandemic.
Household incomes are benefiting from fiscal support measures and the strength of the
labour market, with the unemployment rate having fallen to a new historical low.
Looking at inflation, according to Eurostat's flash estimate, headline inflation has
declined from its October peak and stood at 6.1% in May. While base effects have led
to some variation in energy inflation in recent months, the rate declined to -1.7% in May.
Food price inflation remains elevated but is decreasing and stood at 12.5% in May,
down from 13.5% in April.
Price pressures remain strong. Inflation excluding energy and food declined to 5.3% in
May from 5.6% in April. Upside pressures on both headline and core inflation are still
coming from the pass-through of past energy cost increases and supply bottlenecks,
which are nonetheless expected to fade gradually. The latest available data suggest
that indicators of underlying inflationary pressures remain high and, although some are
showing signs of moderation, there is no clear evidence that underlying inflation has
peaked.
Wage pressures have strengthened further as employees recoup some of the
purchasing power they have lost as a result of high inflation. Moreover, in some sectors
firms have been able to increase their profit margins on the back of mismatches
between supply and demand and the uncertainty created by high and volatile inflation.
ECB's monetary policy
High inflation is putting a strain on people living in the euro area. As energy inflation -
which imposed a notable burden on low-income households - declines, the inflation
differential between low and high-income consumers starts to fade away. Nevertheless,
high food inflation continues to weigh on low-income households in particular. We are
fully committed to fighting inflation and we are determined to achieve its timely return to
our 2% medium-term target. This commitment to price stability contributes to economic
growth and employment in the medium term and hence to reducing inequality.
In the light of the ongoing high inflationary pressures, in our May meeting we decided to
raise the three key ECB interest rates by 25 basis points. We also announced that we
expect to discontinue the reinvestments under the asset purchase programme (APP) as
of July 2023.
Our rate hikes are being transmitted forcefully to financing conditions for firms and
households, as can be seen in rising lending rates and falling lending volumes. At the
same time, the full effects of our monetary policy measures are starting to materialise.
Recent ECB staff analysis indicates that the effects of monetary policy tightening on
real activity and inflation can be expected to strengthen in the coming years, but our
assessment is surrounded by significant uncertainty.1
Our future decisions will ensure that the policy rates will be brought to levels sufficiently
restrictive to achieve a timely return of inflation to our 2% medium-term target and will
be kept at those levels for as long as necessary. We will continue to follow a
datadependent approach to determining the appropriate level and duration of restriction. In
particular, our policy rate decisions will continue to be based on our assessment of the
inflation outlook in the light of the incoming economic and financial data, the dynamics
of underlying inflation and the strength of monetary policy transmission.
As requested by you, let me now discuss the financial stability outlook. Financial
stability is a pre-condition for price stability and vice versa.
Financial stability in the euro area has proved robust so far, but we continue to assess
possible risks, taking into account a wide range of indicators.2
Euro area banks' exposure to the recent banking sector stress which arose in other
regions has been limited. But challenges to funding and asset quality may weigh on
future profitability. More broadly, as financing conditions tighten, we will gain more
insight into the resilience of euro area firms, households and banks.
The medium-term orientation of our monetary policy strategy allows us to consider
financial stability in monetary policy decisions if this supports the pursuit of price
stability. Conversely, price stability remains as crucial as ever for durably preserving
financial stability.
We do not see a trade-off between financial stability and price stability in the euro area.
Over time, the pursuit of price stability through monetary policy, and of financial stability
primarily through macroprudential policy, are complementary. In addition, the ECB has
the tools to provide liquidity to the euro area financial system if needed to preserve
financial stability and the smooth transmission of monetary policy.
We remain committed to price stability. And to support financial stability, it is essential
that you, as co-legislators, make tangible progress towards completing the banking
union and that you strengthen regulatory policies to further enhance the resilience of
the euro area financial sector.
Conclusion
Allow me to conclude.
In 1998, former ECB President Willem Duisenberg stressed that the European System
of Central Banks (ESCB) should be open, transparent and accountable, noting that "the
most important challenge for the ESCB is to win the confidence of the citizens of
Europe".3
25 years on, this is still an important challenge, and we are working hard to further
foster trust in our institution. But the ECB cannot do this alone. Today's dialogue with
you, who represent the people of Europe, is essential to that endeavour.
This is why I am delighted that I have just signed, together with the President of the
European Parliament, an Exchange of Letters between our two institutions. Building on
our close and fruitful dialogue over the past 25 years, this Exchange of Letters will allow
us to better structure our interactions and facilitate effective cooperation.4
Together we must do all we can to keep listening and responding to concerns of
European citizens.
Thank you. I now stand ready to take your questions.
Recent ECB staff analysis estimates that the tightening of monetary policy since
December 2021 will have a downward impact on inflation of two percentage points on
average over the period 2023-25, compared with a situation in which policy remained
unchanged. The bulk of this impact can be attributed to rate policy, with a less material
though non-negligible contribution stemming from the reduction in the asset purchase
programme portfolio. See European Central Bank (2023), "A model-based assessment
of the macroeconomic impact of the ECB's monetary policy tightening since December
2021 ", Economic Bulletin , Issue 3.
2
See the latest ECB Financial Stability Review .
3
Duisenberg, W. (1998), "Ceremony on the occasion of the establishment of the
European System of Central Banks " , speech, 30 June.
4
See "Arrangements in the form of an Exchange of Letters between the European
Central Bank and the European Parliament on structuring the practices for interaction in
the area of central banking", 5 June 2023.