Christine Lagarde: Hearing of the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement 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, 28 November 2022.
* * *
Accompanying charts of the speech
Over the past 12 months, the ECB has embarked on a swift and comprehensive
process of normalising monetary policy.
First, we ended net asset purchases in a matter of a few months. Next, we started
raising our policy rates at their fastest pace ever.
In my short remarks today, I will briefly look back on the past year and focus on the key
actions taken by the ECB, and the EU more broadly, to address people's concerns.
I will also address the two topics selected by this Committee for today's hearing, namely
the global monetary policy cycle and inflation differentials.
A challenging year for Europeans
The Russian invasion of Ukraine has caused widespread human suffering. It has also
shattered our sense of safety, threatened our energy security, disrupted supply chains
and contributed to pushing inflation well above our target.
The shock hit just as we were coming out of the pandemic and has continued to cause
economic disruptions. The reverberations have been felt not only in Europe but also
around the world: inflation has surged almost everywhere, prompting central banks to
raise interest rates and leading financing conditions to tighten rapidly worldwide.1
Given our proximity to the conflict and our dependence on energy imports, Europe has
been hit particularly hard. Higher energy costs have been a key driver of euro area
inflation, which in October reached double digits for the first time since the start of the
monetary union.
While the energy shock and global bottlenecks have constrained supply, the re-opening
of the economy after the pandemic has led to a rapid release of pent-up demand,
contributing to the upward pressure from demand factors on core inflation, which has
increased gradually over the year.2
This rise in inflation affects everyone, but some are feeling it more than others. I am
thinking particularly of those on low incomes who spend a larger share of their
consumption budgets on essentials such as food, electricity, gas and heating while
having lower financial buffers to cover the rising cost of living. Currently, the gap
between the effective inflation rate experienced by the lowest and highest income
groups is by far at its highest level on record in the euro area.3
The divergence in inflation rates across euro area member countries is also at a record
high, mainly due to different degrees of exposure to the energy shock and to the
pandemic. We are monitoring these divergences carefully and expect them to normalise
as the impact of these shocks fades over time.
The different shocks over the past year have also had an impact on real economic
activity.
While the reopening of the economy after the pandemic resulted in surprisingly strong
activity at the beginning of this year, growth is now slowing down rapidly as a
consequence of the war.
By reducing people's real incomes and pushing up costs for firms, high inflation is
dampening spending and production. High uncertainty, tighter financial conditions and
weakening global demand are also weighing on economic growth, which is expected to
continue weakening for the remainder of this year and the beginning of next year.
Addressing people's concerns and delivering on our mandate
Faced with these unprecedented challenges, Europe has risen to the occasion and
shown a strong sense of unity and solidarity - thanks also to the crucial role played by
this Parliament in pushing for genuinely European actions.
Beyond providing financial, humanitarian and military assistance to Ukraine, the
European Union has taken significant steps to shield us from the consequences of the
war, enhance our resilience and reduce our energy dependence.4
The European response to the war has garnered broad support among citizens and
5
optimism about the future of the EU has increased. Two out of three citizens now
consider their country's EU membership a good thing - the highest result since 2007.6
Yet, the same surveys also show that one-third of citizens find the rising cost of living to
be the most important issue facing the EU. And although the majority of citizens believe
that the defence of our common European values must be a priority, even if this has a
negative impact on the cost of living, every policymaker should respond to this
challenge.
In line with its mandate, the ECB is doing its part by ensuring price stability. Our third
major policy rate increase in October, resulting in a cumulative increase of 200 basis
points since July, underscores our commitment to tame inflation. This increase was
accompanied by a recalibration for our targeted longer-term refinancing operations
(TLTROs) to reinforce the transmission of our policy rate increases to bank lending
conditions and contribute to the normalisation of the Eurosystem balance sheet.
In December, we will also lay out the key principles for reducing the bond holdings in
our asset purchase programme portfolio. It is appropriate that the balance sheet is
normalised over time in a measured and predictable way.
Interest rates are, and will remain, the main tool for fighting inflation. Higher interest
rates reduce demand pressures by making it more expensive to borrow money and by
influencing how much people and businesses spend, save, borrow and invest. This in
turn will put downward pressure on prices, although the adjustments will take some time
to be felt in the economy.
Higher interest rates also have an immediate effect on people's and businesses'
expectations about future inflation, thereby guarding against the risk of second-round
effects. Persistently high inflation could lead to de-anchored inflation expectations,
which then become engrained in wage negotiations and price setting. Not only would
the resultant wage-price spirals prove self-defeating in supporting real incomes
economy-wide, but it would also hamper the productive capacity of the economy as a
whole.
Strong labour markets - with the unemployment rate still at the historically low level of
6.6 per cent in September - are likely to support higher wages. Incoming data suggest
that wages are picking up, and we will continue to assess their implications for the
medium-term inflation outlook.
While monetary policy is geared towards bringing inflation back to our medium-term
target, the economic outlook will also depend on the actions taken by other
stakeholders.
In the current environment of high inflation, fiscal policy needs to be considerate to not
add to inflationary pressures. Fiscal support should therefore be targeted, tailored and
temporary. It should be targeted, so that the size of the fiscal impulse is limited and
benefits those who need it most; tailored, so that it does not weaken incentives to cut
energy demand; and temporary, so that the fiscal impulse is not maintained longer than
strictly necessary. At the same time, governments should pursue fiscal policies that
show they are committed to gradually bringing down high public debt ratios.
Delivering on the ECB's mandate will create the conditions for strong and sustainable
growth with benefits for everyone. Yet, achieving price stability is a necessary, but not
sufficient condition. Other policy areas will need to act.
Removing constraints on economic growth through an ambitious economic reform
agenda at the EU and national levels will not only rebuild supply that has been impaired
by the recent shocks. It will also, over time, strengthen the resilience of our economy in
a world that is becoming less predictable.
In this respect, we also welcome the Commission's proposals to reform the EU
economic governance framework. Sustainable fiscal policies are needed not only to
ensure medium-term debt sustainability, but also to support the three key transitions
that will determine our future and our growth model: towards cleaner energy, greater
economic security and a more digital and productive economy.
The Commission proposals are a good starting point for discussion. I encourage EU
policymakers, including this Parliament, to soon reach a viable and broadly shared
agreement to help strengthen the foundations of our Economic and Monetary Union.
Conclusion
Allow me to conclude.
We are committed to bringing inflation down to our medium-term target, and we are
determined to take the necessary measures to do so. We expect to raise rates further
to the levels needed to ensure that inflation returns to our 2% medium-term target in a
timely manner.
In this environment of high uncertainty and with complex shocks hitting the economy,
the Governing Council decisions will continue to be data-dependent and follow a
meeting-by-meeting approach. How much further we need to go, and how fast we need
to get there, will be based on our updated outlook, the persistence of the shocks, the
reaction of wages and inflation expectations, and on our assessment of the
transmission of our policy stance.
I now stand ready to take your questions.
1
See International Monetary Fund (2022), World Economic Outlook: Countering the
Cost-of-Living Crisis
, October.
2
See Gonçalves. E. and Koester, G. (2022), "The role of demand and supply in
underlying inflation - decomposing HICPX inflation into components ", Economic Bulletin
, Issue 7, European Central Bank.
3
See Charalampakis, E., Fagandini, B., Henkel, L. and Osbat, C. (2022), "The impact
of the recent rise in inflation on low-income households ", Economic Bulletin, Issue 7,
European Central Bank.
4
See EU response to Russia's invasion of Ukraine , European Council.
5
See Standard Eurobarometer 97 .
6
See European Parliament Spring 2022 Survey: Rallying around the European flag -
Democracy as anchor point in times of crisis.