Christine Lagarde: Hearing at the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement (via videoconference) by Ms Christine Lagarde, President of the European
Central Bank, before the Hearing at the Committee on Economic and Monetary Affairs of the
European Parliament, Frankfurt am Main, 18 March 2021.
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Madam Chair,
Honourable members of the Economic and Monetary Affairs Committee,
Ladies and gentlemen,
I am very happy to appear again before the Committee in our first regular hearing this year.
Today marks the one-year anniversary of the extraordinary Governing Council meeting during
which we decided to launch the pandemic emergency purchase programme (PEPP).
Standing where we are today, the economic situation looks brighter now than it did back then and
we can expect it to improve over 2021. In the short term, however, the economic outlook for the
euro area remains surrounded by uncertainty due to the dynamics of the pandemic and the
speed of vaccination campaigns. The severe impact that the pandemic continues to have on not
just the economy, but on all aspects of the lives of many Europeans, does not allow us to
"celebrate" the anniversary of the PEPP. It is nevertheless important to look back and proudly
acknowledge our collective efforts in shielding European citizens from even worse outcomes.
In my remarks today, I will focus on the euro area economic outlook and the ECB's monetary
policy stance in the light of the Governing Council's decisions taken on Thursday of last week. I
will conclude by discussing the policy mix required to secure a solid path to economic recovery.
The current macroeconomic outlook
The rebound in global demand and additional fiscal measures are supporting global and euro
area activity. At the same time, persistently high coronavirus (COVID-19) infection rates, the
spread of virus mutations, and the associated extension and tightening of containment measures
continue to have a negative impact on euro area economic activity. As a result, real gross
domestic product (GDP) is likely to contract again in the first quarter of the year after declining by
0.7 per cent in the fourth quarter of 2020.
Looking ahead, the ongoing vaccination campaigns, together with the gradual relaxation of
containment measures underpin expectation of a firm rebound in economic activity in the second
half of 2021. Over the medium term, we expect the recovery in demand, as containment
measures are lifted, to be supported by favourable financing conditions, and an expansionary
fiscal stance.
This assessment is also reflected in the March 2021 ECB staff macroeconomic projections for
the euro area, which foresee annual real GDP growth at 4.0 per cent in 2021, 4.1 per cent in
2022 and 2.1 per cent in 2023, broadly unchanged compared with the December 2020
1
Eurosystem staff macroeconomic projections.
The risks surrounding the euro area growth outlook over the medium term have become more
balanced owing to better prospects for the global economy and progress in vaccination
campaigns. However, downside risks remain in the near term, mainly related to the spread of
virus mutations and the implications of the ongoing pandemic for economic and financial
conditions.
Euro area annual inflation has picked up over recent months, mainly on account of some
transitory factors. Headline inflation is likely to increase in the coming months, but some volatility
is expected throughout 2021 reflecting the changing dynamics of the idiosyncratic factors which
are currently pushing inflation up but which can be expected to fade out early next year.
Underlying price pressures are expected to increase somewhat this year due to current supply
constraints and the recovery in domestic demand. Nevertheless, we judge that these pressures
will remain subdued overall, also reflecting low wage dynamics and the past appreciation of the
euro. Once the impact of the pandemic fades, the unwinding of the high level of slack, supported
by accommodative fiscal and monetary policies, will contribute to a gradual increase in inflation
over the medium term. Survey-based measures and market-based indicators of longer-term
inflation expectations remain at subdued levels.
While our latest staff projection exercise foresees a gradual increase in underlying inflation
pressures, the medium-term inflation outlook - with projected annual inflation at 1.5 per cent in
2021, 1.2 per cent in 2022 and 1.4 per cent in 2023 - remains broadly unchanged from the staff
projections in December 2020 and below our inflation aim.
The ECB's monetary policy stance and effectiveness
Against this background, preserving favourable financing conditions over the pandemic period
remains essential to reduce uncertainty and bolster confidence, thereby underpinning economic
activity and safeguarding medium-term price stability.
Let me further elaborate on our assessment of financing conditions. This is defined by a holistic
and multifaceted set of indicators.
It is holistic because we consider a broad array of indicators, spanning the entire transmission
chain of monetary policy from risk-free interest rates and sovereign bond yields to corporate
bond yields and bank credit conditions. It is also multifaceted, because we take a sufficiently
granular view that enables us to detect movements in specific market segments in a timely
manner.
Last week, as it received a new round of staff projections, the Governing Council conducted a
joint assessment of these multiple set of indicators against the evolution of our inflation outlook
since the last projection exercise. We concluded that the increase in risk-free market interest
rates and sovereign bond yields that we have observed since the start of the year could spur a
tightening in the wider set of financing conditions, as banks use them as key reference points for
determining credit conditions. Therefore, if sizeable and persistent, increases in those market
interest rates, when left unchecked, may become inconsistent with countering the downward
impact of the pandemic on the projected path of inflation.
Based on this joint assessment, the Governing Council announced that it expects purchases
under the PEPP over the next quarter to be conducted at a significantly higher pace than during
the first months of this year. While records of our weekly purchases will continue to be distorted
by short-term noisy factors - such as occasionally lumpy redemptions - the step-up in the
runrate of our programme will become visible when ascertained over longer time intervals.
Purchases will be implemented flexibly according to market conditions and always with a view to
preventing a tightening of financing conditions that is inconsistent with countering the downward
impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases
over time, across asset classes and among jurisdictions will continue to support the smooth
transmission of monetary policy. If favourable financing conditions can be maintained with asset
purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the
envelope need not be used in full. Equally, the envelope can be recalibrated if required to
maintain favourable financing conditions to help counter the negative pandemic shock to the path
of inflation.
The PEPP is not the only tool the ECB is using to support favourable financing conditions over
the pandemic period for all sectors of the economy.
The third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive
source of funding for banks. The TLTROs' built-in incentive structure ensures that banks have
access to ample funding at very favourable conditions if they maintain their lending to the real
economy. This supports bank-based financing conditions for firms and households. Likewise, the
remaining monetary policy instruments in place - ranging from our key ECB interest rates to the
Governing Council's forward guidance and the Asset Purchase Programme - make a crucial
contribution to the ample degree of monetary accommodation that is necessary to support
economic activity and the robust convergence of inflation to our definition of price stability.
We will also continue to monitor developments in the exchange rate regarding their possible
implications for the medium-term inflation outlook. We stand ready to adjust all of our
instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained
manner, in line with our commitment to symmetry.
The path to a solid economic recovery
Looking ahead, decisive action in other policy areas to support the recovery remains essential
and should build on the favourable financing conditions prevailing in the euro area.
When appearing before the European Parliament last month, I pointed out that the strength of
Europe's crisis response over the last twelve months crucially depended on the strength of
national and European responses across all policy areas: monetary, fiscal, supervisory and
regulatory.
We should continue to rely on the same recipe when it comes to securing a path to a solid
economic recovery.
An ambitious and coordinated fiscal stance remains critical. National fiscal policies should
continue to provide critical and timely support to firms and households most exposed to the
pandemic and the associated containment measures. At the same time, these measures
should, as much as possible, remain temporary and targeted in nature to address vulnerabilities
effectively and support a swift recovery.
By brightening economic prospects for firms and households, fiscal policy would also strengthen
the transmission of our monetary policy measures. Fiscal policy can also act as a catalyst to
transform our economies in the recovery phase. This is why the NextGenerationEU package
should become operational without delay.
In the coming weeks, Member States should ensure a timely ratification of the Own Resources
Decision and should finalise their recovery and resilience plans. The European Parliament can
play an important role in making sure that these plans are well-designed and that they include
productivity-enhancing structural policies to address long-standing weaknesses and accelerate
the green and digital transitions.
All of us, across all policy levels, should ensure that we use the thrust of the recovery to
transform our economies and make them fit for the world of tomorrow, for instance by reducing
and preventing climate risks. The ECB is ready to play its part in line with its mandate. This
morning we published the preliminary results of our first economy-wide climate stress test to
help both authorities and financial institutions assess the impact of climate risks over the next 30
years.
Conclusion
When we announced the PEPP one year ago, the Governing Council declared that it would do
everything necessary within its mandate and explore all options and all contingencies to support
the economy through this shock.
Looking back at the past year, I think we can affirm that we have delivered on this commitment.
But there is no room for complacency - the ECB will continue to deliver on its mandate and
support the recovery with all appropriate measures.
I now stand ready to take your questions.
1See "ECB staff macroeconomic projections for the euro area, March 2021", ECB, 11 March 2021.