christine lagarde : building confidence in the path ahead speech by ms christine lagarde, president of the european central bank, at " the ecb and its watchers xxiv " conference, organised by the institute for monetary and financial stability, frankfurt am main, 20 march 2024. * * * since the pandemic, monetary policymakers have been facing an exceptionally complex environment. as inflation rose, we were confronted with profound uncertainty about how far it would go and how widely it would spread across the economy. and even as inflation has eased, uncertainty about its persistence has remained. the potential costs of mis - calibrating policy have been high, which is why we had to employ a policy framework that minimises the risk of mistakes. and we have done so by building our reaction function around three criteria : the inflation outlook, the dynamics of underlying inflation and the strength of monetary transmission. though we conceived these criteria when we had low visibility of future inflation, they have also helped guide our decisions as inflation has fallen and forecasts have become more accurate. as marie curie once said, to thrive through the ups and down of life, " we must have perseverance and above all confidence ". and our framework has indeed encouraged us to persevere when necessary and to build up confidence when needed. it has served as a reliable compass for calibrating policy through three phases of our current policy cycle. first, it helped create robustness during our tightening phase when we were devising how far we needed to go to rein in inflation. second, it has helped us practice patience during the holding phase until the signals from our inflation projections and underlying inflation are more consistent. third, it will support us in building up sufficient confidence to begin the dialling - back phase in which we make policy less restrictive. the tightening phase in the early phase of our tightening cycle, our main priority amid surging inflation rates was to exit our accommodative policy stance as quickly as possible. while the policy challenge was immense, the policy path was relatively simple to calibrate. but as rates rose and approached restrictive territory, calibrating our policy stance became more complex. we first had to assess how much rates needed to rise until they were sufficiently restrictive, and then for how long they needed to stay at that level. but our assessment was blurred by much lower than normal visibility of the future. 1 / 6 bis - central bankers'speeches our forecasts repeatedly underpre

inflation returning to our target over the medium term. 2 / 6 bis - central bankers'speeches we now project inflation to average 2. 3 % in 2024, which is 0. 4 percentage points less than projected in december and 0. 9 percentage points less than september. we then expect inflation to decline to 2. 0 % in 2025 and 1. 9 % in 2026. and unlike in the earlier phases of our policy cycle, there are reasons to believe that the expected disinflationary path will continue. first, for some time now inflation outturns have been broadly in line with our expectations. in 2023 we saw a reduction of about 70 % in the average absolute error in our staff projections relative to 2022, one quarter ahead. second, we now see inflation returning to 2 % earlier in our projection horizon than before, in mid - 2025, and not exceeding our target for the remainder of the horizon. third, the composition of inflation is improving, as we now expect lower core inflation in the medium term. this suggests that the convergence to 2 % is likely to be more durable and less beholden to assumptions about commodity prices, although the latter can always prove hazardous. the other criteria are also becoming more consistent with this improved inflation outlook. the transmission of our monetary policy is unfolding in the right direction. financing conditions have reacted strongly to higher rates, loan demand has weakened and, in turn, activity has slowed notably in the most interest - sensitive sectors of the economy. and underlying inflation is generally easing. nearly all the measures that we track are declining, and the range of readings between the different measures has narrowed from 4. 1 percentage points at its peak to 2. 4 percentage points today. some of the measures of underlying inflation with the best leading indicator properties for future inflation have dropped steeply. 5 but, at the same time, domestic price pressures remain strong. services inflation is still stubborn and hovering around 4 %, while momentum increased somewhat in february. and our indicator of domestic inflation, which measures items with a low import content, stands at 4. 5 %, at the top of the range of underlying inflation measures that we monitor. this measure has also been found to have good leading indicator properties. 6 these pressures largely reflect robust wage growth as the catch - up process continues, as well as a tight labour market that has so far been resilient to a slowing economy. employment grew by two million cumulatively during 2023, even