Debate: European Central Bank – annual report
Date: MONDAY, 8 FEBRUARY 2021
Speaker: Christine Lagarde
Language: EN

I would also like to thank the Commission, you, Mr Dombrovskis, for your support for the great cooperation that we have on so many of the issues that we both tackled. Let me also thank each and every one of you for your questions, for your comments, for your views. I’ve taken due note of it. I’m not necessarily going to respond to each and every one of your points or your questions because it would take us way into the night and I’m not sure that we want to do that. But I will try to tackle quickly some of the issues because I think that they are critically important for our mandate, and they are also relevant for our cooperation.  I’m not going to touch on the economic outlook. I think that not many of you actually raised the issue and I think that we know quite well what the prospects are, and I’ve touched on that in my opening remarks. I would like to come back to one item which is clearly related to the output and the composition of that output, and that is inflation, which was touched on by some of you. I’ll start with reiterating what I was nicely reminded of, which is that price stability is the mandate of the ECB. There is no question in our minds, and certainly no question in my mind, that this is the case. But I would like to turn to inflation a bit because it is a matter that has been changing recently and I would like to come back to that.  As we saw in January, headline inflation increased after having been in negative territory for almost half a year in 2020. This swing was partly expected. According to Eurostat’s flash estimates, Harmonised Index of Consumer Prices (HICP) inflation increased to +0.9% in January, after having been at -0.3% in December and before. That swing reflects, to a considerable extent, the increase in energy inflation due to upward base effects and the recent oil increases. In particular, it reflects the reversal of the temporary VAT rates in Germany, and the change in the HICP weight that always takes place at the start of the year, and which now reflects the consumption structure of 2020, which, under the impact of the Covid pandemic has changed, compared to that of 2019.  Headline inflation is expected to gradually increase further in the coming months, and this will largely be due to base effects in energy inflation, as the drops in oil prices in early 2020 will fade away from the annual growth rates. In the near term, domestic price pressures will remain subdued, though, owing to factors that I have mentioned, which are weak demand, increasing labour market slack, euro exchange rate appreciation and softer wage pressures. It is because of those factors, which clearly imply negative pressure on prices, that we believe that in order to reach the price stability that has been defined back in 2003 as close to below 2%. It is for that reason that we believe that ample monetary stimulus remains essential to preserve favourable financing conditions over the pandemic period for all sectors of the economy. This will help to reduce uncertainty and support confidence, encourage consumer spending and investment and ultimately underpin economic activity and safeguard medium-term price stability. So you see, price stability is clearly right and centre in our considerations when we decide our monetary policies on a regular basis.  I would like to touch on a couple more issues which you have mentioned that have to do with the link between fiscal and monetary, and I would like to just come back to the European response to the crisis that you actually address in your resolution, Mr Rapporteur.  First of all, I would like to emphasise that the national fiscal responses have been crucial so far. They helped secure employment, prevent a rise in structural unemployment and safeguard the survival of firms. Indeed, it’s the  Now, as I said, as much as possible those fiscal measures should be targeted and should be temporary in nature and be mindful of medium-term fiscal sustainability. The longer fiscal support prevails, the more the quality of this measure is of the essence. Needless to say, Next Generation EU, once duly ratified by all 27 members and properly rolled out, will support fiscal recovery and will be an important ingredient in the strategy going forward, but it must become operational without delay. For this, it is critical that Member States channel European funds into much needed reforms and investment, including in the areas of climate change and digitalisation.  Finally, we need to reflect on the lessons of the Recovery and Resilience Facility for the fiscal architecture in the medium term. With Next Generation EU, for the first time ever, Europe has put in place a common counter cyclical budget. It can also contribute to making EU economies structurally stronger, thereby reducing the divergences in growth and income. We will also need to reflect on a future reform of the Stability and Growth Pact going forward.  Now let me say a few words about our strategy review. Some of you have mentioned it and, as you know, there are quite a few items that will be on our list of investigation as far as this review is concerned. As you know, we decided to extend the timeline, because of the pandemic, but now we’re back in full swing and moving fast. We expect to conclude the review in the second half of 2021. In several topical sessions so far, we have discussed inflation, inflation measurements, fiscal policies, price-stability objectives and monetary policy instruments, with all members of the Governing Council. More sessions are planned in the coming months and we are still in the general mode of listening, discussing, reflecting. Since all review-related issues are strongly interdependent, it is premature at present to draw any conclusions and to present them.  We also involve external parties in some parts and stages of the process and I will ensure the involvement of this Parliament throughout the review process, as part of my regular exchanges with the Committee on Economic and Monetary Affairs (ECON), and also in the context of dedicated visits to the ECB.  I would like to finish with some key points on climate change, which some of you have mentioned. I think it is important and I know that it’s not music to everyone’s ears, but it is the reality. The primary responsibility to address climate change lies with governments, who have the most important tools at hand. I’m convinced that we need to see faster progress along three interlocking dimensions: including, informing, innovating. Those are my three Is that I significantly expanded upon in a previous speech – I will not bother you with that – but what I mean by that is that we need to include the true social and environmental cost of carbon into the prices paid by all sectors of the economy. I know that Parliament is working hard on that.  We also need to get greater information on the exposure of individual companies in order to make sure that climate risks are adequately priced. Lastly, we need to see substantial green innovation and investment. Both, however, require a complex ecosystem of which finance is a key element. The EU must make progress to consolidate its leading role in sustainable finance. Green bond issuance by euro-area residents has grown sevenfold since 2015, reaching 75 billion in 2020. Funding for green innovation must also come from other market segments. Recent analysis points to the beneficial role of equity investors – research by the ECB, I have to say.  Completing the capital markets union should provide a further push to support equity based green finance by fostering deep and liquid capital markets across Europe. The fact that central banks are not responsible directly for climate policy does not mean that we can ignore climate change or that we do not play any role in combating it. Climate change is, in my view, very relevant to the ECB mission. The scale and the irreversibility of its consequences calls for not medium- or long-term action, but for immediate action from all actors, each within their competence, each within their mandate.  The material effect of climate change as well as the acceleration of the transition have macroeconomic and financial implications. They have consequences for price stability (our mandate), for financial stability and banking supervision (also a responsibility of the ECB), as well as for the euro system’s own balance sheet. We are aware of these consequences and determined to mitigate and adapt to them. The ECB is thus reflecting on the emerging risks related to climate change in the pursuit of its treaty tasks.  We are assessing those issues in the context of our ongoing strategy review. We are, in particular, considering how environmental sustainability considerations can be relevant in pursuing ECB policies not applied only to the non-monetary policy portfolios, but way beyond that. So, there will be more to come as we progress in our strategy review and, I hope, for the better of generations to come. With that, Mr Vice-President, I thank you very much for your patience with me and for your hospitality.