Debate: European Central Bank - annual report
Date: WEDNESDAY, 15 FEBRUARY 2023
Speaker: Christine Lagarde
Language: EN

What I would like to do is focus my response on three key points which have been debated by many of you – and I apologise to those who had specific questions, but I think in the time that is imparted to me, I think I will not do justice to their curiosity if I focus on the 20 different Members who have asked questions.  So let me address three particular points that I think are on the mind of many. One, let me just go back a little bit to inflation and what our mission is and what our mandate will deliver. Let me then say a few things about climate change because clearly, as Commissioner McGuinness has indicated, there are multiple views – it’s the beauty of this Parliament – but I would like to address specifically what we are doing, which in no way undermines the focus, the concern that we have for our primary mandate, which is price stability. I’ll come back to the links between the two. Then I would like to have the benefit of this wonderful tribune to be able to make a few comments on the relationship between fiscal policy and monetary policy and the impact that it can have on inflation and, as a result, the monetary policy decisions that we make.  Allow me to get back to numbers and not use either fantasy numbers or to borrow from outside Europe, and the euro area in particular. Our headline inflation, which includes all components including energy and food was, in January, 8.5% – likely to be revised a little bit upward, as I have indicated, once the German numbers are included by Eurostat. That is way too high. There is no question about that. I think that, if anything, we all agree upon the fact that inflation is way too high, inflation is hurting and inflation is particularly hurting the most exposed, the most vulnerable and the most underprivileged. That is, I think, something that brings us together on this particular issue.  I would like to draw your attention to the fact that inflation is not rising at the moment and, if anything, headline inflation is declining. It was at 10.1% in November, 9.2% in December, and it is now probably a little bit north of 8.5%. That is headline inflation. What is, on the other hand, not declining – because it is stable and has remained stable from December to January, having increased a little bit from November and December – is what we call core inflation, which is all components taken into account to measure the increase of prices, except energy and food. That level of inflation is currently 5.2%.  I think it’s particularly notable that we have had an increase in what we call ‘non—energy industrial goods inflation’ – and that goes to the point made by some that inflation is currently essentially attributable to energy. It is not only attributable to energy. Energy played a significant part, is continuing to play its part, and indirect energy costs are also fuelling what I have called the ‘non—energy industrial goods’, as it does with services, which have slightly begun to decline a little bit, moving from 4.4% to 4.2%. But it remains to be seen whether that is going to be continued.  It’s pretty obvious that a further weakening of demand would also contribute to lower price pressures than currently anticipated, especially over the medium term. I know Mr Fernandez had some really interesting, important questions about the actual determination of ‘medium term’. I think that he would understand if I say that when inflation is particularly high and way too high, the medium term is probably a little bit closer than it would be if inflation was at a much more reasonable level. I think I’ll leave it there because the medium term is something that obviously is going to depend on the instrument as well as the distance from which we are to target.  Now what we are seeing in the economy is price pressures that remain strong. But what has changed since our previous monetary policy meeting and the review that we have taken most recently, in February, is that risks to the inflation outlook have become more balanced, especially in the near term. And there are multiple factors for that. It’s the decline of the high energy prices that continue to pass through to the rest of the economy – and we hope that this will move at as fast a path as it has passed through when energy prices were going up, but that remains to be seen. We have not really witnessed that yet. Fiscal energy, compensatory measures, temporarily dampened inflation, but – and I’ll come to that in a second – could also temporarily upward the pressure in the medium term as those measures expire. I’ll come back to that.  The risk of a stronger pass—through of high inflation to wages cannot be ruled out. At this point in time, we are not seeing any obvious sign of an emerging self-sustained wage price spiral but that could obviously happen and would come and fuel inflation. So we are monitoring very carefully these numbers. We are trying to be as detailed and sectorial as possible to really understand where this is heading, but it clearly could have an upward impact. As a result of that situation, as I have indicated, our monetary policy is determined to return inflation to 2% in the medium term, and we will do so and we will take the measures that are required in order to return inflation to 2%. This is the best service that we can provide to the economy so that economic actors understand what is the proposal in terms of prices, investors know under what terms they invest, borrowers know under what expected interest rates they borrow. This is actually the primary objective of the ECB, and we will deliver upon it.  Let me now say just a few words about another topic that has been on the mind of a few – and I will not touch on the special green rates, which is obviously an interesting topic, but not one that I can just address and resolve in this particular moment. What I would like to do is to clarify for you, particularly for those that are concerned about us not focusing our attention on price stability and the fight against inflation. This is our fight, this is our focus, and this is where we spend our energy but, as you know, within our mandate, we have also taken decisive steps to integrate climate change considerations into our monetary policy framework, financial stability monitoring and banking supervision. It is very clear to us that the ECB and any central bank is not in the driving seat for those measures. You are the drivers of this bus. Executive authorities are the drivers of this bus, not the European Central Bank, not any central bank, but as part of our primary mandate, which is price stability, we have to take into account the risks posed by climate change, and under our secondary objectives – as long as it is without prejudice to the primary objective – we should certainly look into what can be achieved in order to respond to what you have determined as critically important economic policies going forward. It is specifically indicated in the Treaty, as far as the secondary mandate of the ECB is concerned.  So what have we done? We have adjusted our monetary policy corporate bond holdings, and since October 2022 we have started to tilt the reinvestment towards issuers with better climate performance. That has led us to a reduction in APP reinvestment flows, and from March onwards the programme that we have to only partially reinvest is going to increase this tilting approach.  By the end of 2024 we will limit the share of assets issued by non-financial companies with a high carbon footprint in the collateral pool that we have. By 2026, we will introduce climate—related disclosure requirements based on the CSRD. That’s on the central banking side of the ECB. If you look at the supervision side of the ECB, we are working – and started the work back in 2020 with the banking sector to alert them to the process that was underway – on climate stress testing to assess the impact of climate risks on the EU economy, credit institutions and the European balance sheets.  Some of you have expressed a concern and would like to continue to be informed of the progress of our Climate Action Plan. So I am committed to continue to inform the European Parliament and the public about the progress that we make, within our mandate, based on the primary objective, based on the secondary objective, to the extent that it does not prejudice the first. We will continue doing that, I am pleased to report that thanks to the energy of all members at the ECB, we are on schedule under the Action Plan and we are delivering like – as some of you said – no other central bank is delivering at the moment.  Now a few final words on the good coordination between fiscal policy and monetary policy. This matters enormously, and as you know we have repeatedly asked that the fiscal measures that have been decided at the national level be targeted, temporary and tailored. You’ve heard those Triple T’s ad nauseum. Why is it? It’s because of the target of fiscal policy, which is precisely to address those that are most exposed, most vulnerable, and that take the hardest hit, particularly as a result of high energy prices. When we say that it should be temporary, it’s in order to align with the variation in the prices of energy. When we say that it should be targeted, it should be directed to those people most exposed. When we say that it should be tailored, it should be tailored in such a way that it actually continues to incentivise people to save energy.  Now, regrettably, of the many measures that have been taken – and this is a result of an exercise that we have conducted for the first time in the summer, but that we will deepen for our March monetary policy meeting – only a very small proportion of the measures that have been decided by fiscal authorities actually satisfy the Triple T criteria. The Bruegel Institute has most recently also issued its assessment, and I think they assessed that only 25% of the measures are targeted, temporary and tailored. This is critically important, because while those measures at the moment are likely to dampen inflation without consideration, unfortunately, for many of them, for those who are most exposed, when they are withdrawn, when they are retired, then of course the retirement of those measures will actually have an inflationary impact on prices and that is likely to take place in 2024 and 2025, which is the medium term that we are concerned about when we determine if and when and how we going to reach target.  So our exhortation to members of government, in the euro area in particular, is to really stick to the temporary, targeted and tailored principles in order to make sure that their policies do not counteract with our monetary policy and does not lead us to having to tighten even more in order to reduce inflation and reach our target. I thank you very much for your attention.