Debate: European Central Bank – annual report
Date: MONDAY, 26 FEBRUARY 2024
Speaker: Christine Lagarde
Language: EN

So let me start first with one that is very, very clear to me, as is clear for all of you, I am sure, which is that the primary objective of the European Central Bank is price stability. It is inscribed in the Treaty, Article 127. There is no doubt, no question about it – this is the objective and it is the primary one. Which doesn’t mean to say that there are no secondary objectives which are also inscribed in the Treaty, but they are inscribed as such: without prejudice to the primary objective.  So I think, be under no doubt that this is very clear in my mind and in the mind of members of the Executive Board – all of them – as well as members of the Governing Council. One of you asked: ‘What are the tools?’ Well, what are the tools for what? To achieve price stability. And price stability has been defined as 2 % medium term – very clear. And this is what we are aiming for, this is where we will get. For that, of course we need to tame this inflation that is vastly unequally hitting our citizens. The higher the inflation, the more the least privileged are hurt. And the service that we can do to the less privileged is precisely to fight inflation, to bring it down to that 2 % medium-term objective that we have. So, what tools do we have? The primary tools that we can use are the interest rates. Where we are in the cycle, and given the magnitude of the force of inflation, this is the best tool that we have available and we have been using it. I remind you that we went from -0.5 % to 4 % – just looking at the DFR, the deposit facility rate. In addition, but somehow on the back burner, we have also – and this has been mentioned by one of you – gradually started reducing the size of our balance sheet and the footprint that we have on the markets. This has happened for two reasons: one, the reimbursement of the TLTRO programmes that we had to put in place to respond to the COVID crisis. EUR 1.7 trillion has been reimbursed in the course of the last few months. There is still a little bit left and there will be yet another reimbursement of a significant amount in March, but we are getting to the end of that. We are also reducing, of course, any kind of reinvestment in the APP – so the asset purchase programme is on a run-off mode, and there is a declining footprint as a result of that. And it has been decided that on the pandemic emergency programme, we will continue to reinvest, but reducing our reinvestment by EUR 7.5 billion as of 1 July. So this is happening at the same time as we are using our major tool, which is interest rates. This is very clear to me. Second point – because it has been raised by some and it is always an object of questions – on wages. So wage pressures remain high and as I said during my comments, we expect them to be a key driver of inflation dynamics in the coming quarters. But almost in the same breath of air, I said that we are also observing what we had expected, which is that profits – I am oversimplifying it – profits are not increasing at the pace that we have seen them increase in the course of 2022 and beginning of 2023. So during the second half of 2023, profits were contributors to inflation by only 25 %, whereas in the past it had been 50 %. So gradually, because of pressure on demand, we are seeing a reduction of profits because they absorb some of the wage increases. And those wage increases are a factor of two things: one, a tight labour market in many of your economies, and second, a catching-up with inflation that has been suffered by employees. So we are observing that very closely because it’s a key factor, a key driver, but we are gradually seeing that wage increase caused by the two factors that I have mentioned being actually partly absorbed by the profit contribution to inflation, which has reduced. Now, I want to finish with two things. And I want to specifically address one issue, which is that of the participation of the European Central Bank in the fight that many of you in this Chamber have decided was critically important for Europe, which is the fight against climate change and the protection of biodiversity. And let me also be very clear on that point: this is your call. It is your domain. It is your decision. And that of government’s executive and legislative arms are the drivers of that bus.  But let me also be clear that to the extent that we have to evaluate the risks, to the extent that we have to conduct macroeconomic analysis, it is imperative that we take into account climate change. And to the extent that we are complying with our primary objective and delivering on our secondary objective without prejudice to the primary objective, we have to consider those issues. Does that mean that we are excluding anyone? ‘No’ is the answer, very squarely. At the European Central Bank, we value highly – and I can tell you that personally, I value immensely – diversity. And it’s not just the gender diversity that we will all celebrate on 8 March. It’s intellectual diversity. It’s diversity of background, diversity of understanding and assessment of the economic reality that we live in, based on facts, on knowledge, on science. Does that mean that we would be excluding people? No. Diversity does not call for exclusion. Diversity calls for inclusion, debate, proper understanding of each and every one’s position. So while I completely support all my colleagues, including the one that you have referred to, I realise that sometimes words can go a little bit beyond the passion that underlies what they express. But trust me, diversity will not be diluted by the passion of something that is critically important and that impacts on our activity and I will only mention assessment of risk, tilting of our corporate portfolio and taking into account in our models and in our assessment of economic reality the imperative of climate change that belongs as a priority to you and to the executive branch of our governments.