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

The ECB was granted a democratic mandate to ensure price stability in the euro area. In other words, we safeguard one of the fundamental conditions for stable economic growth. To achieve this mandate, the ECB was also granted a high level of independence, and as you acknowledge in the draft resolution we are discussing today, the ECB’s ability to take all necessary measures free from any political interference is essential to deliver on its mandate.  This is particularly the case at the moment, given the present circumstances. High inflation continues to have a large impact on all areas of our economy and on people’s everyday lives, especially low—income households, as you also noted. This is why the Governing Council started normalisation of its monetary policy back in December 2021 and has raised ECB interest rates by 300 basis points since July 2022. It has recently – at its February meeting a few days ago – emphasised its determination to stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium—term target.  But independence comes also with a great deal of responsibility. The choices that we make as central bankers have a significant influence on society. So being accountable for our decisions is the necessary counterweight to our independence. This means that we need to explain our policies and the analysis that underpins them to ensure that people understand how and why our decisions are taken. But it also means that we must be attentive to the concerns of the public and carefully evaluate whether and how we can respond to these concerns within our mandate. After all, reinforcing trust in our institution also supports our monetary policy – for example by anchoring inflation expectations.  Today’s debate on your draft resolution is crucial in both these aspects. So I’m here today to explain our policy, but also to listen to your views as elected representatives of the European citizens and to further reflect on how the ECB can act for the benefit of all Europeans within its mandate.  Let me start by briefly outlining our assessment of the euro area economy as was discussed by the Governing Council earlier this month. Euro area growth slowed, but didn’t stall, in the fourth quarter of 2020. The outcome was better than was initially expected as the adverse economic effects from Russia’s unjustified war were partly buffered by improving supply conditions and fiscal support related to the energy crisis. While confidence is rising and energy prices have fallen, we expect activity to remain weak in the near term.  According to Eurostat’s flash estimate – and this number, by the way, is calculated using an estimate for German inflation at this point in time – inflation was 8.5% in January. It is likely to be revised slightly upwards when taking into account the German inflation numbers, which have now been published. The decrease compared with December was mainly due to a sharp drop in energy prices. At the same time, the prior surge of energy prices and other input costs is still feeding through to consumer prices. Overall, price pressures remain strong and underlying inflation is still high. If, for instance, you exclude energy and food, inflation remains at 5.2% in January, the same as in December. Looking at the labour market, wages are growing faster, supported by robust employment dynamics, with the main theme in wage negotiations becoming how wages can to some extent catch up with high inflation. Even though most measures of longer—term inflation expectations currently stand at around 2%, these measures warrant constant and continued monitoring.  The risks to the growth outlook are now balanced or, rather, more balanced than they were in December. Russia’s war against Ukraine and its people continues to be a significant downside risk. But a faster resolution of the energy shock would support growth. The risks to the inflation outlook have also become more balanced, especially in the near term.  So against this economic backdrop that I have summarised very briefly for you, what is our monetary policy? Well, at our latest meeting on 2 February, a few days ago, we decided to raise the key ECB interest rates by 50 basis points, and we expect to raise them further. So in view of the underlying inflation pressures, we intend to raise interest rates by another 50 basis points at our next meeting, in March. We will then evaluate the subsequent path of our monetary policy.  Keeping interest rates at restrictive levels will, over time, reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. Our future policy rate decisions will continue to be data dependent and will follow a meeting by meeting approach.  At our February meeting, we also decided on the modalities for reducing the size of the Eurosystem balance sheet and the asset purchase program that I will call the APP for simplification purposes. As we communicated in December, the APP portfolio will decline at a measured and predictable pace, with the decline amounting to EUR 15 billion per month on average from the beginning of March 2023 until the end of June 2023. It will then subsequently be determined over time.  In the interest of simplicity and neutrality, the parameters for reducing the APP portfolio will be closely in line with what we have done previously. This will preserve consistency with our monetary policy stance, which is being set primarily by our interest rates.  For the Eurosystem’s corporate bond purchases, reinvestments will be tilted more strongly towards issues with a better climate performance, supporting the gradual decarbonisation of our corporate bond holdings, in line with the goals of the Paris Agreement, without prejudice to our price stability objective.  Let me now turn to other important matters you have raised in your draft resolution – namely the expansion of the euro area and the work we must do to complete our economic and monetary union. On 1 January, we welcomed Croatia to the euro area, expanding our club from 19 to 20 countries. Croatia’s accession is an impressive achievement not only for Croatia itself, but also for the euro. It shows that the euro is an attractive currency and once again reminds us that in Europe we are just stronger together.  Adopting the euro will bring tangible benefits to Croatia’s 4 million citizens, Building on the broader positive impact the euro has had over the last two decades. As an anchor of stability, the euro has advanced European integration and strengthened the single market’s role in driving growth. This in turn has elevated the EU’s standing as the world’s largest trading bloc and enhanced our autonomy on the global stage.  The euro has also become a symbol, and a binding symbol, and an integral part of our shared European identity, as its popularity shows. Support for the euro and for economic and monetary union has now reached an all time high at 80%. But with rising geopolitical tensions in the global economy, a stable euro will become even more important in ensuring that Europe continues to thrive. For that to happen, we need to collectively double down on the work that remains to complete our economic and monetary union. On that, each and every European policymaker needs to contribute.  Let me mention briefly, by way of conclusion, the three areas where progress can be made in the next 12 months before the EU elections in 2024 – which I know is already keeping many of you busy, but there is work to be done before that. Let me mention those three areas.  Number one, euro area financial integration. Number two, EU economic governance. Number three, the digital euro. Big projects.  If we look first at strengthening the euro area financial integration, the ECB is playing its part, notably by ensuring European banking supervision that is effective and consistent. We promote financial integration through our central bank services, for example by supporting EU debt securities to fund the NextGenerationEU programme. But the future of EU capital markets hinges on the broader regulatory environment, which is in your hands. Deeper, more integrated EU capital markets are essential for enhancing risk sharing and mobilising the private financing needed, especially for the green and digital transition.  I know that work is underway, that the Commission is playing its part and the ECON Committee is also active in that respect. But more needs to be done. It is critically important if we want capital to flow and to feed the ambitions that you have and that we legitimately have in relation to our green transition and digital mutation. Now, by the same token, we must not overlook the crucial work remaining for the completion of the banking union – an issue highlighted in your draft resolution and on which this Parliament has been vocal in pushing for progress.  Second, the reform of the EU economic governance framework. The ECB has highlighted – and has gone public in that respect – the importance of a simpler and more predictable framework, stronger national ownership and sustained implementation. I really encourage policymakers, including this Parliament in particular, to rapidly reach a viable and broadly—shared agreement that strengthens the foundations of our economic and monetary union.  Third, the digital euro. An appropriate regulatory framework needs to be laid down. The Digital Euro project is a truly European initiative which is moving ahead at a steady pace. In the autumn, the ECB’s investigation phase will come to an end and the Governing Council may well decide on the next steps.  But let me be clear, that does not mean that we will then issue the digital euro. That would only happen at a later stage, based on a dedicated decision, and only after Parliament and the Council of the EU have adopted the legislative act. As EU policymakers, all the EU policymakers should continue playing their part, and I’m really counting on you, as the European Parliament, to swiftly start working on the legislative proposal, which the European Commission has been working hard on and intends to present in a few months.  So let me conclude at this point. We are committed to bringing inflation back to our 2% medium—term target in line with our mandate, and we will take the necessary measures to do so. As Thomas Jefferson once wrote: ‘the price of freedom is eternal vigilance’. In a democratic society, central bank independence can only be legitimate if it is founded on a clear mandate and balanced with accountability, to ensure that the central bank follows and respects its mandate.  This also means that forceful efforts to ensure price stability need to be accompanied by equally forceful democratic scrutiny. In this spirit, we will continue our ongoing dialogue with you as the representatives of the EU citizens, as also advocated in your draft resolution. The ECB stands ready to agree on a formalisation in writing of the accountability practices between the ECB and the European Parliament. The ECB has made a proposal to the European Parliament and looks forward to finalising an agreement between our two institutions.  At this point of my conclusion, I would like to recognise the President of the ECON Committee. Ms Irene Tinagli, without whom progress would not have taken place. The entire ECON Committee has been a great partner in the work that we do together, but without her it wouldn’t have moved. So thank you, and thank you to you all for your attention. I’m now looking forward to listening and, if more explanation is needed, of course I’ll come back at the end of this debate.