Speech by Christine Lagarde, President of the ECB, at the hearing of the European Parliament’s Committee on Economic and Monetary Affairs
Brussels, September 26, 2022
It is a pleasure to be back with you here in Brussels for our third hearing this year.
Russia’s unjustified war of aggression against Ukraine continues to cast a shadow over Europe. My thoughts are with the Ukrainian people suffering from the senseless atrocities of war.
The economic fallout for the Eurozone has continued to unfold since we last met in June and the outlook is dimming.
Inflation remains far too high and is likely to remain above our target for some time to come. At our meeting earlier this month, the Governing Council therefore took the important step of bringing forward the transition from the prevailing highly accommodative policy rate level to one that ensures the timely return of inflation to our medium-term target of 2%.
In line with the topics chosen for this hearing, I will provide you with a brief overview of the economic outlook and then elaborate on our recent monetary policy decisions.
The outlook for the euro area economy
The euro area economy grew by 0.8 percent in the second quarter of 2022, mainly due to strong consumer spending on services as the economy reopened. Economies with large tourism sectors benefited particularly as people traveled more in the summer. The still robust job market also continued to support the economy.
Regardless, we expect activity to slow significantly in the coming quarters. There are four main reasons for this. First, high inflation is dampening spending and output across the economy, and these headwinds are compounded by gas supply disruptions. Second, the strong demand for services that came with the reopening of the economy is losing momentum. Third, weakening global demand, also in the context of tighter monetary policies in many major economies, and deteriorating terms of trade will mean less support for the euro area economy. Fourth, uncertainty remains high, reflected in declining household and business confidence.
These developments have prompted downward revisions to recent employee forecasts for economic growth for the remainder of this year and throughout 2023. Employees now expect economic growth of 3.1 percent in 2022, 0.9 percent in 2023 and 1.9 percent in 2024.
Inflation rose further in August to 9.1 percent. Energy and food price inflation remained extremely high and were the largest contributors to headline inflation. Price pressures are spreading to more and more sectors, in part due to the impact of high energy costs on the wider economy. Almost half of the positions in the inflation basket saw annual inflation rates above 4 percent in August and measures of underlying inflation remain elevated. While supply constraints have eased, their inflationary impact continues to gradually feed through to consumer prices. Likewise, the recovery in demand in the services sector is putting upward pressure on prices. The depreciation of the euro has also contributed to the build-up of inflationary pressures.
With regard to the labor market, wage dynamics have so far been limited. However, resilient labor markets and some catching-up to offset higher inflation should boost wage growth.
Most measures of longer-term inflation expectations are currently around 2%. However, signs of recent above-target revisions in some indicators warrant continued monitoring.
ECB staff baseline inflation projections have been revised significantly upwards; Annual inflation is now projected to be 8.1 percent in 2022, 5.5 percent in 2023 and 2.3 percent in 2024.
Risks to the inflation outlook are mainly on the upside, mainly reflecting the possibility of further major energy disruptions. While these risk factors for growth are the same, their effect would be the opposite: they would increase inflation but decrease growth.
The monetary policy of the ECB
Based on the medium-term inflation outlook, the Governing Council decided to raise the ECB’s three key interest rates by 75 basis points in addition to the 50 basis point increase announced in July.
From today’s perspective, we expect to raise rates further over the next few sessions to dampen demand and protect against the risk of a sustained upward move in inflation expectations. We will regularly reassess our monetary policy stance in light of incoming information and the evolving inflation outlook. Our future policy rate decisions will continue to be data-driven and follow a meeting-by-meeting approach.
As requested by the committee, I shall now turn briefly to the issue of fragmentation. Since we embarked on our normalization path in December 2021, we have made it clear that we will act if fragmentation risks threaten the even transmission of monetary policy across the euro area.
As of July 1, 2022, we have applied flexibility to reinvest maturing redemptions in the Pandemic Emergency Purchase Program portfolio to address risks to the transmission mechanism related to the pandemic.
Later in July, we also announced a new monetary policy tool, the Transmission Protection Instrument (TPI), which complements our existing tools. This tool is designed to counteract unwarranted disorderly market dynamics, with sufficient flexibility to respond to the severity of the risks faced by policy transmission. It will maintain the consistency of our monetary policy as the Governing Council continues on its path towards normalizing key interest rates and will help us to ensure price stability over the medium term, in line with our mandate. The TPI is subject to a list of eligibility criteria that the Governing Council will use to assess whether a jurisdiction is pursuing sound and sustainable fiscal and macroeconomic policies.
In conclusion, inflation continues to rise across the euro area, affecting citizens in all walks of life.
The latest Eurobarometer shows that almost two out of three citizens currently see rising inflation as one of the two most important problems. Higher energy and food prices are hitting the most vulnerable households in particular, and the situation is expected to get worse before it gets better.
In this environment, it is crucial that fiscal support to protect these households from the impact of higher prices is timely and well-targeted. This limits the risk of fueling inflationary pressures, thereby also facilitating the task of monetary policy to ensure price stability and helps maintain debt sustainability.
The best contribution that monetary policy can make to the euro area economy is to ensure price stability over the medium term. This means ensuring that inflation expectations remain well anchored and that demand conditions are consistent with our target.
As I have promised to update the European Parliament and the general public on our progress, I would like to end with a brief overview of our ongoing work to integrate climate change considerations into our monetary policy operations.
From next Monday, the Eurosystem will take a climate score of the issuers into account for all purchases of corporate bonds as part of the Eurosystem’s ongoing reinvestment purchases. This will result in more bonds being bought by companies with good climate performance and fewer bonds by companies with poor climate performance.
These measures will reduce the Eurosystem’s exposure to climate-related financial risks and support the green transition of the economy in line with the EU’s climate neutrality goals.
Beginning in Q1 2023, we will begin disclosing climate-related information on our corporate bond holdings and we will report regularly on the actions we are taking to address climate change as part of our mandate.
I am now ready to answer your questions.