MEPs in the Economic and Monetary Affairs Committee meet with Christine Lagarde, European Central Bank President, on the subject of the regular monetary dialogue as well as the ECB’s revised inflation target and the consequences of a rapid increase in housing costs.

meeting

European Central Bank

monetary dialogue with the ECB (T)

Committee on Economic and Monetary Affairs

LAGARDE, Christine (FR)

TINAGLI, Irene (S&D, IT)

Monetary Dialogue: Introduction by Irene TINAGLI (S&D, IT), ECON Chair and opening statement by with Christine Lagarde, President of the ECB - ECON Committee

SOUNDBITE (English), Irene TINAGLI (S&amp;D, IT), ECON Chair Good morning. Good morning, everyone. I think we should start our econ committee as usual. We start with the adoption of the of the agenda. If there are no objections, I considered the agenda is adopted now, the point now is that the approval of minutes of the past meetings, specifically the meetings of April 14th, May 27, September 27, September 30th, October 11th, 2021, if there are no objections, I consider these minutes approved. And now I have some announcements to make on the coordinators meeting of October 25th, 2020.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair One, I'm here to report you some summary of decisions and recommendations. So the first one, concerns of future coordinators meetings. It was agreed that the next meeting, which is scheduled for December the 2nd, would take place in the meeting room with hybrid facilities if possible. Regarding meetings in 2022. It was agreed to try to schedule physical meetings, possibly in committee weeks regarding nominations, establishing a framework for the recovery and resolution of insurance and reinsurance, undertake taking and amending directives 20 02 47 2004 etc.. This goes to the EEP amending direct two thousand nine one hundred thirty eight to eight European Commission, as regards proportionality, quality of supervision, reporting long term guarantee measures, macro prudential tools, sustainability risk group and cross-border supervision. It goes to EEP.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair It was also agreed that the Basel three package of three proposals expected from the commission, which actually is out now, would be attributed to the SMB group Estaba the 2030 Policy Programme Path to the Digital Decade. It was decided that no opinion will be issued then on public hearings and possible workshop on the joint economy. A public hearing on anti money laundering noter was taken of the time slot for the rearranged joint hearing, which will take place on December the 1st from ten to 12.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank On other public hearings, there was broad agreement that legislative files should be the focus of hearings in 2022, with particular focus on solvency to Basel three. And the amale package note was taken about the possible hearings to which coordinators would return in due course and then on econ missions and IDOC delegations in 2022, coordinators endorsed the previously agreed principles of the composition of the missions based on rolling out. It was agreed to schedule a visit to the ECB.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair It was agreed to also schedule a visit to Basel, where priorities should be given to meetings with the Basel Committee on Banking Supervision and the Bank for International Settlement. Then, regarding economic governance, subject to the availability of resources, etc., it was agreed to organise a joint action mple economic dialogue with the EEP Dombrovskis and Commissioners Gentiloni and Shmeat following the publication of the European Semester, Autumn Package and Economic Dialogue with AVP, Dombrovskis and Commissioner Gentiloni on the fiscal package, then on the interinstitutional agreement with the European Central Bank.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair It was agreed that such agreement, which would include a solid accountability framework, strengthening the role of the EEP, would be added as an additional topic for the monetary dialogue that we are about to start then on possible gender equality related event: on March, the eight coordinators were fully supportive of the chair suggestion to organise a gender equality related event event on or around March eight, 2022, and involving various high profile female interlocutors, interlocutors of a conference and then on the FISC subcommittee follow up to the Joint Action Coordinators meeting of October the 7th.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair It was agreed that more time was needed in order to find an agreement on the type of assistance to be provided by FISC to ECON. Then we had an endorsement of a summary of FISC coordinators meeting of October 11th. And these regard, the FISC recommendations were endorsed with the exception of this section the follow up of the ECON coordinators meeting.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair On working groups, Coordinators took note of the activities of the working groups organised since the latest update in March or planned soon. And there were also some announcements for reasons linked to the workload: Econ. will not organise a presentation of the SCA report. SCA 182021 special report on commission surveillance of member states exiting and Macroeconomic Adjustment Programme, an appropriate tool in need of streamlining.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair Last on any other business. We discussed a possible hearing on Coom Ex. It was agreed that initially the issue would be dealt with by the FISC subcommittee at a later stage it could be decided if there is a need for econ to also look into some issues. Regarding the IMCO hearing on November 8th. 2021 on whistle blowers testimonies on the negative impact of big tech companies, products on users. With that, Mrs Frances Hogan, a former Facebook employee. It was agreed that the slot allocated to ECON would go to the rapporteur of the DSA file.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair Now, the next point in the agenda, I have to report on ongoing interinstitutional negotiations and on this regard, reporting that on November the eight, 2021, the third trialogue on the DLT pilot regime took place. We discussed, amongst other things, the role of the ESMA, the thresholds and the new concept for the distributed ledger technology, trading and settlement system.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair In addition, upon request of the Council, we added a new agenda item, the extension of the deadline regarding the mandatory by engaging in the CSDR case, the coordination between the DLT pilot regime negotiating team and the CSIDR negotiating team is ongoing. The next DLT pilot, Regin Trialogue, will be on November 24th, 2021 in Strasbourg.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair Now, finally, we are now arrived at the crucial point of today's agenda: monetart dialogue with Christine Lagarde, the president of the European Central Bank. So on this regard, I would like to welcome ECB President Christine regard to these fourth and last monetary dialogue of 2021. The previous monetary dialogue took place on September 27. Today, we are again holding the monetary dialogue in a virtual format. Having said that, there are no you are no doubt aware that in line with the EPP presidents decision of the October 28, all members taking part in today's meeting are actually in the meeting room.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair The date of this meeting was actually, as you can imagine, decided many months ago on the basis of the assumption that the meetings would be held remotely and the President's decision came too short in advance to be able to reorganise the entire discussion with Madame Lagarde in presence, considering also the difficulty of reconciling her institutional commitments with the internal constraints on the management of the rooms and the facilities.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair Since both we and and her attribute an important and indispensable role to these monetary dialogue, we have decided to keep these date already set and to proceed exceptionally in these hybrid mode. However, I also understand that if conditions allow Madame Lagarde will be happy to participate physically in our next monetary dialogue during the first quarter of 2022. And of course, we'll look forward to meeting her in that occasion.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair Now, last October 20th, the ECB Governing Council judged that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the Pandemic Emergency Purchase programme in the second and third quarters of this year. Moreover, the Governing Council also confirmed its other measures, namely the level of the key ECB interest rates, its forward guidance on their likely future evolution, its purchases under the asset purchase programme, its reimbursement policies and its longer term refinancing operations.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair As indicated at the press conference on the same day, the euro area economy continues to recover strongly, although momentum has moderated to some extent, inflation increased to three point four percent in September, primarily because of the surge in energy prices, but also as a recovery in demand is outpacing constrained supply. You foresee inflation rising further in the near term, but then declining in the course of the next year.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair Moreover, the ECB underlined that market and survey based measures of longer term inflation expectations have moved closer to 2%. The two topics chosen by econ coordinators for today's meeting are quite timely and help us to better discuss the situation with Madame Lagarde. The first one is the ECB revised inflation target and the second is inflation measurement role of owner occupied housing costs.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair As usual, all briefing papers prepared by their EEP panel of experts are available on the econ website and moreover, as I and I said previously, econ coordinators. I have exceptionally decided for another topic to be included in this monetary dialogue regarding improving the ECB accountability framework.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair Indeed, in recent years, monetary policy gradually became more complex and with more uncertain side effects and with a greater interaction with other policies constrained with the lower bound on interest rates central banks have, out of necessity, used a so-called non-standard monetary policy instruments. Faced with an unprecedented economic shock, caused by the covid-19 pandemic, the ECB reacted quickly, forcefully and steadily by employing once again these instruments at an even greater scale.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair The completion of the strategy review in July marks, in some ways the beginning of a new phase for the ECB. We need to reflect on what this revised strategy means for our interaction with the ECB and scrutiny of its monetary policy. The European Parliament considers that improvements to the ECB accountability framework could and should be made, while, of course, safeguarding the ECB treaty defined independence. Madame Lagarde statements during the monetary dialogue of September 28, 2020 where also going in the direction of reconsidering accountability practises following the outcome of the review.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair So, the ECON Committee's ready to start discussion and actually start negotiations on an interinstitutional agreement to formalise and possibly go beyond the existing accountability practises in the area of monetary policies. Now, before starting a few practical considerations in line with the Greta, practises, we will apply this procedure: there would be introductory remarks by President Lagarde of about 15 minutes, followed by five minutes question and answer slots with the possibility of a follow up question, time permitting, within the same slot. So two minutes maximum for the question and three minutes maximum for the answer.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), ECON Chair In the first round of questions, each political group will have one slot and thereafter we will apply the Daunte system. If time allows, additional slots will be allocated on a catch. The Ibbs is taken due account of the weightings of each of the political group. I really ask you to strictly respect the time given to you. I recall that wearing a mask is needed. Why you don't speak about it is no longer needed as you are speaking. And and now I think I'm done and we can finally give the floor to President Lagarde. Madame Lagarde, you have the floor for five fifteen minutes.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Thank you very much, President. And thank you to you and to all your colleagues for your understanding of the fact that I could not on short notice, join you physically in the hemisphere of the European Parliament. But indeed, I'll be delighted to come at the next dialogue that we have circumstances permitting. And if it is the constant wish of President Sassoli and of you indeed, that this meeting be held in person, it's always nice to see each other and to be there together. So rest assured that I'll make a point of being with you next time around. So let me say a few words by way of introduction, tapping on the key topics that you've identified yourself.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank We are now nearing the end of the Euro, which means that you will soon reach the midway point of this legislative term. And for my part, I have just completed the first two years of my mandate at the ECB and I'm sure that on taking office, none of you, none of us thought that a global pandemic would be at the top of our agendas. And for so long.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank But in the face of turbulence, we came together as Europeans and mounted an unprecedented response to protect people's lives and livelihoods. The challenge is not over yet, not only the course of the pandemic, but also the decisions taken by policymakers will continue to determine the strength of the recovery. And that is why our regular hearings are so important.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank My remarks today will focus on the outlook for the euro area and the relevance of the cost of housing for inflation. As your committee has requested, will do this with a little innovation, a small one, but we introduce it now. You should all have received a two page document which visualises the content in this statement in a very simplistic and abbreviated form. At your request, I will conclude by discussing how to effectively discharge the ECB accountability obligations.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank So let's look at economic activity. And I would call your attention to the first chalk on the left on the document that has been distributed to economic activity, continued to recover strongly. In the third quarter, quarterly gross domestic product growth stood at two point two percent, and GDP is still expected to exceed its pre pandemic level around the end of the year. You see that clearly on the chart.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank After the great financial crisis, euro area GDP took seven years to return to its pre crisis level. This time, thanks to the strong and combined fiscal and monetary policy responses, we expected to exceed its pre pandemic level in less than two years. At the same time, growth momentum is moderating to some extent owing to supply bottlenecks and the rise in energy prices. Consumer spending is solid, but shortages of materials, equipment and labour are weighing on manufacturing production, weakening the near-term outlook.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Although the duration of supply constraints is uncertain, they are likely to persist for several months and gradually is only during Supply 2020. bottlenecks are not the only source of downside risks to the growth outlook. Higher energy prices could also dampen growth by limiting purchasing power and holding back the rebound in consumption. On the upside, households still have considerable excess savings, which could boost activity levels if deployed.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Now, turning to inflation. The rate increased by more than we had anticipated in September, standing at four point one percent in October compared with October a year ago. The upswing in inflation is being driven by three primary forces. The first of these forces is energy prices. In October, energy inflation accounted for just over half of overall headline inflation. And that is the yellow bar that you see on the chart to the second shot, to the right.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank The second is that recovery in demand related to the reopening of the economy is outpacing constrained supply and this is pushing up prices. And the third driver is that the reversal of the temporary cut of German VAT last year is mechanically driving current headline inflation figures. The latter factor will fall out of the inflation calculation from January 2022. But the other two may last longer. Current futures prices point towards a noticeable easing of energy prices in the first half of 2022.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank As the recovery continues and supply bottlenecks down, we can expect the price pressure on goods and services to normalise gradually. As a result, we still see inflation moderating in the next year, but it will take longer to decline than we had originally expected. If energy prices keep rising or supply constraints persist, inflation may remain higher for longer than we currently anticipated. This could feed into higher wages and subsequently higher prices. But so far we see no evidence of this in the data for negotiated wages. We do see wage growth next year potentially rising somewhat more than this year. But the risk of a second round effects remains limited.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Overall continue we to foresee inflation in the medium term remaining below our new symmetric two percent target. Growth and medium term inflation dynamics still depend on favourable financing conditions for all sectors of the economy. Such conditions remain favourable and bank lending rates to firms and to households remain at historically low levels.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank At our October meeting, the Governing Council continued to judge that favourable financing conditions could be maintained, with the stance endorsed in September. Regarding policy interest rates.: in our forward guidance, we clearly articulated the three conditions that need to be satisfied before rates will start to rise. Despite the current inflation surge, the outlook for inflation over the medium term remains subdued and thus these three conditions are very unlikely to be satisfied next year.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Meanwhile, our asset purchases under the Pandemic Emergency Purchase Programme continue to safeguard favourable financing conditions for all sectors of the economy at a time when purchasing power is already being squeezed by higher energy and fuel bills and undue tightening financing conditions is not desirable and would represent an unwarranted headwind to the recovery. As for further calibration on purchases, we will announce our intentions in December.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Even after the expected end of the pandemic emergency. It will still be important that monetary policy, including appropriate calibration of asset purchases, supports the recovery throughout the euro area and the sustainable return of inflation to our target of 2%. I will not turn to the treatment of owner occupied housing for inflation measurements, as you've requested. The ECB considers that price stability is best maintained by aiming for two percent inflation over the medium term.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank With the harmonised index of consumer prices that I will refer to as HICP being the appropriate price measure. So it is of primary importance to the ECB that the HICP appropriately represents the consumption patterns of euro area households. Shelter being a primary need. The cost of housing is an issue that is foremost in many people's mind.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank This was actually reflected in our ECB Listens events and a new resolution adopted earlier this year. We have listened to you and to the public and we are now proposing steps to better reflect housing costs in the measurement of inflation in the euro area. Doing so, we are mindful of the various technical challenges posed by incorporating housing costs in the HICP and the role that different EU institutions have in this process. So let me explain this in more detail. As things are more complicated than they may first appear.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank One challenge is that housing has a dual nature. At first, buying a house is an investment in an asset. But buyers may have different intentions. They could use the house only as an investment by renting it out or use it primarily for consumption, by occupying it as an owner, as the owner occupier will also benefit from the increase in the house's value. Over time, it will be used for both investment and consumption to ensure that HICP maintains its focus on consumption expenses, as is required by the HICP regulation. Only the consumption part of housing costs must be captured. However, doing so is quite challenging from a technical point of view, as shown by the considerable variation in ways the matter is dealt with in other countries. The first step is to define what should be measured.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank The owner pays for the house only once, at the time of the transaction, but the owner consumes the housing service for a long time. Now this issue is solved under the so-called net acquisition approach, whereby a house is treated like any other durable goods. Prices for new cars, for example, are included at the time of purchase, even though the car will be used for the next few years. The second step in line with the HICP regulation is to derive a price index by looking only at transactions to, but not within, the household sector.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Sales of houses between households should be ignored, which means focussing mainly on new builds. This results in a relatively small number of transactions per month, which for smaller countries may make it impossible to calculate a monthly price index. In the strategy review we looked at all of these technical issues and how to solve them. As part of the review, the Governing Council decided in favour of including owner occupied housing using the net acquisition approach. However, the HICP is not compiled by the ECB, but by Eurostat and the National Statistical Institutes.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank The Governing Council has proposed a roadmap that takes into account the role of the various EU institutions involved in the process. This roadmap foresees four main stages for moving to an HICP that would include owner occupied housing costs. First, we are constructing an analytical index, which includes owner occupied housing for internal purposes only. Second, we would like Eurostat to publish an experimental quarterly HICP including owner occupied housing costs, possibly by 2023. In parallel, the necessary legal work will be studied so that an official quarterly index can be made available possibly in 2026.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank And here, let me say this: I'm counting on the support of the European Parliament, given that it already requested the integration of owner occupied housing back in 2016. The aim and final stage would be to include owner occupied housing at the monthly frequency and in a timely manner, hence fully usable for monetary policy purposes. The Governing Council also decided that during the transition period, the main reference index for monetary policy will remain the current HICP.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Nevertheless, the quarterly standalone Owner-Occupied Housing Price Index, as well as the quarterly indices combining HICP and owner occupied housing once available, will play an important supplementary role and inform our monetary policy decisions. Let's review some preliminary calculations of the experimental index envisaged for the first stage of the roadmap. Adjusted inflation figures, including the owner occupied house price indixes, would currently be slightly higher than the annual inflation rate.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank Preliminary estimates indicate that the difference was around zero point two percentage points in the second quarter of 2021, slightly higher than the average since 2012. This reflects strong euro area house price dynamics in the recent period, which remained unabated during the covid-19 crisis and continued to be supported by strong fundamentals and favourable financing conditions. At the same time, it is important to highlight that during periods when there is downward pressure on housing prices, such adjustments may also result in a lower inflation rate.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank So let me conclude by discussing an issue which I believe is of crucial importance to both our institutions, namely how to effectively discharge the ECB accountability obligation. Over the past few years, the European Parliament has asked the ECB to improve its communication practises to ensure that we earn people's trust. As you know, I'm personally very committed to this issue and I'm pleased to say that we have listened to you and made progress, I believe; in this area.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank clear A new, and symmetric two percent inflation target makes it easier to hold us accountable. Moreover, we have taken concrete measures to enhance the clarity and accessibility of our communication to the public, such as the new monetary policy statement following our Governing Council meetings. And we are also making listening events a structural feature extending the principle of two way communication that we have with you in the European Parliament, also, directly to citizens.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank But this direct communication with citizens can only complement our accountability relationship with the European Parliament, which is prominently enshrined in the treaty. We need you as the representatives of the EU citizens, to channel their concerns to us and help explain our policies to them. Delivering on the ECB treaty obligations is a challenge shared by both the ECB and the European Parliament.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank So over the past two years, I have answered around 300 questions in hearings and responded to more than 90 written letters from you. But we have also gone beyond the regular practises and taken several initiatives to enhance the scrutiny of the ECB action. Together, we have organised additional hearings and visits to the ECB on topical issues, such as the strategy review and the Digital Euro. As for soon, instance, as the Digital Euro project was launched by executive board colleague, Mr Panetta clearly communicated our willingness to have additional regular exchanges following progress made in the investigation phase. Actually, the next of these will take place this Thursday and Mr Panetta will come.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank The flexibility that has shaped our accountability practises in recent years has paid off and we should build on that. The literature on how we can improve our accountability practises, which has been enriched by the studies commissioned by the European Parliament, shows that once you take into account the statutory differences of major central banks, what matters really is how we do things. These international experiences and things we have learnt from the past years, together with the provisions of primary EU law, should be our guiding principles when we discuss how to effectively discharge the ECB accountability obligations in years to come.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank As the British human rights activist and environmental campaigner Anita Roddick once said, if you do things well, do them better. Well, we will try. Thank you very much for your attention. And I am sure that I stand to answer more than the three hundred questions that I have answered over the last two. Years. Thank you, President. Thank you.