The European Central Bank is the central institution of the Economic and Monetary Union and has been responsible for conducting monetary policy for the euro area since 1999. The ECB and the national central banks of all EU Member States constitute the European System of Central Banks. The President of the European Central Bank (ECB) takes part four times a year in a monetary dialogue with Parliament's Committee on Economic and Monetary Affairs (ECON) to report on monetary policy. MEPs of the Committee on Economic and Monetary Affairs (ECON) debate with Christine LAGARDE the latest develepments of the monetary policies of the European Central Bank. Opening statement by Irene TINAGLI (S&D, IT), Chair of ECON and introductory remark by Christine LAGARDE, President of the European Central Bank. This transcription is a result of an automatic process. Please check against delivery.

Brussels

statement

debate

European Central Bank

monetary dialogue with the ECB (T)

LAGARDE, Christine (FR)

TINAGLI, Irene (S&D, IT)

Monetary Dialogue with Christine Lagarde, President of the European Central Bank: opening statement by Irene TINAGLI (S&D, IT), Chair of ECON and introductory remark by Christine LAGARDE, President of the European Central Bank

https://api.multimedia.europarl.europa.eu/documents/20125/72328791/1695368196288_I246309Chapters%5BSD-EN%5D.srt

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, Good afternoon colleagues, I think we should start. I kindly ask photographers to let us talk to the committee. So, as usual, we start with the adoption of the agenda. If there are no objections. The agenda is considered adopted and we have today interpretation facilities in 12 languages German. English. French, Italian, Dutch, Greek, Spanish, Portuguese, Czech, Hungary, Poland, and Romania. And let's move now to start to our monetary dialogue.

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, So welcome, President Lagarde, to this third monetary dialogue in 2023. Our monetary dialogue today is a game taking place in a steel challenging environment marked by uncertainty, inflationary price pressures and the deteriorating economic outlook in the euro area. Since the last monetary dialogue in June, headline inflation in the euro area remained high, but has continued its downward trend and reached 5.2% in August.

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, The September ECB staff macroeconomic projections for the euro area, they see an average inflation at 6.5. 6% in 2023 before declining to 3.2% in 2024. ECB staff and the European Commission staff in their summer 2023 economic forecasts have lowered the economic growth projections for 2023 and 2024.

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, These reflected largely the increasing impact of the financial tightening on domestic demand and the weakening of international trade environment since the last monetary dialogue on June 5th. The ECB Governing Council has continued on its monetary policy tightening path. The Governing Council, during its last meeting in September, decided to further raise key interest rates by 25 basis points for the 10th consecutive time.

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, President Lagarde indicated that the key ECB interest rates have reached levels which maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target. As concerns the so-called PEP for the Pandemic Emergency Approaches programme, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the program until at least the end of 2024.

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, Flexibility, and I'm quoting, will continue applying in reinvesting redemptions coming due in the pep portfolio with a view to countering risks to the monetary policy transmission mechanism. Furthermore, in June, the Governing Council confirmed that it will discontinue their investments under the asset purchase program as of July 2023. In this context, two topics were chosen by the ECON Committee coordinators for today's meeting.

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, The first one is achieving the right fiscal monetary mix in the context of the Economic governance review, and the second is excess liquidity in the euro area. Developments and implications As usual. All briefing papers prepared by the Parliament's panel of experts are available on the ECON Committee's website. And before we start to just a few practical considerations on the procedure, there will be an introductory remarks by President Lagarde of 10 minutes, followed by a first round of questions.

SOUNDIBTE (English), Irene TINAGLI, Chair of ECON Committee, One slot for political group, longer slots for speakers In the first round of Q&A with the follow up questions allowed one and a half minutes for the initial questions and 3 minutes for the answer. Let me add, if you will, use to two and a half minutes for the first question, I will not give a follow up because we have to keep the time.

 So and in the second round of questions, we will apply the system one minute for questions and 3 minutes for the answer. So please respect the time given to you so we can have everybody able to ask and receive answers. President Lagarde, thank you very much for being with us today. And you have the floor for 10 minutes.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Thank you very much, Madam Chair. And good afternoon to all of you. It's really a pleasure to be back in Brussels for our regular quarterly exchanges. Since our last hearing in June, the ECB has made further progress in its efforts to bring inflation back to its 2% medium term target in order to reinforce progress towards our target.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, We decided at our last meeting to raise the three key ECB interest rates by 25 basis points. And based on our current assessment, we consider that our rates have reached levels that maintained for sufficiently long duration will make a substantial contribution to the timely return of inflation to target. My short remarks today, I will outline an outline our latest assessment of the outlook for the economy and inflation, and explain our latest decisions.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, I will also briefly address the two topics selected by this committee for today's hearings, namely excess liquidity and the fiscal monetary policy mix. Let's look at the euro area economic outlook. Euro area activity broadly stagnated in the first half of 2023, and recent indicators point to further weakness in the third quarter of 2023. Lower demand for euro area exports and the impact of tight financing conditions are dampening growth, including through lower residential and business investment.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, The services sector, which had been resilient until recently, is now also weakening. The labour market has so far remained resilient despite the slowing economy, with the unemployment rate staying at its historic low of 6.4% in July. But while employment grew by zero 2% in the second quarter, job creation in the services sector is moderating from overall momentum is slowing.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Looking further ahead, economic momentum is expected to pick up as consumer spending and real incomes rise, supported by falling inflation, rising wages and a strong labour market. Our latest staff projections forecast growth of 0.7% in 2023, 1% in 2024 and 1.5% in 2025. And you have all these indications in the two pages that are regularly send you before the hearing.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Turning to inflation. Headline inflation continued its decline from its peak in October 22 last year, reaching 5.2% in August, down from 5.3% in July. Energy inflation ticked up in August from its downward path, but remained negative at -3.3%. Food price inflation has also come down from its peak in March, but is still high, standing at almost 10% in August. Inflation, excluding energy and food, fell from 5.5% in July to 5.3% in August, and most measures of underlying inflation continued to moderate.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, At the same time, domestic price pressures remain strong. Services inflation is still being kept up by strong spending on holidays and travel and by high wage growth. In the second quarter, the contribution of labour costs to annual domestic inflation increased partially due to weaker productivity. In contrast, the contribution of profits fell for the first time since early 2022.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Our latest staff projections show that inflationary pressures are expected to moderate and that inflation is set to reach our target by the end of 2025. It is projected to fall from 5.6% in 2023 to 3.2% in 2024 and 2.1% in 2025. We remain determined to ensure that inflation returns to our 2% medium term target in a timely manner. Inflation continues to decline, but is still expected to remain too high for too long.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, To reinforce progress towards our target,  we decided to raise our key interest rates by 25% basis points earlier this month. Based on our latest assessment, we consider that our policy rates have reached a level which maintained for sufficiently long duration will make a substantial contribution to the timely return of inflation to our target.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, In any case, our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels as long as necessary. We will continue to follow a data dependent approach, basing our decisions on our assessment of the inflation outlook in the light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmissions. The three criterias that we have flagged now for several meetings.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Let me now very briefly turn to excess liquidity, which I've chosen as a topic for today's hearing. The shift to a full allotment system during the financial crisis and the adoption of new monetary policy instruments have resulted in a strong rise in commercial banks holdings of central bank money. The surplus of funds over minimum reserves is referred to as excess liquidity.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, The funds are held as overnight deposits with the Eurosystem remunerated at the deposit facility rate and exceed the level of minimum reserves which are now remunerated at 0% and decision were made in July. The amount of excess liquidity has decreased by more than €1 trillion over the past 12 months. You have a chart in the two pages which indicate that.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, First the repayments of the third series of targeted longer term refinancing operation, and second, the reduction of the securities held under the asset purchase programme, with reinvestment being now fully discontinued. And since July this year, additional total repayments and the gradual rundown of the app portfolio will also cause our balance sheet to shrink over the coming years, further reducing excess liquidity.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, At the same time, Eurosystem staff are now analysing the optimal runrun size and composition of our balance sheet and by implication, the adequate level of excess liquidity. This is not a trivial issue and it has implications for the way we implement monetary policy. It is also an issue that is relevant for all major central banks as the environment in which we operate as undergone fundamental changes over the past decade.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, To this end, we are conducting a comprehensive review of the operational framework to steering short term interest rates, assessing the cost and benefits of alternative regimes. We aim to conclude this review by spring 2024, and we will of course report to this committee of the outcome at each meetings that we will have.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Allow me to conclude and by way of conclusion, to touch on the other topic that you had selected. Of the monetary and fiscal policy mix, the last few years have been particularly turbulent with unprecedented shocks hitting Europe. Decisive progress in your parliamentary term has shown that Europe can stick together, respond to challenges and emerge stronger.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, But important legislative work remains to be done before next year's elections. Making progress on banking union, capital markets union and the digital euro rests in your hands. Your involvement is also crucial for the second topic chosen for today's hearing. Ensuring the right mix of fiscal and monetary policies in the euro area.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Before the pandemic, fiscal policy was often pro-cyclical, but the response to the pandemic was different. National fiscal policies responded counter cyclically to the downturn, working in tandem with monetary policy and supervisory measures. As the energy crisis fades, governments should continue to roll back the related support measures to avoid driving up medium term inflation pressures.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, At the same time, fiscal policies should be designed to make the euro area economy more productive and to gradually bring down high public debt. A robust economic governance framework is overwhelmingly in our common interest. Agreement on the reform of the EU fiscal framework should therefore, we hope, be reached by the end of this year. We have outlined four priorities in our ECB opinion, which I would summarise in four key guideposts.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Lower sovereign debt and lower progeny of debt levels across countries. Higher growth and higher counter-cyclical ity of fiscal policy. Now is the time to move forward on this dossier, and I count on this committee to play its part in ensuring a timely adoption. It is also important for us as monetary policy deciders. Thank you very much for your attention. I apologise for being extended a little bit by speaking time.