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 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 developments of the monetary policies of the European Central Bank. Opening statements by Irene TINAGLI (S&D, IT), Chair of ECON and introductory remark by Christine LAGARDE, President of the ECB. This transcription is a result of an automatic process. Please check against delivery.

Brussels

statement

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

SOUNDBITE (English) Irene TINAGLI (S&amp;D, IT), Chair of ECON, Good afternoon, everyone. So let's get started with our committee meeting. As usual, we start with the adoption of the agenda. There are no directions the agenda is adopted. We also have to approve the minutes of the meetings of 23rd and 24th of October 23 and of November 7th, 23. If there are no objections, they are considered approved. I take the liberty of postponing all their announcements to tomorrow morning, so we can jump to the core of our meeting today, which is the monetary dialogue with Christine Lagarde, president of the European Central Bank.

SOUNDBITE (English) Irene TINAGLI (S&D, IT), Chair of ECON, Welcome, president Lagarde. This is the fourth and the last monetary dialogue in 2023. The previous one took place on September 25th. Today, the dialogue is taking place in a still challenging environment, which is marked by uncertainty. Since the last monetary dialogue in September, headline inflation in the euro area declined markedly to 2.9% in October, down from 4.3% in September. This is the lowest level since July 2021, and at the same time, core inflation has been high and persistent, exceeding 5% throughout the year, but now also showing a downward trend at 4.5% in September and 4.2% in October.

SOUNDBITE (English) Irene TINAGLI (S&D, IT), Chair of ECON, So after ten consecutive rate hikes in a row, the ECB Governing Council left in October 26, the ECB has raised interest rates by a cumulative of 450 basis points between July last year and now making it the most aggressive monetary policy tightening since the start of the Economic and Monetary Union. In parallel, the Eurosystem balance sheet is being reduced through a first ever quantitative tightening operation under the APP and through larger TLTRO III repayments.

SOUNDBITE (English) Irene TINAGLI (S&D, IT), Chair of ECON, Reinvestments under the PEP are set to continue at least until the end of 2024. In this context, two topics were chosen by the ECON Committee coordinators for today's meeting. The first one is a comparative analysis of monetary policy and inflation dynamics in the euro area and the United States. And the second one is the climate change considerations in monetary policy implementation.

SOUNDBITE (English) Irene TINAGLI (S&D, IT), Chair of ECON, As usual, all briefing papers prepared by the Parliament's panel of experts are available on the Econ Committee's website. A few practical considerations before starting, the following procedure will be applied. There would be introductory remarks by President Lagarde of 10 minutes, followed by first round of questions and then a second round. I ask to all of you to respect the time given to you, President Lagarde before I choke to the floor.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), Thank you very much, President. But I'm afraid I suffer from the same deficiency in terms of throat. And I might choke again, in which case I'll give you the floor. But we are fully equipped with water and a few mints around, courtesy of the European Central Bank, actuall. Here we are for the mints.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), So good afternoon to all of you and let me just start with my preliminary comments. So as just mentioned, the world has continued this period marked by compounding challenges. This new political and geopolitical landscape is emerging, fuelled by mounting tensions that are fragmenting the global economy. This has direct economic consequences as it is fostering uncertainty and economic volatile.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), The climate crisis is accelerating, resulting in more frequent and unprecedented natural disasters. These extreme weather events trigger supply shocks that reverberate through the global economy, further exacerbating the existing challenges. To navigate this shifting environment, policymakers must be open minded. At the same time, it is critical that central banks provide an anchor of stability by delivering on their price stability mandates.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), In my short remarks today, I would like to briefly discuss our current assessment of the economic outlook and our efforts to bring inflation back to target, and then I will explain how the ECB incorporates climate change considerations in its monetary policy. One of  the two topics that you have chosen for today's hearing.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), So let's have a first to look at the situation of the euro area economy. The activity has stagnated in recent quarters and is likely to remain weak for the rest of the year. Real GDP contracted by 0.1% in the third quarter, reflecting a broadening impact of higher interest rates, weak foreign demand and the fading impetus from the reopening of the economy after the pandemic. You must have received the one pager, which is recto verso, actually. Yes. Thank you so much. Okay, plenty now. Okay, I'll take one.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), So I will refer to this one page and you have on the top of the front page to the to the left. You have a good description of how GDP is evolving using also PMI indicators. So manufacturing output has continued to fall and activity in the services sector is weakening further. Despite the slowdown in activity, the labour market remains resilient overall, although there are now some signs that job growth may lose momentum towards the end of this year.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), While the short term outlook remains subdued the economy is set to strengthen again over the coming years as inflation falls further. Households, real incomes recover and the demand for euro area exports picks up. Turning now to inflation, which, as you said, chair, fell further to 2.9% in October. That's the latest headline reading that we have. And this fall reflected a general decline in inflation, but was also helped by what we call the base effects.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), 'These effects were particularly visible in the low rate of energy inflation, which stood at -11.2%. Food inflation has also declined, but is likely to remain strong for the rest of the year. This contrasts with inflation development in the United States, the first topic chosen for today's hearing where food inflation has been more contained while core inflation picked up faster after the pandemic.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), I encourage you to look at on the back of that one feature, which is called topic one, and it gives you a nice graph of how inflation looks like in Europe and in the United States. And I know it's a bit counter to intuitive, but the numbers that we have in terms of latest

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), readings is headine 2.9% in the Euro area,

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), still headline 3.2% in the United States.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), There is that sort of conventional wisdom that the U.S. is faring a lot better in its fight against inflation. I'm not sure that this is exactly accurate. If we look at the core, we are at 4.2%, U.S. is at 4%, but it peaked earlier than we had ourselves. Inflation, excluding energy and food, often called core inflation, has continued to moderate. It fell to 4.2% in October, owing to declines in both goods and services Inflation.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), Most other measures of underlying inflation have also come down. At the same time, the ECB is indicator of domestic inflation, which excludes items with a high import content, has not come down by much, reflecting the fact that inflation is now driven more by domestic sources than by external sources, and that you will find on the first page in the right hand graph, which shows in yellow, which is high domestic sources.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), 'Wage pressures, meanwhile, remain strong. Our current assessment is that this mainly reflects catch up effects related to past inflation rather than the self-fulfilling dynamic. And we expect wages. And again, that's the on the first page at the bottom left where you have wage contribution in green and red for profits. So wages will continue to be a key factor driving domestic inflation, but at the same time, the contribution of profits, as I said in red in that graph which accounted for much of the strong domestic price pressures since recently, is now weakening.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), Looking ahead, we expect the weakening of inflationary pressures to continue, even though headline inflation may rise again slightly in the coming months, mainly owing to some base effects. However, the medium term outlook for inflation remains, of course, surrounded by considerable uncertainty. So turning to monetary policy, we remain determined to ensure the timely return of inflation 12 2% medium term target.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), In October. As you indicated, we decided to keep the key interest rates unchanged and we expect that maintaining interest rates at current levels for a sufficiently long duration will make a substantial contribution to restoring price stability. Our future decisions, will ensure that policy rates are set at sufficiently restrictive levels for as long as necessary.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), 'The appropriate level and duration of restriction will continue to be determined in a data dependent manner, assessing the inflation Outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council will reassess its monetary policy stance in mid-December in two weeks time, informed by new data and updated projections, including for 26.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), Let me now turn briefly to the other topic you have selected for today's hearing that is climate change in monetary policy implementation. Climate related disasters are becoming more frequent and more severe. This year's catastrophic floods in Slovenia, Italy, Greece and France are a stark reminder of this. At the same time, the warming of our climate continues. July and August 23 were the two warmest months on record globally, and the planet is now on track to reach average warming of 1.5 degrees centigrade by the thirties.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), In today's challenging geopolitical environment, it is easy to lose sight of this unfolding climate crisis. But we remain committed to supporting the green transition. European governments are primarily responsible for addressing climate change. They have the authority, the tools and the ability to implement the appropriate policies to tackle this crisis.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), That said,

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), climate change and the protection of the enviroment are also

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), relevant for the ECB from the perspective of both our primary and secondary objectives. The ECB therefore remains committed within its mandate to playing its part.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), First and foremost by ensuring that we fulfil our primary objective of price stability. Large investment in green technologies are needed to support the

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), transition. A inflation outlook gives stable

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), 'firms visibility on investment costs, which is particularly important for green projects in light of their mostly long-term planning horizon. Price stability also supports the relative price signal from policies such as carbon pricing, thereby making those policies more efficient.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), Over the past years, we have enhanced our understanding of the economic and financial ramifications of climate change. We published a set of climate related indicators to improve the quality and quantity of climate related data. As climate related data improve, we are also working to further enhance our macroeconomic models, scenario analysis and risk assessment. This helps us better account for climate risks, and the implication for the transition to a carbon neutral economy may have.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), As it is relevant to our primary mandate, we are also working to better take into account climate related financial risk in the euro systems balance sheet. In doing so, we are also following our secondary objective by supporting the green transition of the economy in line with the EU's climate neutrality objectives.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), In the implementation of our monetary policy, for instance our tilting activities have helped decarbonise our corporate bond holdings and we continue to tilt our reinvestments under the Pandemic Emergency Purchase Programme. You have a reference to that in on the back of the one pager.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), We recently concluded our one year review of the Tilting framework and we expect the decarbonisation of our corporate sector portfolios to continue throughout 23 and 24 on a path that supports the goal of the Paris Agreement. There are three main factors driving this decarbonisation process. First, the effectiveness of our tilting approach. Second, redemption of bonds with a relatively high carbon impact. And third, we see that issuers of the bonds we hold are actively working to reduce their carbon footprint with benefits for society at large.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), Looking beyond 24, the Governing Council is committed to considering ways to ensure the further decarbonisation of our corporate portfolio on a path that support the Paris Agreement Objectives without prejudice to a Price Stability Objective. We will continue to review our climate actions to ensure that they remain fit for purpose, focusing on the areas where the risks are greatest and contributes the most.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), So as we enter in this new era of heightened geopolitical tensions and an unfolding climate crisis, we need to step up our efforts to make our economies more resilient. Progress on the green transition, including to accelerate Europe's energy independence, is essential, as it will reduce the likelihood of higher and more volatile energy prices.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank (ECB), Deepening the Capital Markets Union, reaching an agreement on a sound fiscal framework and addressing regulatory barriers are equally crucial to foster investment and speed of the development of renewables. The ECB will play its part first and foremost by ensuring that inflation returns to our 2% medium term target. This is not yet the time for us to declare victory. We need to remain attentive to the different forces affecting inflation and firmly focussed on our mandate of price stability. Thank you very much.