Christines LAGARDE appears for the first time before the ECON Committee of the newly elected European Parliament to discuss the assessment of the ECB's monetary policy shortly after the ECB Governing Council decided on 12 September 2024 to further ease monetary policy by lowering the key interest rate (deposit facility rate - DFR) by 25 basis points, continuing the change initiated in June. This monetary dialogue is also an opportunity to address the topic of the Capital Markets Union (CMU) and its relevance for monetary policy.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.

Brussels

statement

debate

European Central Bank

monetary dialogue with the ECB (T)

LAGARDE, Christine (FR)

LALUCQ, Aurore (S&D, FR)

Monetary Dialogue with Christine Lagarde, President of the European Central Bank: Opening statements by Aurore LALUCQ (S&D, FR), Chair of ECON Committee and by Christine LAGARDE, President of the ECB

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, But let me first congratulate all of you for your re-election or your election, because clearly you will be playing a significant role at a time when Europe faces major challenges and critical decisions will need to be made, will need to be taken over the next five years. And the work that you do in this particular committee is critically important. As a member of the European Parliament in general, you play an essential role in channelling citizens questions and concerns about all policies, but also about European Central Bank policies.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, And I am committed, together with my team members, to maintaining the dialogue that I have always had with your Econ committee. As those members who have been around in the previous term will remember, I'm committed to building a positive and constructive relationship with you, Madam President. But with all of you as representative of the European people, I think that by working together, we can fulfil our joint accountability, liability and obligations under the treaty and build better trust in our institutions and certainly better trust in the European Central Bank.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, So in my remarks today, I will start by providing an update on the euro area economic outlook as we see it. And then I will say a few words about the ECB monetary stance. And I will conclude, as you can imagine, by a few remarks about the Capital Market Union, which I have already committed a few speeches or remarks to, because I believe that it's important also from the ECB point of view.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, So turning first of all to the economic activity, it has recovered slowly since the end of the pandemic. The post-pandemic reopening allowed the euro area economy to grow during the first nine months of 2022, but economic activity broadly stagnated thereafter, and this was due, among other factors, to the energy price shock following Russia's invasion of Ukraine and the increased geo capital uncertainty, but also attributable to the tightening of our monetary policy. More on that later.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, Growth resumed in early 2024. The euro area economy grew by 0.2% in the second quarter after a 0.3% in the first quarter. However, growth in the second quarter stemmed mainly from exports and government consumption. On the other hand, domestic demand remained weak as households consumed less, firms cut business investment and housing investment dropped. The services sector is holding up with signs of deceleration, while activity in the manufacturing and construction sectors remain subdued.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, Looking ahead, the suppressed level of some survey indicators suggests that the recovery is facing headwinds. We expect the recovery to strengthen over time as rising real incomes should allow households to consume more. The latest ECB stuff projections foresee the economy growing by 0.8% in 24, 1.3% in 25 and 1.5% in 26. You should have and I'm sure it has been circulated to you, a little chart that looks like that, which gives you a number of graphs or reference points that can be helpful as I go through the economic outlook description. And you can see the growth progression that we expect in the upper and left corner.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, The labour market and you see that in the unemployment chart and the unemployment rate. So the labour market remains resilient with unemployment rate standing at 6.4% in July. Latest reading, we have broadly unchanged from past year, little lower, but it's a matter of decimal really. At the same time, employment growth slowed to just 0.2% in second quarter, but still growth. Recent indicators point to a further deceleration in the coming quarters.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, According to our staff, the unemployment rate is projected to remain around its current low level, and you have that in the employment unemployment rate chart in the right hand side of the term sheet that you have. Turning now to price developments. Disinflation has been accelerating over the last two months. Headline inflation fell to 2.2% in August 24th and is expected to drop further in September, mainly on account of falling energy costs.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, We have seen already some numbers coming down for France, for Spain, for Italy, and more recently for Germany today. And that confirms this point. Core inflation taking energy and food out edged down to 2.8% in August, driven by a decline in goods inflation that outweighed an increase in services inflation. The indicator of domestic inflation, which includes items with a low import intensity, remained high in August as wages continued to grow at an elevated pace.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, At the same time, the overall growth in labour costs has been moderating in recent quarters and profits have been buffering the impact of higher wages on inflation. Looking ahead, inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices dropped out of the annual rates. But the latest developments strengthen our confidence that inflation will return to Target in a timely manner. We will take that into account in our next monetary policy meeting in October. And again, you have indication about inflation development in the left bottom corner of the term sheet that you have.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, The ECB staff projections from September foresee inflation to average at 2.5% in 24, 2.2% in 25 and 1.9% in 26. So let me now turn to our monetary policy stance, which is the first topic that you've chosen for today's hearing. I would contend that we have come a long way in the fight against inflation. Remember, in October 22nd. Inflation was at 10.6%. One year later. By September 23rd, the last time we raised interest rates, it had dropped by more than half, down to 5.3%, 5.2%. The decline in inflation and the anchoring of long term inflation expectations showed that our strong monetary policy response was bearing fruit.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, Then after nine months of holding rates steady, we saw inflation halve again. So 10.6, 5.2. We were down in June at 2.6. When we started lowering interest rates, as you indicated, Madam President. The new data available at the time of the September Governing Council meeting reinforced our confidence in the timely return of inflation to our 2% target. We therefore lowered the rate on the deposit facility, which is the rate through which we steer the monetary policy stance and will also lowered it by another 25 basis points. We're now down to 3.5% for the deposit facility rate (DFR).

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, We are determined that inflation will return to our 2% medium term target in a timely manner. We will continue to follow a data dependent approach in determining the appropriate level and duration of restriction, focusing on the inflation outlook. The dynamics of underlying inflation and the strength of monetary policy transmission. Policy rates will be kept sufficiently restrictive for as long as necessary to achieve our aim and we are not committing to any particular rate path.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, Moreover, as we announced on March 13th, 2020, some changes to the operational framework for implementing monetary policy took effect. As of September the 18th, in particular, the spread between the interest rate on the main refinancing operations and the deposit facility rate was set at 15 basis points instead of 50 basis points. The aim of this measure is to steer short term money market rates more closely in line with monetary policy decisions.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, In parallel to our policy deliberations, we have also launched an assessment of our monetary policy strategy. This assessment will be more limited in scope than our last review, which we completed in July 21st and will include two workstreams. One Workstream will focus on the changed inflation environment and the other on the implications for our monetary policy strategy, including what we can learn from the periods of both low and high inflation. We expect to conclude that assessment in the second half of 25 and before that, I will regularly keep you updated on the progress of our analysis and our consideration.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, So let me now turn to the second topic of this hearing, the Capital Markets Union. The ECB has long emphasised the need for progress in this area to integrate our fragmented markets and thus foster risk diversification and shock absorption across the European Union. Doing so would support financial stability and facilitate the transmission of monetary policy. But a deep and integrated single market for capital is also essential for achieving some of the EU's other key goals. From financing the green and digital transitions to enabling savers to earn higher returns.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, Additionally, young and innovative firms need to grow and become more productive, which will ultimately benefit all Europeans. But for the time being, a lack of access to equity financing is a key factor holding this firm's book or letting them go across the Atlantic. Advancing the Capital Markets Union must therefore be a cornerstone of the EU's competitiveness strategy. Significant efforts have been made over the past decade to move forwards. And I want to pay tribute to the role that the European Parliament has played in promoting an ambitious European approach. But vested interests and competing national priorities and protection of territories have hampered that process.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, Now at the beginning of a new legislative term we are at a crossroads. The current political momentum needs to be converted into concrete agenda with clear priorities, and this agenda must be swiftly followed up with genuine action. The ECB Governing Council laid out its priorities for European capital market in a statement that we issued back in March. Let me highlight briefly three key areas where progress in our view, the view of the Governing Council, comprising all governors of the National Central bank banks of the euro area, are.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, First, we must improve the way we save in Europe. In 22 households, European savings exceeded €1.1 trillion. However, around a third of these savings are held in deposits, significantly more than in the United States. You have that comparative as well on the on the back page of this term sheets. Mobilising even a small portion of these funds and investing them in European capital markets could greatly contribute to more to the more than 700 billion needed annually to achieve the EU key strategic objectives. This is also likely to provide better long term returns to our citizens while improving European companies access to equity finance.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, Second. And yes, it is controversial. We need a single regulatory and supervisory ecosystem that promotes market integration. And third, for EU capital markets to be more attractive to investors in issues they need to achieve greater scale and depth. This can only happen through integration, especially in our trading and post trading infrastructure. So the world is changing. Europe is at risk of falling behind. You've heard that already from my illustrious predecessor, I'm sure.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, The diagnosis and the remedy are clear. The EU must come together and address its structural challenges to increase its competitiveness. Advancing the Capital Markets Union is an important part of this agenda, but not the only one. Significant efforts to boost Europe's economic resilience and decarbonise the economy will also be needed. This will require substantial investment in the coming years, which needs to come from both private and public sources. Progress in these areas will not only enhance Europe's ability to withstand future economic shocks, but also help the ECB to maintain price stability.

SOUNDBITE (English), Christine LARGARDE, President of the European Central Bank, I would like to quote former President Jacques Chirac on this subject, on this particular moment. He once observed the construction of Europe is an art. It is the art of the possible. The Parliament has found ways to push Europe forwards before, and I trust you will do so again. Future of Europe is in your hands. So I want to thank you for your attention. I look forward to your questions when I have the answer. When I know the answer, I promise I will give it to you. If I don't, I will admit that I don't. And I will come back to you when I've done my little research. Thank you.