Christine LAGARDE, President of the European Central Bank is invited to discuss with the ECON Committee. This Monetary Dialogue takes place in a particularly challenging environment, marked by strong inflationary pressures (the euro area annual inflation reached 9.1 % in August 2022). It is the first Monetary Dialogue since the Governing Council decided to raise twice the key ECB interest rates for the first time since 2011. Opening statements by Christine LAGARDE, ECB President, and Irene Tinagli, ECON Chair.

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

SOUNDBITE (English), Irene TINAGLI, (S&amp;D, ET), ECON Chair, Good afternoon, everyone. We are here with our second meeting, we start with the adoption of the agenda. There are no objections. The agenda is deemed to be adopted. We have translation in 12 languages for today. And before we jump to our monitory dialogue, I have to report on the ongoing interinstitutional negotiations. On September 14th, 2022, the first trialogue on the review of the European long term investment funds regulation took place.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, Co-legislators heard the first exchange of views on key political provisions, in particular on sustainability issues, product design and scope, retail, investor protection, aspects of the application period and grandfathering clause. The co-legislators agreed to delegate work to the technical level and to mandate the Commission to prepare three known papers on sustainability issues, eligible assets and selected investor protection safeguards.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, The second trialogue is scheduled on October 19th. Now, now we can jump on our monitory dialogue, and on this regard, I would like to welcome ECB President Lagarde today. Our last monetary dialogue with the ECB president took place on June the 20th. Since then, the ECB Governing Council made a number of important monetary policy decisions. In July, key interest rates were increased by 50 basis points, followed by a further 75 basis point increase decided earlier this month.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, Moreover, to support effective transmission of monetary policy during the normalisation process, the Governing Council announced the launch of the Transmission Protection Instrument on July 21st.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, These monetary dialogues with President Lagarde is coming in the midst of an extremely challenging economic environment. Inflation numbers in the euro area are at a record high level. Eurostat estimates for August indicate an annual headline inflation rate of 9.1 percent. Almost half of it is directly determined by energy prices, followed by food, alcohol and tobacco services and non-energy industrial goods.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, The ECB staff projections have revised up inflation to 8.1 percent in 2022, 5.5 percent in 2023 and 2.3 percent in 2024. At the same time, economic growth forecasts have been revised down in the baseline scenario to 3.1 percent for 2022, 0.9 percent for 2023 and 1.9 percent for The 2024. far-reaching and uncertain ramifications of the ongoing Russian invasion of Ukraine, the persistence of supply bottlenecks and the current setting of energy prices by producers provide much reason for concern for the coming months.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, In the most recent Eurobarometer surveys, citizens have firmly indicated that inflation is their top concern. The ongoing erosion of real incomes due to high inflation may have serious economic and social consequences. The ECB is facing daunting tasks of containing record high and supply driven inflation and avoiding an economic recession while ensuring the effective transmission of its monetary policy.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, In this regard, our task as Econ Committee to scrutinise the ECB's monetary policy becomes even more important. Not only to assess the ECB policy decision, but also to understand the extent to which other economic policy actions are needed to face the current challenges and to avoid strong and long lasting negative consequences on the real economy, unemployment, on the social cohesion and on citizens' trust in national and European institutions.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, As usual, we have briefing papers that we were prepared ahead of this monitoring dialogue by Parliament's panel of experts. And these were already discussed two weeks ago in a lively preparatory meeting and are available on the ECON Committee's website. Two topics were selected by ECON Coordinators for these monitory dialogue. The first one is the assessment of the ECB monetary policy stance, and the second is the anti-fragmentation, new tool in the toolkit. So I think both topics are really timely and particularly relevant today.

SOUNDBITE (English), Irene TINAGLI, (S&D, ET), ECON Chair, Now, before I give the floor to President Lagarde, just a few practical considerations about the dialogue, because ECON coordinators decided to confirm the new format of the hearing that we experimented last June. Therefore, we will have one first round of questions of one and a half minute, followed by three minutes for the answer and then one minute follow up by the map and two minutes for the answer. Then we will have a second round of questions where each speaker will have one minute for questions and Mr Lagarde will have three minutes for answers. But no follow up is foreseen. So President Lagarde, we are now looking forward to hearing you. You may have the floor for 10 minutes.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Thank you very much, Madam President. And let me tell you that it is a pleasure to be back in Brussels with you for a third hearing this year. Russia's unjustified war of aggression on Ukraine continues to cast a shadow over Europe. My thoughts are with the Ukrainian people suffering the senseless atrocities of a war. The economic consequences for the euro area have continued to unfold since we last met in June, and the outlook is darkening.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Inflation remains far too high and is likely to stay above our target for an extended period of time. At our meeting earlier this month, the Governing Council took the major step to front load the transition from the prevailing, highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our 2% medium term target. In line with the topics chosen for this hearing, I will provide you with a brief overview of the economic outlook and then explain our recent monetary policy decision in greater details.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), So what is the outlook for the euro area economy as we see it? The euro area economy grew by 0.8 percent in the second quarter of 2022, mainly owing to strong consumer spending on services as the economy reopened. Economies with large tourism sectors benefited especially? as people travelled more over the summer.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), The steel robust labour market also continued to support economic activity. Nonetheless, we expect activity to slow substantially in the coming quarters. And there are, four reasons behind this. First, high inflation is dampening spending and production throughout the economy, and these headwinds are reinforced by gas supply disruptions. Second, the strong demand for services that came with the reopening of the economy is losing steam.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Third, the weakening in global demand. Also in the context of tighter monetary policy in many major economies and the worsening terms of trade will mean less support for the euro area economy. And fourth, uncertainty remains high as reflected in falling household and business confidence.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), You have received, I believe, the reactor vessel pager that I normally circulate around and this is easily illustrated in this document. These developments have led to a downward revision of the latest staff projections for economic growth for the remainder of the current year, 22 and throughout 23.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Staff now expect, as you rightly said, Madam President, the economy to grow by 3.1 percent in 22, 0.9 in 23 and 1.9 percent in 24. You have those charts as well and it compares our June projections with our September most recent staff projection on the reactor vessel pager that you have with you.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Inflation rose further to 9.1 Percent in August, that was the latest reading. Energy and food price inflation remained extremely elevated and were the dominant contributors to overall inflation. Price pressures are spreading across more sectors, in part owing to the impact of high energy costs across the whole economy.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Almost half of the items in the inflation basket recorded annual inflation rates above four percent in August, and measures of underlying inflation remain high. While supply bottlenecks have been easing, the inflationary impact continues to gradually feed through consumer prices. Similarly, recovering demand in the services sector is putting upward pressure on prices.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), The depreciation of the euro has also added to the build up of inflationary pressures. Looking at the labour market, wage dynamics remained contained so far. However, resilient labour markets and some catch up to compensate for high inflation are likely to push up wage growth. Most measures of longer term inflation expectations currently stand at around two percent.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), However, signs of recent above target revisions to some indicators warrant continued monitoring. The baseline inflation projections of the ECB staff have been revised up significantly, as had been the growth projections, except growth was revised downwards, inflation was revised upward.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Annual inflation is now expected to stand at 8 percent in 22, to 5.5 percent in 23 and 2.3 percent in 24, which is above our target. The risks to the inflation outlook are primarily to the upside, mainly reflecting the possibility of further major disruptions in energy supplies. While these risks factors are the same for growth, the effect would be on the opposite. They would increase inflation, but to reduce growth.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), So what has been the ECB monetary policy? Based on the medium term inflation outlook? The Governing Council decided to raise the three key ECB interest rates by 75 basis points on top of the 50 basis points that were decided in July. As things currently stand, we expect to raise interest rates further over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), We will regularly re-evaluate our policy path in light of incoming information and the evolving inflation outlook. Our future policy rate decisions will continue to be data dependent and follow a meeting by meeting approach. As requested by the committee, I will now turn briefly to the issue of fragmentation.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Since we embarked on our normalisation path in December 2021, we have made clear that we will act should fragmentations risks threaten the even transmission of monetary policy across the whole of the euro area. Since July 1st, 2022, we have been applying flexibility in reinvesting redemptions coming due in the Pandemic Emergency Programme portfolio, with a view to countering risks to the transmission mechanism related to the pandemic.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Later in July, we also announced a new monetary policy tool, the transmission protection instrument that we call TPI. It will complement our existing tools. It is designed to counter unwarranted disorderly market dynamics with sufficient flexibility to respond to the severity of the risks facing policy transmission. It will safeguard the singleness of our monetary policy as the Governing Council proceeds on its policy rate normalisation path, helping us ensure price stability over the medium term in line with our mandate.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), The TPI is subject to a list of eligibility criteria which the Governing Council will use to assess whether a jurisdiction pursues sound and sustainable fiscal and macroeconomic policies. To conclude, the inflation continues to rise across the euro area, affecting citizens in all areas of life.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), The latest Eurobarometer indicates that almost two out of three citizens see rising inflation as one of the two most important issues at the moment higher energy and food prices are weighing in particular on the most vulnerable households. And the situation is expected to get worse before it gets better in this environment. It is essential that fiscal support used to shield those households from the impact of higher prices be temporary and targeted.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), This limits the risk of fuelling inflationary pressures, thereby also facilitating the task of monetary policy to ensure price stability and contributing to preserving debt sustainability. The best contribution monetary policy can make to the euro area economy is to ensure price stability over the medium term. This means ensuring inflation expectations remain well anchored and demands are consistent with our target.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), As I pledge to keep the European Parliament and the general public informed about our progress. Let me end by providing you with a brief update on our ongoing work to incorporate climate change considerations into our monetary policy operations. As of this coming Monday, a week from now, the Eurosystem will take into account a climate score of issuers in all purchases of corporate bonds in the context of the Eurosystem ongoing reinvestment purchases.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), This will result in the purchase of more bonds issued by companies with a good climate performance and fewer bonds from those with a poor climate performance. These measures will reduce the Eurosystem exposure to climate related financial risk, as well as support 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), As of the first quarter of 23, we will start publishing climate related information on our corporate bond holdings and we will regularly report on the steps we are taking to address climate change within the bounds of our mandate. I'm ready to take questions according to the new format that you have outlined.