MEPs in the Economic and Monetary Affairs Committee (ECON) quiz European Central Bank President Christine Lagarde on the bank’s measures against the current environment, marked by high uncertainty and strong inflationary pressures. Introduction by Irene TINAGLI (S&D, IT) and Opening statement by Christine LAGARDE, President of the European Central Bank (ECB).

Brussels

European Central Bank

monetary dialogue with the ECB (T)

Committee on Economic and Monetary Affairs

banking supervision (T)

LAGARDE, Christine (FR)

TINAGLI, Irene (S&D, IT)

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

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SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Thank you very much, Chair, and thank you very much for these opening remarks that you just made. And thank you to all of you present today for your interest in this matter. I'm very happy to be back in the Parliament to discuss the ECB's monetary policy shortly after last week's Governing Council meeting.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, More than one year has now passed since that February morning when we all woke up to the horrifying news of war in Europe, the Russian invasion of Ukraine, which you have selected as a topic of this hearing, is first and foremost a human tragedy, human tragedy for the people of Ukraine. And in the face of this senseless atrocity, they have shown remarkable resilience and determination.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, And I would like to quote a former president of this European Parliament, Jose Maria Gil Robles, who sadly passed away last month. He said the future belongs to those who are prepared to make the effort to hear the voice of hope. As Europeans, we need to continue hearing the voice of hope coming out of Ukraine and support the Ukrainian people in their struggle for freedom, democracy and peace. Fundamental values of our Union.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Disclaimer that solidarity, especially during this crisis, makes us stronger and more resilient, So we must continue to nurture our ability to act together, which has again proven effective over the past year. We have managed to reduce our dependency on Russian pipeline gas by roughly 80%, and gas prices have now fallen back to levels below those seen before the invasion.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, In my remarks today, I will start by discussing current market developments and then proceed to outline our assessment of the euro area economy. Before explaining our latest monetary policy decision taken last week, but let me point out in the face of the most recent developments that I welcome the swift action and the decisions taken by the Swiss authorities. These actions are instrumental for restoring orderly market conditions and ensuring financial stability.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Let me also remind that we are monitoring market developments closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient with strong capital and liquidity positions. In any event, the ECB's policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed, and to preserve the smooth transmission of monetary policy.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, I will now turn to the outlook for the euro area economy and monetary policy. Euro area activity stagnated in the fourth quarter of 2022, according to Eurostat latest reference. The outcome was slightly better than what we had expected in December. However, private domestic demand fell sharply. High inflation prevailing uncertainties and tighter financing conditions dented private consumption and investment, which fell respectively by 0.9% and 3.6%.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Survey indicators for economic activity have steadily improved over recent months, coinciding with reduced concern about energy shortages and price increases. These factors, coupled with the ongoing support provided by fiscal policy and the continued resilience of the labour market, are expected to support the recovery over the coming quarters. Accordingly, projected growth for 2023 has been revised up to 1%.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, In our latest staff projections, which also foresee growth of 1.6% both in 2024 and 2025, which is a slight downgrade from where we had our projection the last time around. It has to be stressed, though, that the ECB staff projections were finalised before the recent emergence of financial market tensions. As such, these tensions imply additional uncertainty around the baseline assessments of inflation and growth.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Turning now to inflation, it has decreased from its peak in October, owing to a sharp drop in energy prices and stood at 8.5% in February. Input cost pressures, which are partly related to the past surge in energy costs and the impact of supply bottlenecks and reopening effects are all weakening. However, accumulated price pressures are still spreading through the economy, with a delay.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, As a result, inflation, excluding energy and food, has continued to increase, reaching 5.6% in February. Wage pressures have strengthened on the back of robust labour market and employees aiming to recoup some of the purchasing power that they have lost to high inflation. Moreover, many firms have been able to raise their profit margins in sectors faced with constrained supply and resurgent demand.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, The energy price shock implies a hit to the domestic economy, which should be absorbed by both firms and workers in order to ensure that it does not lead to a spiral of upward price and wages adjustments. In the baseline of our latest staff projections. Headline inflation has been revised downward, mainly reflecting a smaller contribution from energy prices than previously expected.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, We now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time. Underlying price pressures remain strong. Inflation, excluding energy and food, is expected to average 4.6% in 23, which is higher than foreseen in the December projections. Subsequently, it is projected to come down to 2.5% in 2024 and 2.2% in 2025. As the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, As inflation is projected to remain too high for too long, the Governing Council last week decided to increase the three key ECB interest rates by 50 basis points in line with our determination to ensure the timely return of inflation to our 2% medium term target. The elevated level of uncertainty reinforces the importance of a data dependent approach to our policy rate decisions, which will be determined by our assessment of the inflation outlook in light of the incoming economic and financial data to in light of the dynamics of underlying inflation.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, And three, in light of the strength of our monetary policy transmission, the key ECB interest rates remain our primary tool for setting the monetary policy stance. The reduction of the asset purchase programme portfolio. The second topic of today's hearing is part of our monetary policy normalisation. As of the beginning of the month of March. The app portfolio has been declining at a measured and predictable pace of 15 billion per month on average and will continue to do so until the end of June.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, The subsequent pace after June 23 will be determined over time and the Governing Council will regularly reassess the pace to ensure that it remains consistent with the overall monetary policy strategy and stance to preserve market functioning and to maintain firm control over short term money market conditions.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, So let me conclude with war in Europe and high inflation requiring immediate action, policymakers may be inclined to divert attention from long term challenges, but we must all strive to keep up our efforts to address the existential crisis of climate change. For us at the ECB, this means continuing to make progress on our climate roadmap.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, This week, on the 23rd, to be precise, we will publish the first climate related financial disclosures of the euro system's corporate sector assets held for monetary policy purposes and of the ECB owned funds and the staff pension fund. We will be joined in the coming weeks by all Eurosystem central banks, which will also disclose climate information on their own euro denominated nonmonetary policy portfolios.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Besides helping us be more transparent about our climate impact, these disclosures help track our progress towards supporting within our mandate a decarbonisation path in line with the goals of the Paris Agreement and EU climate neutrality objectives. They will show, for example, that our corporate sector portfolio is becoming less carbon intensive, partly thanks to our efforts to tilt purchases towards issuers with a better climate performance.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Over time, as more and better quality data become available, we will improve the level of details and expand reporting to include other portfolios and asset classes. Better and harmonised climate disclosures for all asset classes would help not only the ECB but also the entire financial sector to better account for climate related risks. With that, I thank you for your attention and I now look forward to your questions. Thank you.

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

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