Due to some technical interfierances we are facing heavy SOUND issues, we are working on it. Members of the Committee on Economic and Monetary Affairs (ECON), meet in the European Parliament in Brussels to exchange views with Christine LAGARDE, President of the European Central Bank (ECB) during the Monetary Dialogue. Opening statement by the ECON Chair and Opening statement by Christine LAGARDE, President of the European Central Bank. This transcription speech is the result of an automatic process. Check against delivery.

Brussels

exchange of views

meeting

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 at ECON Committee: opening statement by the ECON Chair and by Christine LAGARDE, President of the ECB

SOUNDBITE (Original), Irene TINAGLI (S&amp;D, IT), ECON Chair, We move on to the next point, which is the monitoring dialogue with Christine Lagarde, president of the European Central Bank. Welcome, President Lagarde, to this first monetary dialogue of 2021. The previous monetary dialogue took place on 19 November. Today, once again since the beginning of the pandemic, ECON holds the debate with you in a virtual format.

SOUNDBITE (Original), Irene TINAGLI (S&D, IT), ECON Chair, While better prospects for global demand, bolstered by the sizeable fiscal stimulus and the progress in vaccination campaigns, including the implications for economic and financial conditions. As the Commission has outlined last 11th of February, when presenting its 2021 winter forecast, a protracted crisis has negative effects on the real economy of the euro area through bankruptcies, long term unemployment and higher inequalities even between member states.

SOUNDBITE (Original), Irene TINAGLI (S&D, IT), ECON Chair, The rapid and extensive vaccination campaign and a prolonged fiscal monitor and monetary support are the two key elements to ensure a smooth and balanced recovery, in the EU. Against this background, last March 11th, the ECB Governing Council decided to maintain an accommodative monetary policy stance to support economic activity and the robust convergence of inflation to levels below but close to two percent over the medium term.

SOUNDBITE (Original), Irene TINAGLI (S&D, IT), ECON Chair, In the meantime, the ECB is conducting its strategy review aimed at providing ideas about the best tools and objectives to fulfil in the macroeconomic landscape of the next year. Its mandate of price stability in the medium as well. For today's meeting, ECON coordinators have selected two specific topics for discussion at this monetary dialogue.

SOUNDBITE (Original), Irene TINAGLI (S&D, IT), ECON Chair, The first one is how to recalibrate monetary policy instruments to address the economic fallout from the pandemic and the second one is the danger of cliff effects within the path to recovery. The briefing paper prepared by a European Parliament panel of experts on the Union is available on the ECON website. And we discussed during the preparatory meeting that took place on Monday.

SOUNDBITE (Original), Irene TINAGLI (S&D, IT), ECON Chair, In line with agreed practises, the following procedure will be applied for exchange of views. There will be introductory remarks by President Lagarde of 15 minutes, which will be followed by five minute question and answer slots with the possibility of a follow up question, time permitting, within the same slot. So it would be two minutes maximum for the question and three minutes maximum for the answer.

SOUNDBITE (Original), Irene TINAGLI (S&D, IT), ECON Chair, In the first round of questions each political group will have one slot and thereafter we will apply the d'Hont system. If time allows, additional slots will be allocated on a catch the eye basis taking account of the weightings of each of the political groups. Strictly respect the time given to you. Not easy to chair the meeting from and to keep the time so please. I will open the debates now. Ms. Lagarde, the floor is yours.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, I'm assuming that you handed the floor over to me. I couldn't see your lips moving any more. The connexion was not perfect. So if if I'm not if I'm out of order, will somebody tell that? For the moment, I think I can proceed.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, Honourable members of the Economic and Monetary Affairs Committee. Ladies and gentlemen, good morning. I'm very happy to appear again before your committee for what as your chair just indicated, our first regular hearing in 2021. Today is a very special day for us. It marks the one year anniversary of the extraordinary Governing Council meeting during which we decided to launch the emergency purchase programme.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, That was March 18 2020. Standing where we are today, the situation looks brighter now than it did back then, and we can expect it to improve over 2021. In the short term however, the economic outlook for the euro area remains surrounded by uncertainty due to the dynamics of the pandemic and the speed of vaccination campaigns. The varying impact that the pandemic continues to have on not just the economy but all aspects of our lives does not allow us to celebrate the anniversary of that.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, It is nevertheless important to look back and proudly acknowledge our collective efforts in shielding European citizens from what could have been even worse outcomes. In my remarks today, I will focus on the euro area economic outlook and the ECB's monetary policy stance in the light of Governing Council's decision taken on Thursday last week. I will conclude by discussing the policy mix required to secure a solid path to economic recovery. So let me touch on the current macroeconomic outlook, the rebound in global demand and additional fiscal measures are supporting global and euro area activity.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, At the same time, the high coronavirus infection rate, the spread of virus mutations and the associated extension and tightening of containment measures continue to negative impact on euro area economic activity. As a result, gross domestic product is likely to on retract again in the first quarter of 2021 after having declined by point seven percent in the fourth quarter of 2020.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, Looking ahead, the ongoing vaccination campaigns, together with the relaxation of containment measures and the expectation of a firm rebound in economic activity in the second half of 2021. Over the medium term, expect the recovery in demand as containment measures are lifted to be supported by favourable financing conditions and an expansion fiscal stance.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, This assessment is also reflected in March 21 ECB staff macroeconomic projections for the euro area, which foresee real GDP growth at four percent in 2021, four point one percent in 2022 and two point one percent in 2023, broadly unchanged compared with the December 20 Eurosystem staff macroeconomic projections.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, The risks surrounding the euro area growth outlook over the medium term have become more balanced owing to better prospects for the global economy and progress in vaccination campaigns. However, downside risks remain in the near term, mainly related to the speed of virus mutations and the implications of the ongoing pandemic for economic and financial conditions. Turning to inflation, euro area annual inflation has picked up over recent months, mainly on account of some transitory factors.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, Headline inflation is likely to increase in the coming months, but some volatility is expected throughout 2021 reflecting the changing dynamics of the idiosyncratic factors which are currently pushing inflation up, but which can be expected to fade out early in 2022. Underlying price pressures are expected to increase somehow this year due to current supply constraints and the recovery in demand. Nevertheless, we judged that these pressures will remain subdued overall. Also reflecting low wage dynamics and the past appreciation of the euro.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, Once the impact of the pandemic fades, unwinding of the high level of supported by accommodative fiscal and monetary policies, will contribute to a gradual increase in inflation over the medium term. Market based indicators of longer term inflation expectations remain at subdued levels.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, While our latest staff projection exercise foresee a gradual increase in underlying inflation pressures, the medium term inflation outlook with projected annual inflation at one point five percent in 2021, one point two percent in 2022 and one point four percent in 2023 remains broadly unchanged from the staff projections in December 20 and certainly below inflation aim. Let's now turn to the ECB monetary policy stance and effectiveness.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, So against this background, preserving favourable conditions over the pandemic period remains essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium term price stability. Let me further elaborate on our assessment of finance conditions. This is defined by a holistic and multifaceted set of indicators. It is holistic because we consider a broad array of indicators spanning the entire transmission chain of monetary policy from the risk free interest rates and sovereign bond yield all the way down to corporate yields and credit conditions.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, It is also multifaceted because we take a sufficiently granular view that enables us to detect movements in specific market segments in a timely manner. Last week, as it received a new round of projections, the Governing Council conducted a joint assessment of these multiple set of indicators against the evolution of our inflation outlook since the last projection exercise. And we concluded, the increase in risk free market interest rates and sovereign bond yields that we have observed since the start of the year, could spur a tightening in the wider set of financing conditions as banks use them as key reference points for detecting credit conditions.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, Therefore, if sizeable and persistent, the increases in those market interest rates when left unchecked, may become inconsistent with countering the downward impact of the pandemic on the projected path of inflation. Based on this joint assessment, the Governing Council announced that it expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of 2021.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, While records of our weekly purchases will continue to be distorted by short term factors, step up in the run rate of our programme will become visible when ascertained over longer time intervals. Purchases will be implemented flexibly according to market conditions and always with you to preventing a tightening of financing conditions that is inconsistent. Countering the downward impact of the pandemic, the projected path of inflation. In addition, the flexibility of purchases over time across asset classes and amongst jurisdictions will continue to support the smooth transmission of monetary policy.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, If favourable financing conditions can be maintained with asset purchase, those that do not exhaust the envelope over the net purchase horizon of the back the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative shock to the path of inflation. The PEPP is not the only tool the ECB is using to support favourable financing conditions over the pandemic period for all sectors of the economy.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, The third series of targeted longer term refinancing operations, remains an attractive source of funding for banks. The TLTROs put an incentive structure ensuring that banks have access to all funding and very favourable conditions if if they maintain their lending to the real economy. This supports bank based financing conditions for firms and households. Likewise, the remaining monetary policy instruments in this, ranging from our key ECB interest rates to the Governing Council's forward guidance and the asset purchase programme, make a crucial contribution to the ample degree of monetary accommodation that is necessary to support economic activity and the robust convergence of inflation to our definition of price stability.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, We will also continue to monitor developments in the exchange rate regarding the possible implications for the medium term inflation outlook. We stand ready to adjust all of our instruments appropriate to ensure that inflation moved towards our aim in a sustained manner, in line with our commitment to symmetry. So let's address the issue of the path to a solid economic recovery. We're looking ahead.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, Decisive action in other policy areas to support the recovery remains essential and build on the favourable financing conditions in the euro area. When appearing before the European Parliament last month, I pointed out that the strength of Europe's crisis response over the last 12 months crucially depended on the strength of national and European responses across all policy areas. Monetary, school, supervisory and regulatory. We should continue to rely on the same recipe when it comes to securing a path to a solid economic recovery.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, An ambitious and coordinated fiscal stance remains critical. National fiscal policies should continue to provide critical and timely support to firms and households most exposed to the pandemic and the associated containment measures. At the same time, these measures should, as much as possible, remain temporary and targeted in nature to address vulnerabilities effectively and support a swift recovery.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, By brightening economic prospects for firms and households. Fiscal policy would also strengthen the transmission of our monetary policy measures. Fiscal policy can also act as a catalyst to transform our economies in this recovery phase. And this is why Next Generation EU package should become operational without delay. In the coming weeks, member states should ensure timely ratification of the own resources decision and should finalise their recovery and resilience plans.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, The European Parliament can play an important role in making sure that these plans are well-designed and that they include productivity-enhancing structural policies to address long standing weaknesses and accelerate the green digital transition.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, The EU is ready to play its part in line with its mandate. This morning, we published the preliminary results of our first economy-wide climate test to help both authorities and financial institutions assess the impact of climate risks over the next 30 years. To conclude, when we announced the PEPP, one year ago, the Governing Council declared that it would do everything necessary within its mandate and explore all options and all contingencies to support the economy through this shock.

SOUNDBITE (Original), Christine LAGARDE, President of the European Central Bank, Looking back at the past year, I think we can affirm that we have delivered on this commitment, but there is no room for complacency. The ECB will continue to deliver on its mandate and support the recovery with all appropriate measures. I stand ready to answer your questions. Thank you.