The Economic and Monetary Affairs Committee exchanges with the European Central Bank President, Christine Lagarde, on the implications for the ECB of the war in Ukraine, as well as on the high and disparate inflation in the Eurozone. Opening remarks by Christine LAGARDE, President of the ECB, and Irene TINAGLI, Chair of the ECON Committee. This transcript is a result of an automatic process. Please check against delivery.

Brussels

meeting

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: opening remarks by Christine LAGARDE, President of the European Central Bank, and Irene TINAGLI, Chair of the ECON Committee

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, OK, good afternoon, good afternoon, everyone. We start our committee meeting as usual, we start with the adoption of the agenda if there are no objections. The agenda is deemed adopted. I have a couple of announcements to make on interpretation facilities. This afternoon, we have 12 languages available and that is only available as a passive interpretation. Then I have to report to you on ongoing interinstitutional negotiations.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, On June 14th 2022 the third trialogue regarding the markets in crypto assets regulation took place. The parliament's negotiating team discussed with the council and the commission, amongst other things, the requirements for crypto assets service providers, which offer services for non-refundable tokens, the supervision and authorisation of crypto assets service providers and insurers, anti money laundering issues, points related to the environmental impact of crypto assets and grandfathering rules. Good progress were made on various agenda items, and the next Minka trialogue has been scheduled for June 30th 2022. So that your colleagues.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, Now we move on to our monitary dialogue with Christine Lagarde, president of the European Central Bank. So I really want to welcome ECB President Lagarde to this Second monetary dialogue of 2022. The previous one took place on February the 7th. And today, for the first time since the start of the pandemic, we are holding the monitary dialogue in a physical format and we are really happy to have you in person with us today.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, So our monetary dialogue today to taking place in an extremely challenging context. This is the first monetary dialogue since the invasion of Ukraine. And according to Eurostat, annual headline, inflation in the euro area reached an 8.1% in May. June Eurosystem staff forecast headline inflation of 6.8% in 2022, 3.5% In 2023, and 2.1% In 2024.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, Core inflation is now projected above 2% throughout the projection horizon. So these outlook has let the Governing Council to conclude that conditions for lift off of interest rates have been met. And last week the Governing Council held an Ad-Hoc meeting to discuss fragmentation risks. In this context, the two topics chosen by the ECON committee coordinators for today's meeting are quite timely.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, As usual, we have a briefing papers that were prepared ahead of this monitory dialogue by the parliament's panel of experts. And these were already discussed last week and they are available on the Economic Committee's website.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, Now, the first topic is the war in Ukraine and its implication for the ECB. The invasion by Russia is, of course, first and foremost a tragic and incomprehensible act of aggression, which is causing immense devastation and human suffering. But it has also significant economic and social implications for the European Union since it's hitting our

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, economies in many ways by, for example, significantly increasing the prices of energy products and of those of raw materials and food. Just at the moment when they were starting to show important signs of a stronger recovery from the pandemic.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, It would be therefore interesting to understand what are the impacts on the economic policy choices of the various policy makers. And in this case, of course, of the ECB. In this regard, it would be interesting to understand from President Lagarde what the ECB can do and what it cannot do to deal with the economic consequences of the war.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, And I think in particular, it would be also worth understanding if the toolbox currently available to the ECB is indeed the most effective one to counter this particular supply driven inflation, or if other types of interventions would be more incisive, or with fewer side effects. There are several things that it would be good to think about today.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, the second And topic title was 10 years after the whatever it takes. That speech is considered a turnaround point in the European sovereign debt crisis that jeopardised the future of the common currency. It was followed with the announcement by the ECB of the OMT programme, which was actually never used. This topic, of course, was not selected exclusively or purely for this commemorative purpose. Fragmentation has now re-emerged at the Centre of the debate on monetary policy.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, The PEPP programme and its inbuilt flexibility was introduced exactly to, you know, and I'm quoting to counter the serious risks to the monetary policy transmission mechanism. And at the moment, A pep was, you know, at that moment, people was able to simultaneously and successfully address deflation and fragmentation risks.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, Now, with the war in Ukraine, the magnitude of economic impact differs across the euro area countries. And in addition, the ECB is set to enter into a monetary policy tightening cycle to preserve price stability. So we are seeing in recent weeks an increase in fragmentation in sovereign bond markets. And the word fragmentation, as we can see, is increasingly present in the speeches of ECB executive board members and in public debate.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, Today's context, however, is different from earlier episodes with the surge of inflation that we are observing. So a key development came last week when the Governing Council held a meeting to discuss this resurgent fragmentation risks. Amongst other things, the ECB mandated the relevant Eurosystem committees, together with ECB services, to accelerate the completion of the design of a new anti fragmentation instrument. about the dialogue, because in line with the decisions taken by the coordinators at their meeting in April, the monitary dialogue today will be held in a new experimental format.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, Since the statement after the adhoc meeting of the ECB Governing Council has pledged to act against the resurgent fragmentation is already in December 2021. I think it would be interesting also to understand today what are the issues, the problems that have somewhat prolonged the setting up of these two up to today.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, And furthermore, although some board members have already said something about it, but I think it would be interesting to understand from you any possible insight or about what this new instrument should look like or how to boost existing ones based on the mandate that was given to to the services.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, And finally, I'm sorry, but there are really a lot of things in these days that are interesting for us. Finally, would be interesting to understand if you have an idea about the timing and horizon and the preparatory meeting that we had on Thursday, our experts had, you know, of course, somewhat different views on the real risks of fragmentation because, you know, there is a debate about that. But on the basis of past experiences, they all agreed that it would be better to act before the market pressures escalates rather than later.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, So all these open questions, I think, make our discussion today really, really timely and particularly relevant. So before I give the floor to President Lagarde, just a few practical consideration new experimental format to enable more dynamic exchanges. So 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.

SOUNDBITE (English), Irene TINAGLI, ECON Committee Chair, So these will really change the format. I encourage you to ask one question time because you do have the possibility of a follow up and then we will have a second round of questions where each speaker will have one minute for questions and Miss Lagarde will have three minutes for answers. But no follow up because otherwise we would stay here until tomorrow. So if time so allows additional slots will be allocated on to catch the eye basis. So please let us try to make this new format work nicely. Let's respect the time and ask one question. The time. President Lagarde, we are now looking forward to hearing you. You have the floor for 10 minutes.

SOUNDBITE (English), LAGARDE, President of the European Central Bank, Thank you very much, President. And good afternoon to all of you. It is a pleasure to be back in this room and physically present and to see you in real flesh and to acknowledge that none of us has aged too badly. So that's quite comforting if there is anything that we can find comforting today. So as you indicated, President, the economic and geopolitical landscape facing Europe has changed dramatically following the unjustified aggression by Russia towards Ukraine.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Over the past few weeks and months, Europe, thanks to the work of this parliament, has responded forcefully by imposing sanctions and implementing measures to reduce its dependence on Russia and to cushion the economic impact of the war. Over the same period, the conditions facing monetary policy have also changed markedly. At our June meeting, we therefore decided to take further steps in normalising our monetary policy.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Let me start by discussing our updated assessment of the outlook before going on to explain our decisions in greater details. In view of these new rules that you've just identified, President, and that require me to give a short introductory statement, I will only be able to present a few elements of our assessment and decisions taken at our meeting on June 8-9th 2022.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, So let me first turn to the outlook for the euro area economy. Euro area activity is being dampened by high energy costs, intensified supply disruptions and greater uncertainty, which affects the manufacturing sector in particular. At the same time, activity in the service sector in supporting growth and the recovery in this sector is expected to strengthen over the coming months.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, The lifting of pandemic related restrictions and good prospects for the tourist season are driving stronger activity, particularly in conduct intensive services. Moreover, a strong labour market with more people in jobs will continue to support incomes and consumption. You may have all received actually a two pages, which includes some graphs and short explanation in relation to those indications that I will not specifically refer to in the course of my comments because I don't want to spend too much time on that, given that time is limited.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, So the headwinds from high energy costs, the deterioration in the terms of trade, greater uncertainty and the adverse impact of high inflation on disposable income are expected to gradually fade. As a result, our Eurosystem staff projections see growth at 2.8 percent in 2022, two point one percent in 2023 and two point one percent in 2024. Look, and this is our baseline baseline projection.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Looking inflation, it has risen further, standing, as you said president, at 8.1% in May. Energy prices stand 39.2 % above their level. One year ago, food prices rose 7.5% In May, in part reflecting the importance of Ukraine and Russia amongst the main global producers of agricultural goods, particularly grain.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Prices have also gone up more strongly because of renewed supply bottlenecks amid recovering domestic demand, especially in the services sector as our economy reopens. As a result, price rises are becoming more widespread across sectors, and measures of underlying inflation have risen further. Wage growth has started to pick up, although at the moment it remains modest.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, We expect negotiated wage growth to strengthen slightly further over 2022 and then to remain above average levels for the projection horizon supported by tight labour markets. Increases in minimum wages and some effects of compensation for high rates of inflation. These developments are reflected in longer term inflation expectations, which have increased with most measures derived from financial markets and from expert surveys standing at around 2%. Initial signs of above target revisions to these measures, however, warrant close monitoring.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, The baseline inflation projections by Eurosystem staff have been revised up significantly. These projections indicate that inflation will remain undesirably High for some time. They foresee annual inflation at 6.8% in 2022 before it is projected to decline to 3.5% in 2023 and 2.1% in 2024. For this means that headline inflation at the end of the projection horizon is projected to be slightly above target by 0.1%.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, So what have we decided in terms of ECB monetary policy in view of those circumstances? The current inflation environment with figures well above our target clearly poses a challenge. That is why at its 8-9 June meeting, the Governing Council expressed its unwavering commitment to bring inflation back to its medium term target of 2%.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, With this in mind, and on the basis of the updated assessment that I have just outlined, we decided at that meeting to take further steps in normally our monetary policy. So what have we decided? First, we decided to end net asset purchases and our asset purchase programme as of July 1st 2022.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Second, as the Governing Council concluded that the conditions underlying our forward guidance have been satisfied, we intend to raise the key ECB interest rates by 25 basis points at our July monetary policy meeting. Third, looking further ahead, we expect to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated Medium-Term Inflation Outlook.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, If the medium term inflation outlook persists or deteriorates, a larger increment will be appropriate at our September meeting. And fourth, beyond September. Based on our current assessment, we anticipate that a gradual but sustained path of further increases in interest rates will be appropriate.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, In line with our commitment to our two percent medium term target, the pace at which we adjust our monetary policy will depend on the incoming data and how we assess inflation to develop in the medium term. Since the gradual process of policy normalisation was initiated back in December 2021, we have pledged to act against resurgent fragmentation risks.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, The pandemic has left lasting vulnerabilities in the euro area economy, which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions. Based on this assessment, on June 15th we decided that we will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio with a view to preserving the functioning of the monetary policy transmission mechanism, a precondition  for the ECB to be able to deliver on its price stability mandate.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, In addition, we decided to mandate the relevant Eurosystem committees, together with the ECB services, to accelerate the completion of the design of a new anti fragmentation instrument for consideration by the Governing Council. These decisions underpin our previous commitments to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that stabilisation, that inflation stabilises at our 2% target over the medium term.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, To conclude, Russia's unjustified aggression towards Ukraine is severely affecting the euro area economy, and the outlook is still surrounded by high uncertainty. But the conditions are in place for the economy to continue to grow and to recover further over the medium term. Fiscal policy is helping to cushion the impact of the war, and governments have intervened to slow energy inflation.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank, Alongside targeted fiscal policies, the implementation of the Next Generation EU programme, the fit for 55 package and the repowering EU plan should also help the euro area economy. I count on the work of this Parliament to ensure that these important EU initiatives can actively contribute to forging a sustainable growth path and increasing the EU resilience to shock. Thank you. Ten minutes and three seconds. I now stand ready.