Christine LAGARDE, President of the European Central Bank participates to a monetary dialogue with members of the ECON (Economic and Monetary Affairs) Committee. Opening remark by Irene TINAGLI (S&D, IT), Chair and statement by Christine LAGARDE, President of the European Central Bank (ECB).

exchange of views

statement

meeting

European Central Bank

monetary dialogue with the ECB (T)

Committee on Economic and Monetary Affairs

LAGARDE, Christine

TINAGLI, Irene (S&D, IT)

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

https://api.multimedia.europarl.europa.eu/documents/20125/66730274/1669628434328_I233920Chapters%5BSD-EN%5D.srt

SOUNDBITE (English), Irene TINAGLI, ECON Chair, Good afternoon. Colleagues, please take a seat. So we are about to start our committee meeting. As usual, we start with the adoption of the agenda. If there are no objections, I consider the agenda as adopted. Today we have interpretation in 12, in the usual 12 languages. And I also have a short announcement to make it. And just to update you on the Interinstitutional negotiations that are ongoing on November 23rd, 2022.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, We have the second trialogue on the RF Re Power EU omnibus and the negotiating teams have validated the division between political and technical points as proposed by the technical team, and we had an exchange of views on all the political issues. The Commission was tasked to prepare a compromise, proposals on the consultation of stakeholders, data collection and transparency, alternative sources of grants, pre-financing and sources of grants and the mandate was given for further technical work.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, So, ladies and gentlemen, now we can move to our, you know, the core of our meeting today, which is the monetary dialogue with Christine Lagarde, the president of the European Central Bank. So welcome, President Lagarde, to this fourth monetary dialogue of 2022. Our monetary dialogue today is taking place in a very particular challenging economic environment, which is still marked by high uncertainty and strong inflationary pressures.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, In October, headline inflation in the euro area reached its highest level since the introduction of the euro, with the ECB inflation standing at 10.6%. And according to the ECB November Financial Stability Review, the probability of recession in the euro area for 23 is close to 80%. Since the last monetary dialogue on September 26, the ECB Governing Council has continued on its monetary policy tightening path.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, On 27th of October, key interest rates have been increased farther by 75 basis points in addition, the Governing Council decided to set the remuneration of minimum reserves at the ECB deposit facility rate. Finally, the Governing Council chose to adjust the interest rate applicable to Telstra's RE from November 23-22 and to offer banks additional voluntary early repayment dates.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, Our dialogue today will be the last one of 2022, a year of turbulence and high uncertainty caused by Russia's invasion of Ukraine nine months ago. Since then, the economic outlook for the euro area and the global economy has deteriorated dramatically. At the beginning of 2022, it was only a remote possibility that we would be simultaneously facing such a serious risk of high inflation, recession and financial instability.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, But as the war continues, this is now unfortunately increasing, becoming a baseline scenario. In this context, two topics were chosen by the ECON Committee coordinators for today's meeting. The first one is inflation as a global challenge. And the second one is inflation differentials consequences for monetary policy. As usual, all briefing papers that were prepared by the European Parliament's panel of experts are available on the ECON committee's website, and some of them were presented and discussed last Thursday in Strasbourg.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, Our experts highlighted that both international coordination and domestic coordination between monetary policy and fiscal policy would be extremely important. As for international coordination, our experts view seems to be confirmed by the most recent OECD Economic Outlook that was published last week. Always finds that when all central banks hike interest rates simultaneously, the negative impact on GDP is larger.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, But the impact on inflation is smaller because the foreign exchange channel is muted. Coordination would therefore be essential, but all we all know that it is historically extremely difficult to get. As for internal coordination, all our experts agreed that domestic monetary and fiscal coordination would be probably the first and most important step to be considered. While everybody agree that monetary policy has to intervene, it is important that fiscal policy plays a role too.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, By its nature, fiscal policy can be more targeted than monetary policy and therefore may help household and firms to face extra large energy bills and can reduce possible second round effects on wages, making central bank's task easier. Monetary and fiscal policy can be seen as tragic in the sense that if you use both, you can use less of each if taken alone. Of course, the domestic coordination of monetary and fiscal policy is not easy too.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, However, in uncoordinated solution may have a strong negative impact on real economy as well on financial stability. What is important is that we should not be too demanding on what monetary policy can do in this context. So if we give the idea that Central Banks can do whatever they want with inflation, we might risk to endanger their credibility and therefore their own effectiveness.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, We should not ask them too much, but we have to ask them what is right. And we have all to coordinate all their policy efforts on monetary, fiscal, economic side, because that's the only way we can really get out of the current dramatic situation. So today's meeting is organised as follows There will be introductory remarks by President Christine Lagarde of 10 Minutes, followed by a first round of questions.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, One slot for a political group where each speaker will have one and a half minutes for the initial question and 3 minutes for the answer, with the possibility of a follow up question of one minute maximum for the question and 2 minutes maximum for the answer. And then they will have their will. We will have a second round of questions where we will apply the D'hondt system with one minute for the question and 3 minutes for the answer.

SOUNDBITE (English), Irene TINAGLI, ECON Chair, So please stick to the time one question at a time. This will make the debate easier, smoother and we will have the opportunity to ask all the questions and have all the answers. Okay. President Lagarde, we are now looking forward to hearing you. You have ten minutes.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Thank you very much, Madam Chair. Honourable members of the Economic and Monetary Affairs Committee. Ladies and gentlemen, over the past 12 months, the ECB has embarked on a swift and comprehensive process of normalising monetary policy. First, we ended net asset purchases in a matter of a few months.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), So first we ended net asset purchases in a matter of a few months. Next, we started raising our policy rates at their fastest pace ever. In my short remarks today. I will briefly look back on the past year as this is our last meeting before year end, and I will focus on the key actions taken by the ECB and the EU more broadly to address people's concerns.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), I will also address briefly the two topics selected by this committee for today's hearing, namely the global monetary policy cycle and inflation differentials, or the divergence. So as the Chair indicated, it has been a challenging year for the Europeans. The Russian invasion of Ukraine has caused widespread human suffering. It has also shattered our sense of safety threatened and energy security disrupted supply chains and contributed to pushing inflation well above our targets.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), The shock hit just as we were coming out of the pandemic and has continued to cause economic disruptions. The repercussions have been felt not only in Europe but also around the world. Inflation has surged almost everywhere, prompting central banks, pretty much all of them except to raise interest rates and leading financing conditions to tighten rapidly worldwide.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), And this is something that you will have observed in the two pages that I'm sure you all received on the bottom of page two. This is also the topic that you have chosen. Now, given our proximity to the conflict and our dependence on energy imports, Europe in particular has been hit especially hard. Higher energy costs have been a key driver of euro area inflation, which in October reached double digits for the first time since the start of monetary Union with a reading of 10.6.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), While the energy shock and global bottlenecks have constrained supply, the reopening of the economy after the pandemic has led to a rapid release of pent up demand, contributing to the upward pressure from demand factors on core inflation, which has increased gradually over the year. And that is referenced in the first page of the document that you have received in the middle panel.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), The rising inflation affects everyone, but some are feeling it more than others. And I am thinking particularly of those on low income who spend a larger share of their consumption budgets on essentials such as food, electricity, gas and heating expenses while having lower financial buffers to cover the rising cost of living.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Currently, the gap between the effective inflation rate experienced by the lowest and the highest income group is by far at its highest level on record in the euro area. And we at the ECB have conducted research on that particular matter to evaluate by how much it is harder on the lower income quintile.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), The divergence in inflation rates across euro area member countries is also at a record high, mainly due to different degrees of exposure to the energy shock and to the pandemic. And this is also in your two pager on the second page in the upper panel. And this is a topic that is widely discussed by the papers that you have commissioned in respect of divergence within the euro area.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), We are monitoring those differences carefully and expect them to normalise as the impact of these shocks fades over time. The different shocks over the past year have also had an impact on real economic activity. And while the reopening of the economy after the pandemic resulted in surprisingly strong activity at the beginning of the year, growth is now slowing down rapidly as a consequence of the war by reducing people's real income and pushing up costs for firms, high inflation is dampening spending and production.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), High uncertainty, tied to financial conditions and weakening global demand are also weighing on economic growth, which is expected to continue weakening for the remainder of this year, fourth quarter and the beginning of next year first quarter of 23. And that's referenced in your two pager as well.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), So how can the ECB address people's concern that I have referred to now while also delivering on its mandate, which is price stability? Faced with the unprecedented challenges that you know well and that I have briefly alluded to, Europe has risen to the occasion and shown a strong sense of unity and solidarity. Thanks also to the crucial role played by this Parliament in pushing for genuinely Europe's actions.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Beyond providing financial, humanitarian and military assistance to Ukraine. The European Union has taken significant steps to shield us from the consequences of the war and enhance our resilience and reduce our energy dependence. The European response to the war has garnered broad support amongst citizens and optimism about the future of the EU has increased.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Two out of three citizens now consider the country's EU membership as a good thing, and this is the highest result since 2007. I know we tend to like to beat our chest, but now and again it's also helpful to see how your action, our action collectively we are perceived. But the same surveys also show that one third of citizens find the rising cost of living to be the most important issue facing the European Union.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), And although the majority of citizens believe that the defence of our common European values must be a priority, even if this has a negative impact on the cost of living, every policymaker should respond to this challenge. So in accordance with its mandate of price stability, the ECB is doing its part.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Our third major policy rate increase in October, resulting in a cumulative increase of 200 basis points since July, underscores our commitment to tame inflation. It is the fastest pace ever since the creation of the euro. This increase was accompanied by a recalibration for our targeted longer term refinancing operations, often referred to as TLTRO three.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), To reinforce the transmission of our policy rate increases to bank lending conditions and contribute by so doing to the normalisation of the Eurosystem balance sheet. In December at our next Monetary Policy Governing Council meeting, we will also lay out the key principles for reducing the bond holdings in our asset purchase program portfolio, because it is appropriate that this balance sheet be normalised over time in a measured and predictable way.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Interest rates are and remain and will remain the key tool for fighting inflation. Higher interest rates reduce demand pressures by making it more expensive to borrow money and by influencing how much people and businesses spend, save, borrow and invest. And this in turn puts downward pressure on prices. Although the adjustment will take some time to be felt in the economy.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Higher interest rates will also have an immediate effect on people's and business expectations about future inflation. Thereby guarding against the risk of second round effects, persistently high inflation could lead inflation expectations. Which then become ingrained in wage negotiations and price settings?

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Not only would the resultant wage price spirals prove self-defeating in supporting real income economy wide, but it would also hamper the productive capacity of the economy as a whole. Strong labour markets. With the unemployment rate still at the historically low level of 6.6% in September, are likely to support higher wages.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Incoming data suggests that wages are picking up and will continue to and we will continue to assess the implications for the medium term inflation outlook. And that is a reference to in the first page of the document that we have sent you. So while monetary policy is geared towards bringing inflation back to our medium term target, the economic outlook will also depend on the action taken by other stakeholders.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), In the current environment of high inflation. Fiscal policy needs to be considerate, not to not add to inflationary pressures. Fiscal supports should therefore be targeted, temporary and tailored. It should be targeted so that the size of the fiscal impulse is limited and benefits those who need it most. It must be tailored so that it does not weaken incentives to cut energy demand and temporary so that the fiscal impulse is not maintained longer than strictly necessary.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), At the same time, government should pursue fiscal policies that show they are committed to gradually bringing down the public debt ratio. Delivering on the ECB mandates will create the conditions for strong and sustainable growth that will benefit everyone. Yet achieving price stability is a necessary but not sufficient conditions as other policy areas need to act.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Removing constraints on economic growth through an ambitious economic reform agenda at the EU and national levels will not only rebuild supply that has been impaired by the recent shocks, it will also, over time strengthen the resilience of our economy in a world that is becoming less predictable. In this respect, we welcome the Commission's proposal to reform the EU economic governance framework.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), Sustainable fiscal policies are needed to not only ensure medium term debt sustainability, but also to support the three key transitions that will determine our future and our growth model towards cleaner energy, greater economic security, a more digital and productive economy. The Commission proposals are a good starting point for discussions, and I encourage encourage EU policymakers, including the Parliament, to soon reach a viable and broadly shared agreement to have strengthened the foundation of our economic and monetary union.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), So in conclusion, we are committed to bringing inflation down to our medium term target and we are determined to take all the necessary measures to that effect. We expect to raise rates further to the levels needed to ensure that inflation returns to our 2% medium term target in a timely manner.

SOUNDBITE (English), Christine LAGARDE, President of the European Central Bank (ECB), In this environment of high uncertainty and with complex shocks hitting the economy, the Governing Council decisions will continue to be data dependent and follow a meeting by meeting approach. How much further we need to go? How fast we need to get there? Will be based on our updated outlook on the persistence of the shocks, on the reaction of wages and inflation expectations, and on our assessment of the transmission of policy stance. I now stand ready to take your questions.

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

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