Hearing of the Committee on Economic and Monetary Affairs of the European Parliament
ECB President Christine Lagarde’s opening speech at the hearing of the European Parliament’s Committee on Economic and Monetary Affairs (video conference)
Frankfurt am Main, 7 February 2022
On this day in 1992, the leaders of twelve European countries decided to transform the European Community into the European Union by signing the Maastricht Treaty. Thirty years later, Europe continues to benefit from many of the achievements of that agreement.
The agreement confirmed European citizenship, including the right to move and settle freely in the EU. It granted the Parliament expanded powers with its co-decision right and strengthened Europe’s voice in the world through a common defense and security policy. And perhaps most importantly, the Treaty laid the foundation for our economic and monetary union, leading to the introduction of the euro and the establishment of the ECB.
As we celebrate the 20th anniversary of euro banknotes and coins this year, there is no doubt that the single currency has been a success. It has brought stability and made us more resilient in the face of the many adverse shocks we have experienced.
Over the past 20 years, the ECB has ensured price stability, with an average inflation rate of 1.7 percent since the beginning of 1999. We will continue to do so.
In my speech today, I will first give you an up-to-date assessment of the economic situation in the euro area and present our position on monetary policy. I do so with the firm determination that clear communication – the topic you have chosen for today’s hearing – is crucial to our politics, our credibility and the people’s trust in us.
Already in my first hearing in December 2019,[1] I talked about my desire to improve our communication practices so that the market, agents like us and the wider public better understand how we make our decisions, what motivates them and how they affect people’s everyday lives.
After the strategy review, we now use clearer, more narrative language and relative visuals. As in the previous hearing, I will explain the key macroeconomic developments discussed in this opinion using the diagrams in the attached two-page document.
Eurozone economy and monetary policy
When we last met in November, I noted that the rate of growth was moderate. Indeed, the latest data confirms that quarterly growth slowed to 0.3% in the fourth quarter of 2021, further allowing gross domestic product (GDP) to return to pre-pandemic levels. The slowdown in the growth rate has been mainly due to the rapid spread of the Omicron variant. Related restriction measures have dampened activity especially in consumer services such as travel, tourism, hospitality and entertainment.
The current pandemic wave and related restrictions will likely continue to negatively impact growth early this year. The other two factors we discussed in the previous consultation – supply bottlenecks and high energy costs – are also expected to dampen economic activity in the near term.
However, the economic effects of the current pandemic wave seem to be less detrimental to operations than previous ones. In addition, the bottlenecks mentioned above will continue for some time, but there are signs that they are beginning to ease. This will allow the economy to recover strongly again later this year.
Inflation has risen sharply in recent months and surprised further with the pace of acceleration in January rising to 5.1% from 5.0% in December. Inflation is likely to remain high for the foreseeable future. Energy prices are still the main reason for the increased inflation rate. Their direct impact was more than half of January’s total inflation, and energy costs are also driving up prices in many sectors. Food prices have also risen due to seasonal factors, increased transport costs and higher prices for fertilizers. In addition, price increases have become more common, and the prices of several goods and services have clearly increased.
The financial conditions of the economy have remained favorable. Although market interest rates have risen since December, banks’ funding costs have so far remained under control. Bank lending rates for companies and households are still at a historically low level.
Regarding the risk assessment, we see the risks to the economic outlook as still largely balanced in the medium term. Uncertainties related to the pandemic have somewhat subsided. At the same time, geopolitical tensions have increased and persistently high energy costs may slow down consumption and investments more strongly than expected. The speed at which supply bottlenecks are resolved is also an additional risk to growth and inflation prospects. Compared to our December expectations, the risks to the inflation outlook have increased in an accelerating direction, especially in the near future. If price pressures translate into higher-than-anticipated wage increases or the economy returns to full capacity faster, inflation may be higher.
In a few weeks, the ECB experts’ forecasts for March will give an updated estimate, taking into account the latest data. This will help the Governing Council of the ECB better assess the impact of the unexpectedly high inflation figures in December and January on the medium-term outlook.
In particular, it will be determined precisely how higher energy prices are transmitted to the economy and affect the overall outlook. Two channels may be at play, pulling inflationary dynamics in different directions. On the other hand, rising energy costs can raise prices directly by raising production costs, but also indirectly through wages. On the other hand, they can have a negative impact on household incomes and company earnings, which weakens economic activity and suppresses inflation prospects. In the past, the euro area has been particularly vulnerable to the second channel, when the rise in energy prices weakened the purchasing power of households and slowed down inflation in the medium term.
When evaluating the inflation outlook, it is naturally necessary to keep in mind that the demand conditions in the euro area do not show the same signs of overheating as in other large economies. This increases the likelihood that current price pressures will subside before they take root, allowing us to achieve our two percent target in the medium term.
Although longer-term inflation expectations have risen in recent months, they are in line with this expectation. According to survey-based measures, inflation will return to two percent by 2023 and remain close to that level thereafter; and the market-based indicators stabilize at a level of slightly less than two percent. The stable anchoring of long-term inflation expectations in the euro area is a reassuring development after a long subdued period.
In summary, it can be stated that the euro area economy has continued to recover, although growth is expected to remain subdued in the first quarter. Although the outlook for inflation is uncertain, it is likely to remain high for longer than previously expected, but to moderate this year.
In our meeting last week, we confirmed the decisions we made in December. For this reason, we will continue to gradually slow down the pace of asset purchases over the coming quarters and end the net purchases of the pandemic emergency purchase program at the end of March.
Due to the current uncertainty, we need more than ever to maintain flexibility and choice in the conduct of monetary policy. Our monetary policy is always data dependent, and this is even more important in the current situation. We remain attentive to upcoming data and carefully assess its implications for the medium-term inflation outlook.
These effects are key parameters in our future guidelines. Our forward guidance has several dimensions. A period has been defined between the end of the net asset purchases and the liquidation date. The interest rate increase will not take place until our net asset purchases have ended. In addition, there are three conditions that must be met before the Governing Council can be sufficiently confident that the tilt in our policy rate is appropriate. All three conditions are intended to protect against premature interest rate increases. Finally, all adjustments to our policy are gradual.
Conclusion
Let me decide.
Former Commission President Jacques Delors described the process leading to the Maastricht Treaty as one that required “great determination, fierce solidarity and a bit of daring now and then”.[2]
Europe’s leaders have once again demonstrated these qualities in their political response to the pandemic crisis. And once we get out of the pandemic, we need to continue on this path.
The ECB is doing its part and showing the determination needed to ensure price stability. You can be assured that our commitment to achieving this is absolutely unwavering, as is our resolve to explain, to convince, but also to listen and better understand people’s concerns. Our regular dialogue with you, their elected representatives, is crucial in this regard.
With that in mind, I look forward to today’s conversation with you.