Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Speech by Christine Lagarde, President of the ECB, at the hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, September 26, 2022

It’s a pleasure to be back here in Brussels with you for our third audition this year.

Russia’s unwarranted war of aggression against Ukraine continues to cast a shadow over Europe. My thoughts are with the people of Ukraine who are suffering the senseless atrocities of war.

The economic consequences for the Eurozone have continued since our last meeting in June and the outlook is darkening.

Inflation remains far too high and is expected to remain above our target for an extended period. At our meeting earlier this month, the Governing Council therefore took the major step of accelerating the transition from the current very accommodative level of policy rates to levels that will ensure a rapid return of inflation to our medium-term objective. by 2%.

In line with the themes chosen for this hearing, I will provide you with a brief overview of the economic outlook, followed by a more detailed explanation of our recent monetary policy decisions.

The outlook for the euro area economy

The euro zone economy grew by 0.8% in the second quarter of 2022, mainly due to strong consumer spending on services as the economy reopened. Economies with large tourism sectors have particularly benefited as people have traveled more during the summer. The labor market, still robust, also continued to support economic activity.

Despite this, we expect a significant slowdown in activity over the next few quarters. There are four main reasons behind this. First, high inflation is dampening spending and production across the economy, and these headwinds are reinforced by gas supply disruptions. Second, the strong demand for services that accompanied the reopening of the economy is waning. Third, weakening global demand, also in the context of tighter monetary policy in many major economies, and deteriorating terms of trade will translate into less support for the euro area economy euro. Fourth, uncertainty remains elevated, as evidenced by declining household and business confidence.

These developments have led to a downward revision of the latest Staff projections for economic growth for the remainder of the current year and throughout 2023. Staff now expect the economy to grow by 3 .1% in 2022, 0.9% in 2023 and 1.9% in 2024.

Inflation increased further to 9.1% in August. Energy and food price inflation remained extremely high and were the main cause of headline inflation. Price pressures are spreading to more sectors, in part due to the impact of high energy costs on the wider economy. Almost half of the components of the inflation basket recorded annual inflation rates above 4% in August and measures of underlying inflation remain elevated. While supply bottlenecks have eased, their inflationary impact continues to gradually feed through to consumer prices. Similarly, the recovery in demand in the service sector is putting upward pressure on prices. The depreciation of the euro has also contributed to the build-up of inflationary pressures.

Regarding the labor market, wage dynamics have remained subdued so far. However, resilient labor markets and some catch-up to offset rising inflation should boost wage growth.

Most measures of longer-term inflation expectations are currently around 2%. However, signs of recent above-target revisions on some indicators warrant continued monitoring.

The ECB staff’s baseline inflation projections have been revised upwards significantly; annual inflation is now expected to stand at 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.

The risks to the outlook for inflation are mainly on the upside, mainly reflecting the possibility of further major disruptions in energy supply. If these risk factors are the same for growth, their effect would be the opposite: they would increase inflation but reduce growth.

ECB monetary policy

Based on the medium-term inflation outlook, the Governing Council decided to raise the three key ECB interest rates by 75 basis points, on top of the 50 basis point hike announced in July.

As things stand, we expect to raise interest rates further in upcoming meetings to dampen demand and hedge against the risk of a persistent rise in inflation expectations. We will regularly reassess our policy trajectory in the light of the information received and the evolution of the inflation outlook. Our future policy rate decisions will continue to be data-driven and on a meeting-by-meeting approach.

As requested by the Committee, I will now briefly address the issue of fragmentation. Since we embarked on our normalization path in December 2021, we have made it clear that we will act if fragmentation risks threaten the uniform transmission of monetary policy in the euro area.

Since July 1, 2022, we have applied reinvestment flexibility for maturing redemptions in the pandemic emergency purchase program portfolio, in order to counter risks on the transmission mechanism linked to the pandemic.

Later in July, we also announced a new monetary policy tool, the Transmission Protection Instrument (TPI), which complements our existing tools. This tool was designed to counter unwarranted and disorderly market dynamics, with sufficient flexibility to respond to the severity of the risks facing policy transmission. It will preserve the unity of our monetary policy as the Governing Council continues its path of policy rate normalization, helping us to ensure price stability over the medium term, in line with our mandate. The TPI is subject to a list of eligibility criteria that the Board of Governors will use to assess whether a jurisdiction is pursuing sound and sustainable fiscal and macroeconomic policies.[1]


In conclusion, inflation continues to rise in the euro area, affecting citizens in all areas of life.

The latest Eurobarometer indicates that almost two out of three citizens consider rising inflation to be one of the two most important problems at the moment.[2] Rising energy and food prices are weighing particularly heavily on the most vulnerable households and the situation is likely to get worse before it gets better.

In this context, it is essential that the fiscal support used to protect these households from the impact of rising prices is temporary and targeted. This limits the risk of fueling inflationary pressures, which also makes it easier for monetary policy to ensure price stability and helps preserve debt sustainability.

The best contribution that monetary policy can make to the euro area economy is to ensure price stability over the medium term. This means ensuring that inflation expectations remain well anchored and that demand conditions are in line with our target.

As I am committed to keeping the European Parliament and the general public informed of our progress, allow me to conclude by giving you a brief update on our ongoing work to integrate climate change considerations into our monetary policy operations. .[3]

From next Monday, the Eurosystem will take into account an issuer climate score in all purchases of corporate bonds, as part of the Eurosystem’s ongoing reinvestment purchases. This will result in the purchase of more bonds issued by companies with good climate performance and fewer bonds from those with poor climate performance.

These measures will reduce the Eurosystem’s exposure to climate-related financial risk and support the green transition of the economy in line with the EU’s climate-neutrality objectives.

From the first quarter of 2023, we will begin to publish climate-related information on our corporate bond portfolios, and we will regularly report on the measures we are taking to combat climate change within the limits of our mandate.

I now stand ready to answer your questions.

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