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

Speech by Christine Lagarde, President of the European Central Bank, at a hearing of the European Parliament’s Economic and Monetary Affairs Committee

Brussels, September 26, 2022

It gives me great pleasure to be back here in Brussels with you for the third hearing this year.

Russia’s unjustified aggressive war on Ukraine continues to cast a shadow over Europe. My thoughts are with the Ukrainian people who suffered the senseless horrors of war.

The economic consequences for the Eurozone have continued to unfold since we last met in June and the outlook is growing grim.

Inflation remains very high and is likely to remain above our target for an extended period. At our meeting earlier this month, the Board of Directors took a major step to sustain the transition from the prevailing highly accommodative level of policy rates to levels that will ensure a timely return of inflation to our medium-term target of 2 percent.

In line with the topics selected for this hearing, I will give you a brief overview of the economic outlook and then explain recent monetary policy decisions in more detail.

Eurozone Economy Overview

The eurozone economy grew by 0.8 percent 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 travel more during the summer. A strong labor market also continued to support economic activity.

Despite this, we expect activity to slow significantly in the coming quarters. There are four main reasons behind this. First, high inflation discourages spending and production throughout the economy, and these headwinds are reinforced by disruption to gas supplies. Second, the strong demand for services that came with the reopening of the economy is losing momentum. Third, weak global demand, also in the context of tighter monetary policy in many major economies, and deteriorating terms of trade, will mean less support for the eurozone economy. Fourth, uncertainty remains high, as reflected in low household and business confidence.

These developments have led to a downward revision of the latest employee forecasts for economic growth for the remainder of the current year and throughout 2023. Employees now expect the economy to grow by 3.1 percent in 2022, 0.9 percent in 2023, and 1.9 percent in 2024.

Inflation increased to 9.1 percent in August. Energy and food inflation remained very high and were the main contributors to overall inflation. Price pressures are spreading across more sectors, in part due to the effect of rising energy costs across the entire economy. Nearly half of the items in the inflation basket recorded annual inflation rates above 4 percent in August, and core inflation measures remain high. While supply bottlenecks have been easing, their inflationary impact is still gradually feeding into consumer prices. Likewise, the restoration of demand in the service sector increases pressure on prices. The depreciation of the euro has also increased inflationary pressures.

Looking at the labor market, wage dynamics are still contained so far. However, flexible labor markets and some catch-up to compensate for higher inflation are likely to lead to higher wage growth.

Most measures of longer-term inflation expectations are currently around 2 percent. However, recent revisions above the target for some indicators warrant constant monitoring.

Core inflation forecasts for ECB staff have been significantly revised; The annual inflation rate is now expected to be 8.1 percent in 2022, 5.5 percent in 2023 and 2.3 percent in 2024.

The risks to inflation expectations are primarily to the upside, mainly reflecting the potential for further major disruptions to the energy supply. While these risk factors are the same for growth, their effect will be the opposite: they will increase inflation but reduce growth.

European Central Bank monetary policy

Based on medium-term inflation expectations, the Governing Council decided to raise the three key interest rates of the European Central Bank by 75 basis points, in addition to the 50 basis points increase announced in July.

As is currently the case, we anticipate further rate hikes over the next several meetings to dampen demand and guard against the risks of a continued upward shift in inflation expectations. We will regularly re-evaluate our policy course in light of incoming information and evolving inflation expectations. Future interest rate decisions will continue to rely on data and follow a meeting-by-meeting approach.

At the request of the Commission, I shall now turn briefly to the question of fragmentation. Since we embarked on the path of normalization in December 2021, we have made clear that we will act if retail risks threaten the even transmission of monetary policy across the eurozone.

Since July 1, 2022, we have been applying the flexibility to reinvest upcoming recoveries in the Pandemic Emergency Purchase Program portfolio, with the goal of addressing risks to the pandemic-related transmission mechanism.

Later in July, we also announced a new monetary policy tool, the Transfer Protection Instrument (TPI), which complements our existing tools. This tool is designed to counter unexplained and turbulent market dynamics, with sufficient flexibility to respond to the severity of risks to policy transmission. It will protect the privacy of our monetary policy while the Board of Directors is on the path of normalizing its policy rate, helping us to ensure price stability in the medium term in line with our mandate. TPI is subject to a list of eligibility criteria that the Board of Directors will use to assess whether a jurisdiction is pursuing sound and sustainable macroeconomic and financial policies.[1]


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

The latest Eurobarometer indicates that nearly two in three citizens view rising inflation as one of the two most important issues at the moment.[2] High energy and food prices particularly affect the most vulnerable households and the situation is expected to get worse before it gets better.

In this environment, it is essential that the financial support used to protect those families from the impact of price hikes be temporary and targeted. This limits the risks of fueling inflationary pressures, thus facilitating the task of monetary policy to ensure price stability, and contributing to maintaining debt sustainability.

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

As I have pledged to keep the European Parliament and the public informed of our progress, let me conclude by providing you with a brief update on our ongoing work to integrate climate change considerations into our monetary policy processes.[3]

From next Monday, the Eurosystem will take into account the issuer’s climate score in all corporate bond purchases, in the context of Eurosystem’s ongoing reinvestment purchases. This will buy more bonds issued by companies with good weather and less bonds issued by companies with bad weather.

These measures will reduce the Eurosystem’s exposure to climate-related financial risks, as well as support the green transformation of the economy in line with the EU’s objectives on climate neutrality.

Beginning in the first quarter of 2023, we will begin publishing climate-related information about our corporate bond holdings, and we will report regularly on the steps we are taking to address climate change within our jurisdiction.

I am now ready to answer your questions.

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