Christine Lagarde ECB President chairing her first Monetary Policy Meeting

Today is the first time that I have had the privilege and pleasure of sharing the monetary policy meeting of the Governing Council of the ECB, and I'm delighted to proceed now with reporting on the outcome of our meeting together with my friend the Vice President. The Governing Council meeting was also attended by the Commission Executive Vice President, Mr. Valdis Dombrovskis. Based on our regular economic and monetary analysis, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to or below 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. On November 1st, we restarted net purchases under our asset purchase program at a monthly base of 20 billion euros. We expect them to run for as long as necessary to reinforce the accommodative impact of our policy rates and to end shortly before we start raising the key ECB interest rates. We also intend to continue reinvesting in full the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation. The incoming data since the last Governing Council meeting in late October point to continued muted inflation pressures and weak euro area growth dynamics, although there are some initial signs of stabilization in the growth slowdown and of a mild increase in underlying inflation, in line with our previous expectations. Ongoing employment growth and increasing wages continue to underpin the resilience of the euro area economy. The comprehensive package of policy measures that the Governing Council decided in September provides substantial monetary stimulus, which ensures favorable financing conditions for all sectors of the economy, in particular easier borrowing conditions for firms and households, underpinning consumer spending and business investment. This will support the euro area expansion, the ongoing build-up of domestic price pressures, and thus the robust convergence of inflation to our medium-term aim. In the light of the subdued inflation outlook, the Governing Council reiterated the need for monetary policy to remain highly accommodative for a prolonged period of time to support underlying inflation pressures and headline inflation developments over the medium term. We will therefore closely monitor inflation developments and the impact of the unfolding monetary policy measures on the economy. Forward guidance will ensure that financial conditions are just in accordance with changes to the inflation outlook. In any case, the Governing Council continues to stand ready to adjust all of its instruments as appropriate to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry. Now, let me explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP growth was at 0.2% quarter-on-quarter in the third quarter of 2019, unchanged from the previous quarter. The ongoing weakness of international trade in an environment of persistent global uncertainties continues to weigh on the euro area manufacturing sector and is dampening investment growth. At the same time, incoming economic data and survey information, while remaining weak overall, point to some stabilization in the slowdown of economic growth in the euro area. The services and construction sectors remain resilient, despite some moderation in the latter part of 2019. Looking ahead, the euro area expansion will continue to be supported by favorable financing conditions, further employment gains in conjunction with rising wages, the mildly expansionary euro area fiscal stance, and the ongoing, albeit somewhat slower, growth in the global economy. This assessment is broadly reflected in the December 2019 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.2% in 2019, 1.1% in 2020, 1.4% both in 2021 and 2022. Compared with the September 2019 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised down slightly for 2020. The risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism, and vulnerabilities in emerging markets, remain tilted to the downside but have become somewhat less pronounced. According to Eurostat's flash estimate, euro area annual HICP inflation increased from 0.7% in October 2019 to 1.0% in November, reflecting mainly higher services and food price inflation. On the basis of current futures prices for oil, headline inflation is likely to rise somewhat in the coming months. Indicators of inflation expectations stand at low levels. Measures of underlying inflation have remained generally muted, although there are some indications of a mild increase, in line with previous expectations. While labor cost pressures have strengthened amid a tighter labor market, the weaker growth momentum is delaying the pass-through to inflation. Over the medium term, inflation is expected to increase, supported by our monetary policy measures, the ongoing economic expansion, and solid wage growth. This assessment is also broadly reflected in the December 2019 Eurosystem staff macroeconomic projections for the euro area, which foresees annual HICP inflation at 1.2% in 2019, 1.1% in 2020, 1.4% in 2021, and 1.6% in 2022. Compared with the September 2019 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised up slightly for 2020 and down slightly for 2021, mainly driven by the expected future path of energy prices. Turning now to the monetary analysis, broad money M3 growth stood at 5.6% in October 2019, unchanged from the previous month. Sustained rates of money growth reflect ongoing bank credit creation for the private sector and low opportunity cost of holding M3 relative to other financial instruments. The narrow monetary aggregate M1 continues to be the main contributor to broad money growth. On the credit side, the growth of loans to firms and households remained solid, benefiting from the continued pass-through of our accommodative monetary policy stance to bank lending rates. The annual growth rate of loans to non-financial corporations increased to 3.8% in October, compared with 3.6% in September, while the annual growth rate of loans to households continued on its gradual upward path, reaching 3.5% in October. Our accommodative monetary policy stance will help to safeguard very favorable bank lending conditions and will continue to support access to financing across all economic sectors, and in particular to small and medium-sized enterprises. To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued robust convergence of inflation to levels that are below but close to 2% over the medium term. In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential, supporting aggregate demand at the current juncture, and reducing vulnerabilities. The implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential, reduce structural unemployment, and increase resilience. The 2019 country-specific recommendations should serve as the relevant signpost regarding this. Now, fiscal policies. The euro area fiscal stance is expected to remain mildly expansionary in 2020, thus providing support to economic activity. In view of the weakened economic outlook, the Governing Council welcomes the Eurogroup's call for differentiated fiscal responses and its readiness to coordinate. Governments with fiscal space should be ready to act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies and meet structural balance targets, which will create the conditions for automatic stabilizers to operate freely. All countries should intensify their efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union's fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union, the EMU, remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union. Now, we are now, together with the Vice President, available for your questions. But before that, I'm going to take just a couple of minutes of your time to tell you a few things. One is, each and every president has his or her own style of communicating, so I know some of you are keen to compare and write or rank. I will have my own style. So as I said before, don't over-interpret, don't second-guess, don't cross-reference. I'm going to be myself and therefore probably different. Point number one. Point number two, this introductory statement probably rings a few bells for those of you who follow those documents very carefully, but some of you will be disappointed that it does not include anything having to do with the strategic review. It is intended to be that way. So the introductory statement does not include, does not refer, and should not be associated with the strategic review that we are considering. And I'll be happy to give you, I can do that now actually if you want, a little bit of my thinking and our collective thinking on the strategic review, because I know that it is of interest to some of you. So shall I do that now? Yeah, that's easier, and then you can ask questions. So first of all, there is nothing unusual or extraordinary about having a strategic review. I actually consider for myself that it's a little bit overdue, legitimately so, because there were many other things to do, but the last strategic review was in 2003. It's been 16 years since there has been a strategic review, so it's quite legitimate to have a strategy review at this point in time. Second, that strategic review needs to be comprehensive, needs to look at all and every issue, will turn each and every stone, and will take its time, but will not take too much time. By that I mean my plan is to actually get the review started in the course of January. Don't ask me which week or which day or which second, but it will be in the course of January, and our goal is to complete it before the end of 2020. Third, about the strategic review, it will be reaching out to not just the usual suspects, but it will also include consulting with members of parliament, and I committed to that with the European Parliament. It will reach out to the academic community, of course, it will reach out to civil society representatives, and it will aim at not just preaching the gospel that we think we master, but also listening to the views of those to whom we reach out. You know, it is the point of every strategic review by all central banks that are conducting this exercise to actually look at their objective, how they define their medium-term objective in particular, how they give content to the price stability that is in the mandate, and it is the only objective that we have in our mandate ourselves. So that topic indeed will be core and center to our strategic review, and there is no preconceived landing zone at this point in time. Indeed, it will also address the major changes that have taken place over the course of the last 16 years, and by that I include the massive technological change that our societies are facing, it will include the immense challenge that climate change is addressing to each and every one of us wherever located and whatever our mission and duties, it will include aspects of inequality that are certainly rising in our economies, and all of those will be addressed with a view to exploring each and every corner of the business that we conduct as a central bank to see how those businesses are affected and how we can take them into account to better respond to the mission that we have and to deliver on our mandate, serving euro area citizens and delivering on the mandate of price stability. So that's on the strategic review, and if you have additional points that I can answer, I will, but I will not go into much further details when it comes to the substance because the framework has not yet been completely agreed and discussed with members of the Governing Council, and I have certainly made a point of my tenure to include members of the Governing Council and to seek their views and their consideration before any decision is made. With that, I have huge respect for the work that you do. You are a main audience for the central bank, you're not the only audience, and I would also encourage you not to try to sort of draw too many conclusions or decisive findings from communication that I would address to different audiences with a slightly different language, you know, that may be better understood by those who do not have your level of skills and in-depth knowledge of the matters that we deal with. With that, I'm happy to take questions. Christine is going to monitor that, and when I don't know, I will tell you that I don't know.

Thank you very much. One thing that the introductory statement does not specify, but you will find it, I'm showing the findings of the Eurosystem staff macroeconomic forecast, is that in our 2022 forecast for inflation, while the overall year is forecast at 1.6%, the fourth quarter is at 1.7%. So directionally, it is slightly increasing over the course of 2020. The forecast that we have for inflation, is it satisfactory? It's certainly directionally good, but is it the aim that we pursue? No, indeed. On TLTRO, my recollection of what was taken this morning was something like 97.3 billion euros, which is a little less than what was coming for maturity. Do I regard that as half success, half failure? Neither. I would tell you two things. One is, I think we have seven auctions in the course of this TLTRO III, to be precise, so I would not draw a conclusion from this one. I would wait a little bit, particularly given the fact that this one is taking place at year-end, and at year-end, you know, you close your books, there are many considerations that come into play. So I would not draw too many conclusions from this one. I would have preferred it to be a little bit higher, closer to 120 than, you know, 97, but we'll look carefully at the next one. Thank you.

On the timing of the strategic review, you know, there is never a good timing, because you could argue equally that if and when you have delivered on the way in which you've defined your mandate, then why bother about a strategy? I think it cuts both ways. My purpose is really, after 16 years of the same strategy, which is the rule today and that we will respect and will continue to respect until such time when our strategic review is completed. By the way, I think it is timely coming to this job new, and it's just the most, I think, appropriate moment to rally support of members around the table to re-examine the effectiveness, appropriateness of each and every single instrument that we've used in the past, to take assessment of that, and then to redefine for ourselves what exactly will be this medium-term objective that will deliver on the mandate that we have, which is not changing, by the way. You said that, you know, change your mandate. No, the mandate is price stability. The way in which we deliver on the mandate, this is the one that will be under the strategic review. Side effects? Well, first of all, we are very aware of the side effects. I think it's been a constant in the policy of the Eurosystem to actually measure, monitor the side effects. This is part and parcel of the work that is done, and we will certainly continue doing that. We might develop that work further. And clearly, you know, what we have done was always intended to deliver on the mandate as defined under the current strategy, to create the conditions for growth. And on that point, I think that the use of interest rates in particular has been quite efficient in order to lower the financing cost, and that clearly seems to have worked and seems to work properly. When I look at the increase in the volume of financing both for the non-financial corporate sector and for the households, when I look at the decrease in the cost itself, I think that this is a policy that works. Now, the side effects are a preoccupation, there's no question about that, and we would not be doing our job if we were not monitoring and being extremely attentive to that balance of cost-benefit of such measures.

On the first point, the reversal rate, my understanding of the reversal rate is that you are facing a reversal rate when credit begins contracting. That's how in economic theory the reversal rate is defined. You know, given the progression rate that we're seeing, 3.8% the most recent one in the non-financial corporate sector, 3.5% and growing in the household sector, you know, that certainly does not meet the definition of credit contraction. We are still seeing credit expansion. Are we attentive to that credit expansion and those credit numbers? Of course we are, because it's clearly, you know, one of the clear objectives that we have to facilitate the financing of growth, to facilitate the investment, to facilitate the creation of employment, and so on and so forth. So we are not seeing it, and of course we are looking very carefully at the indicators of credit growth in the economy. Weak growth, yes, it is weak growth, and it's not that we're seeing it reaching towards potential in the medium-term horizon. You know, the 1.4% for 2022, we're getting close to the growth potential of the euro area, and it would be very welcome to have other policies join the monetary policy in order to support the reduction of slack and to arrive at that growth potential, and why not exceed it? So that could be very welcome both in fiscal terms and in structural reform terms as well. Japanification? I don't think that we are there at all, and I think that there is certainly, from the enterprise credit, there is a major difference between the situation that Japanese enterprises or Japanese households are relative to the situation of the euro area equivalent, and I don't think that Japanification is in the cards at all.

All right, on the toolbox, you know, I'm not going to revisit the past. Number one, policy decisions that were made stand and were reaffirmed yet again. And my view of it is that they form a package. There were several components to that package, and I think that the intention was for some of the measures, such as the interest rate, to actually have an impact on the short-term end of the yield curve. The forward guidance, that was also part of the package, that gives a clear calendar and induces an automatic adjustment depending on the state of the economy, also is intended to have an impact on the medium-term end of the curve. And the asset purchase program that was reinitiated is intended to have an impact on the long end of the yield curve. Based on what we are seeing, all three seem to have had their impact, and certainly it has been perceived as such. So I'm not going to dissect between each and every item of the package. I think that they are together. The two-tier system was clearly an additional attribute in order to deal with some of the negative effects that you've referred to, and is also part and parcel of the package. And you know, I wouldn't take a view on one element or the other. On the other point that you made to me, it is critically important that a central bank be independent, and that in all its operations, behaviors, its independence be respected and be valued. But what you described to me is a policy mix of first order, except that I would put A monetary, because this is our shop, B fiscal, because that's the next possible tool that can be used, and C structural reforms. So it takes many to actually dance the economic ballet that would deliver on price stability, but also employment and growth. I don't see anything wrong with policymakers actually agreeing that they're going to make the efforts that they can in order to reach their respective goals.

You know, I see exactly where you're trying to get me, but you know, once and for all, I'm neither a dove nor a hawk, and my ambition is to be this owl that is often associated with a little bit of wisdom. I'm not overly, I'm not full of vanity, but I will certainly try to bring the best out of members of my Governing Council in order to arrive at monetary policy decisions and use of instruments that will be as consensual as possible. I'm not suggesting that we will arrive at complete agreement on everything, and I'm sure that the strategic review, particularly in our definition of the medium-term objectives and how we go about it, will be a source of great debates amongst ourselves. But I'm also of the view that once something has been debated at length and in depth and in honesty and with good faith, then some decisions eventually stand, and they are the decisions of the central bank. I don't have a different view from that perspective. Are some unconventional tools better than others? This is also something that we will be assessing as part of the strategic review, because I think that we need to look in retrospect and assess what has been most helpful, what has worked best, what combination of them has worked best. I don't think that I would reduce it as you have to interest rates or unconventional measures, because I think within those unconventional measures you have a variety of things that allow to target better, to also give a better indication of time. I think in that respect the forward guidance is also a very interesting set of components that anchors into time, that gives a sequence, that gives enough clarification to something that by nature is going to be a little bit ambiguous nonetheless, but it introduces this element of automaticity in how things are restated in the course of time.

On the technical discussion of the measure of inflation, depending on whether you measure HICP inflation as is, with or without food and oil prices, or whether we use market-based instruments or survey-based instruments, I think we need to look at all of them. We need to look directionally where it's heading. I think we are very strongly focused on the trends and in the direction. I know that we are all concerned, and I'm concerned as well, with the 0.1% more or less in that direction, but directionally I think that we are seeing some consistent move. And you know, as part of the strategic review, I also think that we will have to look into that, because inflation perceptions can differ as well. I mean, markets have their own assessment and measurements for that, households have different perceptions. Some of the national central banks in the Eurosystem are actually paying close attention to that and are trying to measure those components as well. The whole debate of whether or not we take housing into the measurements, and what portion of housing, and how do we distinguish between, you know, the asset value of the land and the actual use of the premises, those are tricky technical questions that we will have to look at and on which we should also take a view, because there's quite a difference between the various perceptions, anticipation, expected inflation depending on how we measure it. So I would say at this point in time we take all of it into account. I personally, and I don't know if Philip would agree with that or if Luis, you would agree with me, but we look at directionally whether we are sort of consistent between the various measurements. But I think interestingly we will have to look at how it is disaggregated as well as part of our deliberations. On the outlook, as I said, you know, relatively weak growth, let's face it. What I think gives us some hope, and you alluded to that, is the fact that those downside risks that we had on the horizon are less pronounced. And I'm not going to bet on how phase one of the trade discussions between the United States and China are heading and when they will be completed and what it will deliver, but certainly if we compare with a few months back, it's heading in a better direction. That's one. We will know by the end of today what is the outcome of the UK election, which will have a bearing on what happens to Brexit and under the transition period. So that's also an element of uncertainty that is probably loosening, and that will give us a bit more clarity as to the environment in which we operate. So that's encouraging, let's put it that way.

Thank you. For the instruments, I think it is completely legitimate to take stock and to assess the effectiveness and the efficiency of the various instruments, one by one, taken together, and what leverage they have exercised and what results they have delivered. As to the future, I think it's going to be for the Governing Council to actually define how, as part of the framework, we will be considering those. I see very much the strategy as a house that we build, you know, stone by stone, one after the other, and I think that that's one element that will have to be decided by the Governing Council. On the digital currency, first of all, I would like to pay tribute to somebody who is leaving at the end of the year, who has been instrumental at the ECB and way beyond to help us understand a bit better and with more clarity the difference between the bitcoins of this world, the stablecoins, and the digital currency, and by that I mean Benoît Cœuré, who has been a member of the Governing Council, member of the Executive Board of the ECB, and who is finishing at the end of this year. He committed a paper which was commissioned, if I recall, by the G7, but he also very ably participated in a paper that was prepared by the ECB that was distributed by Vice-President de Guindos at the last ECOFIN, if I recall, which has the benefit in three pages. I think that's a huge challenge to, you know, draw the line between what we are talking about, between the bitcoins, the stablecoins, and the digital currency. And on the latter point, the digital currency, we have set up a task force, and we will accelerate the effort of this task force, drawing on the resources of the entire Eurosystem, meaning the national central banks that already participate in that research, that have already committed to the project in terms of experimentation, pilots here and there. So harnessing on all those experiments that have taken place and all the research that has already been put into this effort, together with the work that has been done here also, we will, I think we're trying to do that by mid-2020, we will identify number one the purpose that we have with that. Are we trying to reduce cost? Are we trying to cut out the middleman? Are we trying to have inclusive finance at no cost? I mean, there's a whole range of objectives that can be pursued. So I think we will start by doing that. Then we will identify the technicalities of it all, which is not a given, particularly when you talk about a Eurosystem. And I think that there is also a great interest outside our regional area. I know, for instance, that Canada, the UK, certainly other countries way beyond, are also looking very deeply into that to see if it makes sense, what purpose it serves, and how we can best deliver on it. My personal conviction is that given the developments we are seeing, not so much in the Bitcoin segment but in the stablecoin projects, and we only know of one at the moment, but there are others being explored and underway at the moment, we'd better be ahead of the curve if that happens, because there is clearly a demand out there that we have to respond to. I would like to add a footnote to that. I think the benefit of the paper is that it also draws a line between this sort of glamorous central bank digital currency, much talked about and worth exploring, and the digital payment systems that we have and that exist. You know, we have several items that are completely digitalized that are not at the front end and that, you know, the banks' clients do not perceive as being in operation, but where settlement and clearing are actually taking place instantly thanks to the digital payment systems that have been put in place, notably within the Eurosystem. So on those digital Eurosystem systems that exist, some of which need a better take-up by some of the other members of the system, I will continue to push, because I think we have something which is really worth developing and encouraging. And I'm talking here about TIPS and PEPS and all those acronyms that I should not be using, but I don't know what they stand for. All I know is that they deliver in digital terms the operations of clearing and settling, sometimes in one single operation.

On your first point, and concerning the use of our various instruments in order to deliver on our mandate, we have one objective, and that's price stability as defined under the strategy as it stands today. So that's the goal, that's the aim, and that's what we're pursuing. I wouldn't venture too much into this theory of the output gap, how much slack there is, how much slack there is not. And you know, informed by a good discussion that I've had with colleagues on the other side of the Atlantic, including at the Fed, they now say actually that they had strongly underestimated the slack of the employment market. And at 7.5%, do we still have some? My hunch is that we do, but I would not guess-estimate on that particular front. I think we tend to get it more often wrong than right, and that's not passing our judgment on the forecasting ability of the ECB, because I think that we do actually have more trust in our forecasts. On Greece, well, first of all, I would like to compliment Greece. Greece has been a long story for me in other capacities, and I'm really delighted to see the progress and to see the recovery and to see the results. It's very impressive, both on growth and on the primary surplus, and I had my views on that, don't need to repeat them. You know, the various public purchase programs of the ECB are subject to eligibility criteria, and they're also for the benefit of the entire Eurosystem and all people in the euro area. So my guess is that as soon as Greece reaches those eligibility criteria, it will become eligible instantly to those programs. Until such time, we have to respect the eligibility criteria and we have to play by the rules.

Well, thank you very much for asking about the Green Deal that was presented yesterday by the President of the European Commission, my friend Ursula von der Leyen. I am very pleased to see the ambition of what she has announced, and I very much hope that this ambition can actually be endorsed by all European institutions in their respective territory, with their respective mandate, and in compliance with the treaties. Okay, so what it means is that in our strategic review, we will take up climate change, we will take up the fight that is taken up by the European Commission, and I hope other European institutions, and see where and how we can participate in that particular endeavor. But you know, I'm only sorry about one thing. I was hoping yesterday morning that the taxonomy was a done deal, and unfortunately the Council, as I understand, has not found an agreement yet on taxonomy, which would be extremely helpful for us. That's a call to them to find an agreement. You know, I'm not commenting on any particular country, you will appreciate that, but you know, when we say that we want to deliver on our mandate, we also know that monetary policy is going to be supported and boosted by other policies, amongst which the structural reforms that will improve productivity, that will improve growth, creation of employment, certainty of the economic players. So in that respect, clearly reforms are a necessary component of addressing the future.

You know, on the European Stability Mechanism, and I'm saying it on purpose rather than ESM, because I think each and every word actually matters. It's about stability, it's a mechanism that would be in place if completed and if embedded in the treaty, and it's European. So it's nothing that is intended to disrupt, to damage, or to hurt any particular member of the euro area. And if we had had the ESM in full place, including the collective action clause and the debt restructuring mechanism, if we had that in place at the very early days in the Greek crisis, I think collectively we would have been much more capable of resolving the issue in a more expedited manner. The debt restructuring process that it took as far as Greece was concerned was difficult, took much longer than I think it would have with the ESM. We can't rewrite history, and it's a counterfactual that I'm using here, but clearly having rules established, having CACs, the collective action clauses, that are intended to avoid the behavior of some very toxic creditors, as I have seen them acting in other countries, I think is beneficial to any country that finds itself in a difficult position. And to assume that it's intended to target a particular country, I think, is completely misguided. That's my view. On the banking union, I was really encouraged to see the paper produced by colleague Olaf Scholz, and clearly there are areas that are in debate. The weighing of sovereign bonds is clearly one. It's one where Italy is showing some openness, as I understand, and I think it's great progress. And whatever progress will happen in that area will actually be good, because banking union is one of the necessary attributes, together with capital markets union, in order to make sure that we have a monetary union that works and that, you know, where the different elements actually support each other.

Okay, everybody has to... I was surprised because Mon says very quick, 'No, we have not discussed it.' Voilà. So thank you very much, and I'll see you next year. So happy holidays, Merry Christmas, and whatever you celebrate, I hope you are happy and making other people around you happy.