Interview with Le Figaro

Interview with Christine Lagarde, President of the ECB, conducted by Anne Cheyvialle and Florentin Collomp on 28 July 2023

30 July 2023

Within one year, you have increased interest rates to a record level. Are we reaching the end of this cycle?

We have covered a lot of ground and have made great progress in this fight against inflation. We are moving towards our goal. We will only know when we have reached this goal – a medium-term inflation target of 2% − by looking at the economic and financial data. And we will base our actions on our assessment of these data. I hear some people say that the final rate hike will take place in September. There could be a further hike of the policy rate or perhaps a pause. A pause, whenever it occurs, in September or later, would not necessarily be definitive. Inflation must return durably to its target. We are in an environment of uncertainty and will reassess the situation and our action on a meeting-by-meeting basis.

Will interest rates remain high for a long time or will they fall over the coming months?

The key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target. We are committed to returning inflation to our target in a timely manner and for this we need a sufficiently restrictive policy in terms of level and length.

At a time when the economy is slowing down, wouldn’t further rate hikes make things worse?

Our aim is to lower inflation and our primary mandate is to maintain price stability in the medium term. That necessarily involves a decline in activity. The ideal solution, which is known as a soft landing, is a moderate lowering of activity in tandem with a significant fall in inflation. The second-quarter GDP figures for France, Germany and Spain are quite encouraging. They support our scenario of GDP growth of 0.9% in the euro area this year.

How do you respond to criticisms of your monetary policy voiced by leaders such as Giorgia Meloni or Emmanuel Macron?

As a central banker you need to have a thick skin. And it’s essential to keep sight of the objective of lowering inflation and to be as clear as possible about the tools deployed and the intended results. I will appear before the European Parliament every quarter to report on what we have done.

Is inflation coming back under control?

Inflation is undoubtedly falling: we were at 10.6% in October 2022 and came back down to 5.5% in June. The decline is being driven particularly by the fall in energy price inflation. And monetary policy has clearly begun to have an impact on lowering inflation. You see that in the credit data, in both the interest rates – as our fellow citizens know – and in credit volumes, which are falling, as well as in firms’ demand for loans. We are also beginning to see it in the real economy: in the real estate sector and with regard to investment. We pay close attention to the inflation felt by our fellow citizens and also look very carefully at the mechanisms underlying inflation in order to analyse the root cause of the price increase. At present, the services sector (catering, IT, telecoms, transport...) is more resistant than the others to our monetary policy.

You have said that two-thirds of the inflation in 2022 was attributable to the rise in corporate profits: did firms take advantage of the situation?

What we see is that, unlike in previous crises, the shock was so massive, abrupt and widespread that it created conditions in which it was relatively easy to pass on costs to consumers. In other periods, owing to competition and a smaller gap between supply and demand, firms absorbed some of the costs and reduced their margins. This time, the increases in wages, which represent a catch-up, and the rises in unit profits, are feeding inflation.

Are you afraid of a wage-price spiral?

We are following that very closely, because that would have a huge impact on the services sector. If you look at inflation expectations and the wage increases negotiated collectively and individually, there is no sign of a wage-price spiral emerging. But our projections expect firms to absorb part of the cost of the wage increases in their margins.

If wages don’t plug the loss of income caused by inflation, will households end up as the big losers of this inflationary shock?

In similar crises, wages have caught up with inflation, typically over a period of around three years. We can only hope that this is the case. I should add that through, for example, energy price caps, governments in most euro area countries have provided support not only to firms but also to households. Governments have covered some of the loss of income for households and firms.

Does this fiscal support hamper monetary policy?

As energy prices have been falling for a year, we believe that it is time to withdraw the at times quite broad-based support that has been granted and return to less expansionary fiscal policy. The euro area governments, including France, have made a start on this. And looking ahead, we need to return to a more sustainable level of public debt.

Is France, which has a high level of debt, doing enough to reduce its debt and deficit?

Like many euro area countries, France is aware of the need to restore a public spending policy that is consistent with debt sustainability.

What is your position on the ongoing reform of the euro area fiscal rules?

We have made recommendations to the European Commission in favour of simplified, more effective rules that are agreed among the Member States and effectively implemented. We can see the appeal of having rules tailored to each country’s situation as opposed to a single measure that applies in all circumstances. The proposed four-year debt-reduction path, which could be extended to seven years, is long for us. Also, we have suggested that a common fiscal capacity be created at the European level to handle spending for addressing shared challenges, such as war and climate change. It is a controversial proposal but we think it makes sense for a monetary union to also have elements of a fiscal union.

Is there a debt problem in the euro area? Could we find ourselves faced with situations similar to ten years ago?

If governments set out the rules and adhere to them, there is no reason for this kind of question to come up.

Is the risk of financial crisis fading?

Euro area banks have become much more resilient since the 2008 financial crisis. Capital ratios are significantly higher. Last week the ECB’s supervisory arm announced that it is going to ask banks to provide weekly updates on their liquidity ratios, and we are simply drawing lessons from what happened in the spring with Credit Suisse and some US institutions. These events led all supervisors and the whole financial community to reassess risk measures.

What are the major risks that could derail the economy?

The major risk is the geopolitical situation. Even in a stable situation, with sound economic policies, a political or geopolitical lapse creates volatility and can have an impact on markets. Any new shock – be it an oil or food price shock or an acceleration of the climate crisis – is a potential risk. I have often been criticised for bringing up climate risks, which I was told only exist in the long term. It makes me sad that reality is catching up with us, but this is the reality we see today. The drop in harvests, which is leading to higher prices for goods such as olive oil and rice, is leading some countries that are predominantly exporters, such as India, to take protectionist measures. Further ahead, the El Nino and Gulf Stream phenomena may have an impact on food prices.

Nicolas Sarkozy is said to have advised Emmanuel Macron to appoint you as Prime Minister: do you prefer Frankfurt to Paris?

I have a lot of work on my hands. I have got a job to do and I have a goal that I fully intend to achieve.