(Reuters] – The following text is Christine Lagarde the President of European Central Bank,’s speech after the policy meeting.

Link to statement on ECB website: https://www.ecb.europa.eu/press/pressconf/2021/html/ecb.is211216~9abaace28e.en.html

We are pleased to welcome the Vice President and me to this press conference.

Thanks to ample support policy, the economy of the Euro area continues to rebound and there is an improvement in the labor market. Although growth is slowing, we anticipate activity to rebound strongly over the next year. Some countries have reinstated tighter restrictions due to the Omicron strain and the latest pandemic. The energy prices have risen significantly. There are also shortages in certain industries such as equipment, labour, and materials. These are factors that are restricting economic activity and a hindrance to near-term prospects. Although the public health crisis continues, many have been immunized and booster campaigns have increased.

The society’s ability to cope with pandemic waves has improved. The economy has been less affected by the pandemic. The surge in energy costs and the fact that demand in certain sectors is exceeding supply has caused inflation to rise sharply. The inflation rate is likely to rise in the short term but it should fall in the next year. Although the inflation outlook was revised upward, inflation should still be below our target of two percent over the projected horizon.

The progress made in economic recovery towards the medium-term inflation target allows us to reduce the rate of asset purchases for the next quarters. To stabilize inflation at the two percent target, we need monetary accommodation. We must maintain flexibility and optionality in the management of monetary policy, given the uncertainty. With that in mind, the Governing Board made the following decisions

In the first quarter 2022, net asset purchases will be made under the pandemic emergency purchasing programme (PEPP), but at a much slower pace than during the preceding quarter. The end of March 2022 will see the cessation of net asset purchases made under the PEPP.

Second, it was decided by the Governing Board to expand the reinvestment horizons for the PEPP. Now, the Governing council plans to reinvest principal from any mature securities it purchased through the PEPP till at least 2024. To avoid any interference, future PEPP portfolio roll-offs will be controlled to ensure that the appropriate monetary policies stance is maintained.

A third, our ability to overcome the impair transmission of our monetary policy has been demonstrated by the pandemic. It has also made our efforts to accomplish our goal easier. In accordance with our mandate, when monetary policy transmission threatens price stability, flexibility will be an important part of monetary strategy. PEPP reinvestments may be modified at will in the case of increased market fragmentation as a result of the pandemic. To avoid interruptions to purchases by that country’s economy, it could be possible to purchase bonds from the Hellenic Republic. To counter any negative shocks resulting from the pandemic, net purchases could be made under the PEPP.

Fourth, in line with a step-by-step reduction in asset purchases and to ensure that the monetary policy stance remains consistent with inflation stabilising at our target over the medium term, we decided on a monthly net purchase pace of €40 billion in the second quarter and €30 billion in the third quarter under the asset purchase programme (APP). From October 2022 onwards, we will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of our policy rates. Net purchases will end soon before the key ECB rates are raised.

The ECB’s key interest rates were confirmed and forward guidance was given on how policy rates will change in the future. This is critical to maintain the correct level of accommodation necessary for stabilizing inflation at two per cent over the medium term.

We will keep an eye on bank funding and make sure that the smooth transmission our monetary policy is not hampered by the end of TLTRO III. Our monetary policy stance is also being monitored by us. We’ll be evaluating how our targeted lending operations contribute. The special conditions that were applicable to TLTRO III should end as announced. We will also assess the appropriate calibration of our two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.

To ensure inflation stabilizes at the two percent target, the Governing council is ready to make adjustments to all its instruments as necessary and in any direction.

Now I’ll go into detail about how we view developments in the economy, and in inflation. Then, I will outline how we assess financial and monetary conditions.

Economic activity

We anticipate that the economy will continue to recover, driven by strong domestic demand. There is an improvement in the labor market, where more people have jobs than ever before and fewer are involved with job retention plans. This supports rising household incomes and higher consumption. Also, the accumulation of savings during the pandemic should support consumption. In combination with continued global recovery and current fiscal support, growth should be encouraged by monetary policy.

The economy has seen a slowdown in the last quarter and it is expected that this trend will continue into next year. In the first quarter 2022, we expect that output will surpass its pre-pandemic levels.

Some euro-area countries have increased their protections to deal with the recent pandemic. It could slow down recovery in areas such as travel, tourism and entertainment. Consumer and business confidence is being affected by the pandemic, and new viruses are spreading to create uncertainty. Rising energy costs also pose a threat to consumption.

Production of manufactured goods is being hampered by shortages of materials, equipment and labor in certain sectors. This causes delays and slows down recovery in parts of the service industry. While these bottlenecks may still exist for some time, they will likely disappear by 2022.

In the future, growth is expected to rise strongly in 2022. According to our Eurosystem staff projections, real GDP growth will be 5.1% in 2021; 4.2% in 2020-22, 2.9% in 2023 and 1.6% in 2024. Comparable to our September staff projections the outlook was revised downward for 2022, and upward for 2023.

Monetary policies should not be complemented by growth-friendly, targeted fiscal measures. This will assist the economy in adapting to the current structural changes. An effective implementation of the Next Generation EU programme and the “Fit for 55” package will contribute to a stronger, greener and more even recovery across euro area countries.

Inflation

Further inflation rose to 4.9 percent in November. For most of 2022, it will be above 2 percent. We expect inflation to continue to rise in the short term but to fall in the next year.

Inflation has risen mainly due to a steep rise in fuel prices, including gas and electricity. Energy inflation was responsible for over half the headline inflation in November. The demand continues to rise faster than the supply. This is evident in consumer goods prices and services recently reopened. The base effects of Germany’s VAT reduction are contributing to higher inflation but they will not last until the end.

It is uncertain how long this will take. We expect that energy prices will stabilize, that consumption patterns will normalise and that price pressures from global supply shortages to recede in 2022.

The gradual recovery of the economy’s full potential and continued improvements to the labor market will lead to faster wage growth. Both survey-based inflation forecasts and the market have been stable since October’s monetary policy decision. However, they have been closer to 2 percent over the past months. These factors will assist in underlying inflation rising and bringing headline inflation within our targets for the medium term.

Our new staff projections foresee annual inflation at 2.6 per cent in 2021, 3.2 per cent in 2022, 1.8 per cent in 2023, and 1.8 per cent in 2024 – significantly higher than in the previous projections in September. The inflation rate excluding food, energy, and other items is expected to be 1.4% in 2021 and 1.9% in 2022. It will also rise by 1.7% in 2023 and 1.7% in 2024. This projection is even higher than the September projections.

Risk assessment

Our view of the risks to economic outlook is broadly balanced. We believe that economic activity will outperform the expectations of our forecasts if people are more confident about their finances and make less money than they expect. The recent pandemic and its spread could have a greater impact on economic growth. Risks to recovery and inflation outlook are the path and pace of future energy prices. Inflation could rise if price pressures lead to wage increases that are higher than expected or the economy recovers faster to its full potential.

Monetary and financial conditions

The October Governing Council meeting has seen market interest rates remain stable. The historical low rates of bank lending to households and firms are still a problem. The overall financing environment for the economy remains favorable. The short-term funding requirements of businesses, which are exacerbated by supply shortages and increased working capital costs, is partly what drives lending. Corporate demand for loans continues to be moderated by retained earnings, high cash reserves, and high debt. Lending to households remains robust – driven by demand for mortgages.

Due to lower non-performing loans and higher capital ratios, the balance sheets of Euro area banks are now stronger. Today, banks are as profitable now as they were prior to the pandemic. Overall, bank funding conditions are still favorable.

The Governing Council reviews twice a year, in line with the new monetary strategy, the relationship between monetary and financial policy. A accommodative policy supports growth and protects the financial stability of institutions as well as companies’ balance sheets. The impact of accommodative monetary policy on the financial market and property markets needs to be closely monitored as many medium-term vulnerabilities are increasing. Macroprudential policies remain the best line of defense in maintaining financial stability and dealing with medium-term risks.

Conclusion

The euro area’s economy has continued to improve despite slowing growth in the short term. Inflation has been accelerated by the sharp increase in energy costs and constrained supply in certain industries. While inflation will continue to exceed our targets for the majority of 2022 it is expected that it will ease over the next year. We can also stop net buying under the PEPP due to the economic recovery and our progress towards the medium-term inflation target. But monetary accommodation is still needed – including net purchases under the APP and our forward guidance on interest rates – for inflation to stabilise at our two per cent inflation target over the medium term.

Now we are available to answer your questions.