 Hello and thank you for joining us here in Cintra and online. My name is Claire Jones and I shall be your moderator. Europe has avoided the sharp downturn that many feared this winter, but during 2023 new sources of uncertainty have emerged. Despite a fall in headline inflation price pressures remain far too high. Several central banks, including ECB, have raised rates in response and remain in tightening mode, despite borrowing costs now entering restrictive territory. This is the background to the discussions that will feature in this year's ECB forum on central banking, when we'll be looking at how the world will adapt to more volatile inflation. We'll begin with one of the programme highlights, an introductory speech from President of the European Central Bank Christine Lagarde. Madame Lagarde, the floor is yours. Thank you very much Claire and thank you to all of you for being here in Cintra and those of you joining us online as well. You're missing the wind and a beautiful, beautiful location I tell you. Inflation in the euro area is too high and is set to remain so for too long. But the nature of the inflation challenge we are facing in the euro area is changing. We are seeing a decline in the inflation rate, headline predominantly, as the shocks that originally drove up inflation wane and our monetary policy actions are transmitted to the economy. But the path through of those shocks is still ongoing, making the decline in inflation slower and the inflation process more persistent. This persistence is caused by the fact that inflation is working its way through the economy in phases. As different economic agents try to pass the cost on to each other. Monetary policy makers need to address this dynamic decisively to ensure that it does not lead to self-fulfilling spiral fed by the de-encoring of inflation expectations. So the key question we face today is how can we break that persistence? In the ECB's governing council, many member of whom are here in this room, we have been clear that two elements of our policy stance will be key. And I will quote elements of our monetary policy statement. We will have to bring rates to I quote sufficiently restrictive and quote levels and keep them I quote for as long as necessary. Both elements are affected by uncertainty about the persistence of inflation and about the strength of the transmission of monetary policy to inflation. Setting the right level and length will be critical to our monetary policy as we continue our tightening cycle. So in my remarks today I will explore why the inflation process has become more persistent and what this implies for our policy stance. Disclaimer typical of a lawyer some will say. My intention is not to signal any future decisions but rather to frame the issues that monetary policy will face in the period ahead. So let's look under the skin of inflation. The euro area economy has faced a series of overlapping inflationary shocks since the end of the pandemic. Since the beginning of 22, these shocks have both raised the price level by 11% and led us led to us transferring more than 200 billion euros to the rest of the world in the form of a terms of trade tax. In an environment such as this the natural reaction of every economic agent is to try to pass on these price increases to other actors in the economy. In the euro area we can identify two distinct phases. The first phase was led by firms which reacted to steeply rising input cost by defending their margins and passing on the cost increases to consumers. The intensity of this reaction was unusual. During previous terms of trade shocks in the euro area firms have tended to absorb rising costs in profit margin as slower growth made consumers less willing to tolerate price hikes. But the special conditions that we experienced last year turned this regularity on its head. The sheer scale of input cost growth made it harder for consumers to judge whether price hikes were caused by higher costs or higher profits, fueling a faster and stronger pass-through. As this was not enough at the same time, pent-up demand in reopening sectors, excess savings, expansionary policies and supply restrictions brought on by bottlenecks gave firms more scope to test consumer demand with higher prices. For this reason, unit profits contributed around two thirds to domestic inflation in 22 whereas in the previous 20 years the average contribution had been around one third. This in turn led to the shocks feeding into inflation much more quickly and more forcefully than in the past. This first phase, however, is now starting to wane. Largely thanks to lower energy prices, year on year producer price inflation has already dropped by 42 percentage points from its peak last summer. While it is taking time to feed through to prices more generally, it is partly being reflected in a broad-based decline in headline inflation and a leveling off in some measures of underlying inflation, especially exclusion-based measures and those that capture the persistent effects of energy on economy-wide prices. At the same time, high inflation has eaten into domestic demand which contracted by 2% over the last two quarters and the consumption impulse created by excess saving is fading. The early effects of our policy tightening are also becoming visible, especially in sectors like manufacturing and construction that are more sensitive to interest rate changes. Faced with this combination, falling-in-put cost and dwindling demand, we saw unit profit growth slow markedly in most sectors in the first quarter of this year, but the second phase of the inflation process is now starting to become stronger. Workers, who are also consumers, have so far lost out from the inflation shock seeing large real-wage decline, which is triggering a sustained wage catch-up process as they try to recover their losses. This is pushing up other measures of underlying inflation that capture more domestic price pressures, particularly measures of wage-sensitive inflation and domestic inflation. And since wage bargaining in many European countries is multi-annual and inertial, this process will naturally play out over several years. In our latest projections, we expect wages to grow by a further 14% between now and the end of 25% in real terms. While this catch-up has long been factored into our inflation outlook, the effect on inflation from rising wages has recently been amplified by lower productivity growth than we had previously projected. Which is leading to higher unit labour cost. Alongside past upward surprises, this is the key reason why we recently revised up our projections for core inflation, even though our expectation for wages remained broadly the same. Two features of the current business cycle are contributing to this dynamic and both could linger too. The first is the resilience of employment relative to GDP growth. Some call it the mystery, not all. Typically, most of us would have expected slowing economic growth over the last year to have somewhat reduced employment growth. But for the last three quarters in particular, the labour market has been performing better than an Ocun laws-based regularity would suggest. That disconnect partly reflects increased labour hoarding by firms in the context of labour shortages, which is visible in the current gap between total hours worked and average hours worked. This is weighing on productivity growth and with unemployment expected to fall slightly further over the projection horizon, the motivation for firms to hoard labour may not subside that quickly. The second feature in addition to hoarding contributing to weaker aggregate productivity is the composition of employment growth, which is concentrated in sectors with structurally low productivity growth. Since the pandemic, employment has grown most in construction and the public sector, both of which have seen a decline in productivity. And in services, which has seen only a meager productivity growth. These trends could also persist in some of these sectors over the next few years, given the relative weakness of manufacturing and long-term shift towards employment in services. All of this means that we will face several years of rising nominal wages with unit labour cost pressures exacerbated by subdued productivity growth. And in this setting, monetary policy must achieve two goals. First, we must ensure that inflation expectations remain anchored as the wage catch-up process plays out. While we do not currently see a wage price spiral or a de-anchoring of expectations, the longer inflation remains above target, the greater such risk becomes. That means that we need to bring inflation back to our 2% medium term target in a timely manner. Second, for this to happen, we need to ensure that firms absorb rising labour costs in margin. If monetary policy is sufficiently restrictive, the economy can achieve disinflation overall while real wages recover some of their losses. But this hinges on our policy dampening demand for some time so that firms cannot continue to display the pricing behaviour that we have seen recently. Sensitivity analysis by ECB staff underlines the risks we would face if firms tried to defend their margins instead. For instance, if firms were to regain 25% of the lost profit margin that our projections foresee, inflation in 25 would be substantially higher than the baseline at almost 3%. So faced with a more persistent inflation process, we need a more persistent policy. One that not only produces sufficient tightening today but also maintains restrictive conditions until we can be confident that this second phase of the inflation process has been resolved. So what does that imply in policy terms? We have not yet seen the full impact of the cumulative rate hikes that we have decided since last July, 400 basis points. But we know that the job is not done yet. Bearing a material change to our expectations for inflation, we will continue to increase rates in July. And as we move further into restrictive territory, we need to pay close attention to two dimensions of our policy. First, our actions on the level of rates and second, our communication on future decisions and how that is influencing the expected length of time that rates will remain at that level. The governing council has provided orientation on both dimensions. It has stated clearly on our repeat that future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our 2% medium term targets and will be kept at those levels for as long as necessary. Two sources of uncertainty affect the level, the desired level and length of our interest rate policies. First, since we face uncertainty about the persistence of inflation, the level at which rates peak will be state contingent and it will depend on how the economy and various forces that I have described evolve over time. And it will have to be continuously reassessed. Under these conditions it is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have indeed been reached. And this is why our policy needs to be decided meeting by meeting and has to remain data dependent. Second, we face uncertainty about the strength of monetary policy transmission. The strength of transmission connects current decisions with expectations of future policy and therefore affects the policy stance. How strong transmissions turn out to be in practice will determine the effect of a given rate hike on inflation and this will be reflected in the expected policy path. Uncertainty about transmission arises from the fact that the euro area has not been through a sustained phase of rate hikes since the mid 2000 and has never seen rates move so fast so quickly. And this raises the question of how quickly and forcefully monetary policy will be transmitted to firms via interest sensitive spending and to households via mortgage payments. For firms, ECB analysis finds that monetary policy shocks are typically transmitted more quickly and forcefully to manufacturing, reflecting a sector's higher interest rate sensitivity while there is more muted and delayed impact in services. The key question really today is whether the services sector will eventually catch down, not catch up, catch down, which is what we have seen in previous cycles or whether it will be insulated from the effects of policy tightening for longer than in the past given the strength of demand and employment in the sector. That's for firms, for households. There is evidence that it will take longer for policy changes to pass through to interest burdens in this tightening cycle as a higher share of households have now fixed rate mortgages than in the mid 2000. At the same time, once mortgages have been reprised, the restrictive effect may be greater. Gross debt to income ratios, which emphasise debt servicing capacity are higher than in the previous tightening cycles while the share of homeowners with the mortgage has increased. Both sources of uncertainty will only fade away over time and that is why we have made our future policy decisions conditional on first, the inflation outlook, second, the dynamics of underlying inflation and third, the strength of monetary policy transmission. But to ensure that uncertainty does not interfere with our intended policy stance in terms of both level and length, two points are clear. First, we need to bring rates into sufficiently restrictive territory to lock in our policy tightening. We need facts on the ground. Second, we need to communicate clearly that we will stay at those levels for as long as necessary. This will ensure that hiking rates does not elicit expectations of the too rapid policy reversal and will allow the full impact of our past actions to materialise. All the while, we need to carefully evaluate the strength of policy transmission in order to avoid an error in calibrating policy in either direction. So, in conclusion, it will not surprise you if I say that monetary policy currently has only one goal to return inflation to our 2% medium term target in a timely manner and we are committed to reach this goal come what may. As the author Helen Keller wrote, our worst foes are not belligerent circumstances but wavering spirits. We have made significant progress but faced with a more persistent inflation process. We cannot and we will not waver. Of course, we wish but we cannot declare victory yet. Thank you very much.