They Said it - Recent Monetary Policy Comments Made by ECB Governing Council Members

17 January 2022

By David Barwick – FRANKFURT (Econostream) – The following is a reasonably complete compendium of the most recent comments made by European Central Bank Governing Council members with respect to monetary policy. The frequency of updates will correspond approximately to the frequency with which relevant comments are made.

The current version includes comments from:

Centeno (Banco de Portugal)
de Cos (Banco de España)
de Guindos (ECB)
Holzmann (Austrian National Bank)
Kazāks (Latvijas Banka)
Knot (Dutch National Bank)
Lagarde (ECB)
Lane (ECB)
Makhlouf (Central Bank of Ireland)
Müller (Eesti Pank)
Nagel (Bundesbank)
Panetta (ECB)
Rehn (Bank of Finland)
Schnabel (ECB)
Scicluna (Central Bank of Malta)
Stournaras (Bank of Greece)
Vasle (Banka Slovenije)
Villeroy (Banque de France)
Visco (Banca d’Italia)
Wunsch (National Bank of Belgium)

Since the last publication on January 11, we have added comments from ECB President Christine Lagarde, Executive Board member Isabel Schnabel (twice), Banco de Portugal Governor Mario Centeno and Dutch National Bank Governor Klaas Knot (whose previously unreported comments in an interview with a Dutch newspaper date from December 30).

de Cos (Banco de España):

12 January 2022

The gradual fading of base effects and bottlenecks and the partial reversal of energy price increases suggested by futures markets should reduce inflationary pressures over the course of 2022. Forecasts suggest HICP inflation in Spain rebounding from 3% in 2021 to around 4% in 2022, but with a gradual deceleration, especially in the second half of the year, to below 2% by the end of this and subsequent years. However, there are two sources of risk that could generate a more lasting inflationary process. The first would arise from a scenario of a less pronounced correction in energy prices than suggested by futures markets, for example as a result of an upsurge in geopolitical tensions. Second, a high pass-through of the pick-up in inflation to wage demands would feed through to higher price increases. For the time being, however, wage cost growth is subdued.’

‘[R]ecent developments remain consistent with a return to moderate inflationary pressures in the medium term … Nevertheless, we should pay attention to the possibility of the emergence of signs of a disanchoring of expectations, as this would be the main factor that would make this episode of high inflation more persistent.’

‘At the December Governing Council of the European Central Bank we decided to end the pandemic asset purchase programme (PEPP) at the end of next March, reducing the pace of purchases already in this first quarter. This decision reflects the fact that the negative impact of the health crisis on the medium-term inflation trend is considered to have been overcome. In parallel, to facilitate a smooth adjustment in the flow of asset purchases, we increased the capacity of the traditional purchase programme (APP) by an additional EUR 20 billion and EUR 10 billion in the second and third quarters of next year, respectively. In any case, given the high degree of uncertainty, we continue to maintain a high degree of optionality and flexibility in the conduct of monetary policy. On the one hand, we have preserved the option to reactivate the PEPP if necessary. On the other hand, we also maintain flexibility in cross-jurisdictional asset purchases through PEPP reinvestments and the extension of the duration of these for another year, until the end of 2024. And, finally, our forward guidance, which makes the first interest rate increase and the end of the purchase programme conditional on the evolution and forecasts of inflation at any given time, is also maintained as a key reference. It is in this sense that our statement should be understood that, if today's conditions regarding the evolution of core inflation and inflation expectations hold, we do not expect rate hikes in 2022.’

‘The spread of vaccines, together with extraordinary economic policy support, has led to a significant improvement in the global economic situation and outlook. However, as the emergence and rapid spread of infections caused by the omicron variant reminds us, normality is far from complete and uncertainty remains high. and uncertainty remains high. … The main source of uncertainty obviously remains the pandemic, although it must be recognised that, in terms of its economic impact, the degree to which economies have adapted to it has increased with successive waves.’

22 December 2021

‘It has been taken into account at least partially, although the Eurosystem staff did not know how the Omicron variant would evolve when completing the forecast (late November). We are now seeing that many governments worldwide are taking decisions, which basically limit mobility and you might think that this would have an impact on consumption and tourism flows, in particular. And at the same time, it is true that, after almost two years of successive pandemic waves, consumers and firms have gained a lot of capacity to adjust to these restrictions. This means that the same level of restrictions today, as compared with the level observed a year and a half ago, generates a lower impact on growth. So we are better prepared, although this does not mean that the impact on growth is not going to be significant. Both at the euro area and at the Spanish economy level, the staff incorporated, at least to a certain extent, an adverse impact from the current wave and, hence, from this new variant. This justifies, in fact, that the Eurosystem staff revised downwards GDP growth, both for Q4 this year and Q1 next year.’

‘In the short term what we are observing would mean downside risks to growth. In the medium term, I think we have to stick with the idea that the level of uncertainty is very high. We really don't know how the pandemic will evolve in the future.’

‘The impact on inflation is not so straightforward. Omicron will have a contractionary impact on demand and this could actually translate into lower prices. But there will be also an impact on supply and this goes in the opposite direction.’

‘First, it is true that according to the forecast, we see further convergence towards our symmetric inflation target of 2% over the medium term. The second point is that the forecast at the end of the projection horizon is 1.8%. And not only this but other indicators for the medium-term inflation outlook for the euro area point to the fact that we are still below our target. The third point relates to uncertainty which still stands at very high levels. For instance, we have been surprised by inflation over recent quarters. So with all these factors combined, we made a policy decision that incorporates two basic principles, which are flexibility and optionality. President Lagarde emphasised these two words last Thursday. And I want to emphasise this flexibility and optionality as well. We decided to end the PEPP as anticipated by the end of March. At the same time, we are also making the point that if there is a pandemic-related need, we will consider restarting net asset purchases through the pandemic programme. Another example of flexibility is that our forward guidance is state dependent. Meaning that at each point in time, we analyse the three conditions we have defined for the first interest rate hike to happen. At the same time, we increased the volume of asset purchases under the APP for the second and the third quarter to guarantee a smooth decline in purchases and avoid cliff effects. In addition, the duration of the APP is open-ended and very much linked to the lift-off in rates. So the lift-off is state contingent and the APP is also state dependent. We also increased the reinvestment period of PEPP by one year and we indicated that we will reinvest under PEPP in a flexible manner in order to avoid fragmentation. Indeed, we stressed that, within our mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability. So, all in all, there are plenty of elements of flexibility in our policy.’

‘The fact is that as a way to face the current high uncertainty and the need to maintain optionality in the conduct of our monetary policy (the need for keeping the optionality I just mentioned), we included in our statement that the Governing Council stands ready to adjust all its instruments “as appropriate” and in “either direction” to ensure that inflation stabilises at its 2% target over the medium term. In any case, this issue is very much related to the question of the extent to which risks to inflation are on the upside. In this regard, the risks that inflation will be higher than projected in the forecast depend crucially on wages. It's very difficult to imagine a scenario of inflation in the medium term being more dynamic than in our current baseline without seeing relatively strong wage growth. And here, there are two elements in the forecast that go in opposite directions. On the one hand, the forecast has incorporated very mild second-round effects on wages, basically because negotiated wages are growing at a relatively moderate pace, much lower than prices. Also, automatic indexation mechanisms in the euro area nowadays play a very limited role. In addition, the evidence that we have from the last decade is that the second-round effects played a very small role in the past. On the other hand, the wage path projected for 2022, 2023, 2024 is higher than 3% on average, which is significantly above what we saw in the last decade (around 1 pp higher). In order to justify such a high number, one has to incorporate some higher elasticities of wages to slack. This is something that has yet to materialise. In some sense, there is a kind of positive judgement on wages that we are not calling second-round effects but are embedded in the forecasts. In any case, as it has been customary during the pandemic, we also incorporated alternative macro scenarios. So not only the baseline but also a mild and a severe scenario. In the mild scenario, so under more positive assumptions in terms of the pandemic, consumption etc., what you get for 2024 is inflation at 2%. When you look at the severe scenario, what you get is an inflation number of 1.3%, which is a good example of the high level of uncertainty that we are facing. So overall I think we have made a very balanced decision.’

‘Such a decision [to restart the PEPP] would be conditional on the evolution of the pandemic and its impact on our economies and the inflation outlook. And of course, this includes the period of transition out of the pandemic. So we will have to analyse at each point in time whether the pandemic is affecting our economy and the inflation outlook to an extent that might justify this reopening of net purchases under the PEPP. … I think that this is an option that is on the table and that will be executed if needed.’

‘We are in the fourth or fifth wave and this has been created by a new variant that seems to be capable of spreading much quicker than the Delta variant and is forcing countries to impose restrictions again. So, for me, the main policy uncertainty that we will have to face is related to the pandemic and its economic effects.’

20 December 2021

‘… the view remains that the inflationary pick-up, which is proving stronger and more durable than anticipated a few months ago, is of a temporary nature, so that, over the medium term, inflation is expected to be somewhat below the 2% target. Against this background, we have decided to end the pandemic asset purchase programme (PEPP) at the end of next March, reducing the pace of purchases already in the first quarter. This decision reflects the fact that the negative impact of the health crisis on the medium-term inflation trend is considered to have been overcome.’

‘The economy will continue to be affected in the short term by the pandemic, but on the basis that agents have become more resilient after successive waves, so that it is expected that restrictions as severe as those introduced at the beginning of the pandemic will not have to be re-imposed. Economic recovery is a fact. And based on our forecasts, the euro area will reach pre-crisis GDP early next year. The aim now is to return to the pre-pandemic growth trend as well.’

‘The health crisis is clearly not over and we do not really know when it will end. That is why, among other factors, we have kept the option of re-activating the PEPP, if necessary. It is one of the elements of greatest uncertainty at present, but from the point of view of expected economic developments and the expected path of inflation, we think it is an appropriate time to announce the end of the PEPP. In any case, the amount of monetary stimulus will remain high and we can be reassured that the ECB will continue to support the economic recovery.’

‘And the main learning, in terms of monetary policy instruments during these pandemic years, is the effectiveness and efficiency provided by a high degree of flexibility in the purchase programmes. I am, in fact, in favour of this flexibility being structurally built into future purchase programmes. For the time being, we maintain a significant level of flexibility through the PEPP reinvestments and the extension of these until the end of 2024. And I stress that there is the possibility to re-activate net purchases under the PEEEP, if necessary.’

‘… three conditions must be met for there to be an increase in interest rates and it is clear that, at the present time, these conditions are not met in 2022. But furthermore, this orientation not only conditions the first rise in interest rates, but also the end of the purchase programmes, because there is a link between one and the other, given that it is established that rates will not be raised until shortly after the end of the purchases. In other words, the purchase programme will last until shortly before we raise interest rates. And for the latter, the conditions I have mentioned have to be in place.

‘Our forward guidance is intrinsically conditional on inflation developments and forecasts at any given time. You cannot make an abstract and unconditional commitment today about the future, because the economic scenario evolves over time. What we make is a conditional commitment. In that sense, we say that, if today's conditions are maintained, we will not see rate hikes in 2022. With the level of uncertainty we have, it is very difficult to go further in that anticipation. It will depend crucially on how core inflation and inflation expectations evolve.’

20 December 2021

‘In the case of monetary policy, we in the Governing Council of the ECB are determined to continue to provide the necessary monetary stimulus to ensure that, over the medium term, inflation will durably reach the 2% target, without reacting to temporary shocks.’

Villeroy (Banque de France):

12 January 2022

‘I am going to tell you something this morning very simple but I think very clear: I guarantee … that we - the European Central Bank, the Banque de France – we will do whatever is necessary so that inflation returns to around 2% over time. 2% is our objective.’

‘What’s true is that there is less inflation in France than in other European countries … but nonetheless, temporarily, there is too much inflation in France. That’s why we are very vigilant and I tell you that I guarantee that we will do whatever is necessary.’

‘Regarding inflation, we are of course very attentive, because that’s very sensitive for the French. There is an inflation hump. … [A] year ago inflation was at zero. At the time, inflation was even too weak in economic terms. In one year, we think that inflation in France will fall back to below 2%. And between the two, there is a hump. And the hump is essentially explained by energy prices. … We think that we are rather close to the peak of the hump.’

‘What we see is that in spite of the Omicron wave, the French economy is globally resilient. … we are very resilient. … In January, globally, [French] economic activity will be at the same level as in December. There will be no retreat, despite Omicron. … That also means that this confirms our growth forecasts for 2021: it will be very high: 6.7%, the highest seen in 50 years. And for 2022, our forecast is at 3.6%, that’s still a very good number.’

‘There is more uncertainty than in the month of December. And that we have seen during each of the preceding waves; this uncertainty has just increased with respect to December, but is less strong than during the containment … of Spring 2020 or Autumn 2020 or March and April 2021.’

04 January 2022

‘The other short-term issue is of course that of inflation: it is now close to its peak in our country (December showing first signs of stabilisation) and in the euro area. While remaining very vigilant, we believe that supply difficulties and energy pressures should gradually subside over the course of the year. We should then return not to the low inflation of the past, but to a new inflation regime close to our 2% target, with monetary policy normalising in stages accordingly.’

‘As regards the economic situation, listening to more than 8,000 companies, we will publish our next monthly survey on Tuesday 11 January, and will provide a first assessment of the effects of the fifth wave. We remain confident that they will be relatively limited: we have learned over the past two years that every Covid wave, however serious, has diminishing economic effects. In our December projection, we showed that even an adverse scenario of further severe health restrictions – which is not the case today - would not prevent the French economy from returning by next year to the GDP trajectory it would have followed in the absence of the Covid crisis. These possible restrictions would admittedly reduce average growth in 2022, but this should be fully offset by additional growth in 2023.’

20 December 2021

‘The inflation "hump" is higher and longer than expected, mainly due to energy costs, with a likely peak in late 2021-early 2022. Tensions should gradually dissipate next year, but inflation will remain relatively high on average in 2022, at 3.2% for the euro area. We should then converge around our 2% target. A return to normal in 2023-2024 would not, however, mean a return to the situation that prevailed between 2013 and 2019, characterised by too low inflation. On the contrary, we could return to a more balanced inflation regime, as before the financial crisis of 2008, with inflation around 2% on average in the euro area. The rise in average wages would also be a little higher, around 3% per year, a figure that is compatible with companies maintaining strong margins thanks to productivity gains. This would increase purchasing power, after three Covid years in which it will have increased on average. However, we are careful to ensure that there is no out-of-control price-wage spiral.’

‘Since the beginning of the pandemic, each new wave has had a smaller economic impact than the previous one. This resilience of European growth justifies the end of the exceptional monetary support, while maintaining a fair level of accommodation.’

‘Our objective is price stability in the euro area, i.e. to converge towards 2% inflation: we are making significant progress here. And for this we need a good transmission of our monetary policy throughout the euro area, without undue fragmentation. This is why we are maintaining in the PEPP the reinvestment of debts that have been repaid, and even the ability to reactivate our purchases: one of the contributions of the PEPP is that it allows a great deal of flexibility in our interventions between asset classes or between countries.’

‘The ECB ensures the proper transmission of its monetary policy, avoiding unwarranted fragmentation between euro area countries. But it does not in itself have a spread or sovereign interest rate target. This is important for France as well. The ECB does not act to guarantee a certain level of interest rates to finance French deficits, but to fulfil its mandate of price stability.’

‘With the TLTRO decided in March 2020, the ECB has ensured that the right amount of medium-term financing for banks, and through them for the economy, is secured. We will have to continue to pay attention to this. But regarding the price of the TLTRO, the ECB had put in place exceptionally favourable conditions at -1% which are no longer relevant today. This is why we have just announced the end of this mechanism in June 2022; on the other hand, we will examine how to increase tiering, which mitigates the consequences of negative rates on banking intermediation.’

17 December 2021

‘…we have taken clear, balanced and complete decisions. I think it was a good Governing Council. What is the situation regarding inflation? We have to be totally pragmatic, i.e. look at the data. We look a little at the forecasts, the models, the market expectations, but above all we look at the data and we listen to the business leaders. There is an undeniable inflation bump … it is higher than expected in 2021-2022, essentially because of energy prices and it lasts a little longer than expected. So a forecast of 3.2% on average in 2022. By the way, this average masks a rather different trend, i.e. inflation should fall gradually over the year.’

‘We are probably quite close to the peak of inflation, but we remain extremely vigilant. Again, we are guided by the data, not by beliefs, not by bets. But that is the perspective. After that, we are converging towards our inflation target of 2%, and that's good news.’

‘This inflation forecast of around 2% in 2023-2024 - by the way, this is the forecast of almost all international organisations and private forecasters - means something important that has perhaps not been stressed enough. It is that after the bump, which once again we take seriously, we are not returning to the pre-Covid regime, remember, of very low inflation. There is in some ways a new inflation regime around the 2% target. This is more similar in some respects to what we knew before the financial crisis, in the years 2000-2007. And I would add that we should perhaps not give undue importance today to a difference of 0.2% between the forecast of 1.8 and the target of 2. This is the margin of uncertainty at the forecast horizon of 2024. We will adjust our monetary policy in the future - we can do this at any time - according to the actual data that we observe. There is a very pragmatic and close steering, if I may use a navigation term, a close steering of monetary policy according to the actual situation. But this is the central scenario today.’

‘On wages, negotiations are ahead of us. All these are things that we are looking at very closely, with modesty. I think everybody has to be humble in this period of uncertainty, but there are two possible mistakes on monetary policy. The first would be to tighten too soon when most analysts believe that these difficulties are real but temporary. In the opposite direction, if inflation becomes persistent and lasts longer, the mistake would be not to react. By the way, we said yesterday that we would adapt at any time. There is a word that has been used a lot which is not very nice, it is the word "optionality". If we were in a more sustainable inflation scenario, which again is not our central scenario, then we would not hesitate to act and we have the means to act.’

‘What did we decide yesterday? There were some very important decisions. The first decision was to stop the two exceptional crisis programmes, as we had said, in due course. That is to say, the net purchases under the famous PEPP, the massive asset purchase programme, and then on the TLTRO, which is perhaps less well known - it is a bank refinancing programme with ultra-favourable conditions - we stopped these ultra-favourable conditions.’

‘We are tightening up a bit. In any case, we are reducing exceptional crisis support. Why is this? First of all, it's an element of credibility. We are doing what we said we would do. And secondly, it is an element of confidence in the solidity of the European recovery, despite Omicron and the fifth wave. Of course, we have to be careful. Here too we have to be pragmatic and listen to reality and to companies. But as we said yesterday, European growth will be above 5% this year - that's very high - and should be above 4% next year.’

‘Through this decision [on December 16] ... it means that we are very significantly reducing the amount of our net asset purchases. The figures have perhaps not been sufficiently highlighted or analysed by observers. But this year, in 2021 ... our net asset purchases each month are on average a little over 90 billion euros. At the end of next year, in October 2022, this 90 billion will be reduced to 20 billion per month. That means a division by 4.5. ... it's an extremely significant reduction ...’

‘Central banks are not there to cover the financing needs of governments.’

Nagel (Bundesbank):

11 January 2022

‘Our primary objective is clear: to ensure price stability for the people of the euro area. Inflation rates have risen steeply in the past few months, climbing to their highest levels since the beginning of monetary union. Rates of up to 5% were recorded in the euro area, and in Germany even higher. This means households have significantly less money in their pockets. Many people are concerned about this loss of purchasing power. It is true that the high rates are partly attributable to one-off effects that will expire automatically. But there are other reasons as well. And the medium-term outlook for prices is exceptionally uncertain. While prices might also rise by less than projected in the forecasts, right now I see more of a risk that the inflation rate could remain elevated for longer than expected at the current time. In any case, monetary policymakers must be on the alert. This raises a series of questions that are weighing heavily on all our minds at present. First, how persistent are the high inflation rates? Second, is the very accommodative monetary policy stance still appropriate? If so, for how much longer? And third, how should we deal with the current high degree of uncertainty when making monetary policy decisions? What is the trade-off between different risk scenarios, say?’

‘… I will build on the existing policy of the Bundesbank: The Bundesbank flagged inflation risks early on. It has also been insistent that the pandemic emergency purchase programme (PEPP) should remain tightly bound to the pandemic. And it has warned against committing to the very expansionary monetary policy stance for too long, and has called for policy options to be kept open. For one thing is quite clear through all the uncertainty: the ECB Governing Council must act and must adapt its monetary policy stance where doing so is needed to safeguard price stability.’

‘As central banks, the most important capital we have is trust. People count on us to keep the value of money stable. In order to maintain this trust, it is vital for monetary policy to focus on the objective of price stability. That is why central banks need to preserve their independence and interpret their mandate narrowly. A narrow interpretation of the mandate is not at odds with a far-sighted approach to the challenges of our time. Quite the opposite is true: a stability-oriented monetary policy includes devoting more attention to climate-related matters, for example.’

Kazāks (Latvijas Banka):

11 January 2022

‘Covid is still there, ups and downs are still there. But it seems that it is gradually waning. We have the vaccine, and that will help us solve this problem.’

‘With all due respect that Covid is still around, but the economy is learning to live with it and the negative impact is smaller with every wave. And what I would say kind of, one of the issues that we have to address is exit from Covid-19, okay? What we’ve seen, we’ve seen quite an upswing in inflation, and that is an issue to be addressed, and of course we also see large debt levels. This will need to be discussed this year, and some of the fundamental changes will need to be built in so that we can look into the future.’

‘The [monetary policy] response has been massive and we have supported economies in euro area and European Union. But of course monetary policy is not designed and cannot and should not deal with all the problems. We have fiscal policies and structural policies. So it’s only one element of policy mix and our major task is price stability. So when we see economy rebounding, when we see that the negative effects of Covid are phasing out, of course we will start to reduce our support. And that means that fiscal and structural policies will become responsible for other elements in much more obvious way than it has been during the crisis.’

‘I think one major conclusion is that because of this common and very forceful response, we will see that those scarring effects are smaller than we were at the beginning afraid of.’

‘Why are there differences between the ECB’s and Fed’s policies? Because they are different stages of business cycle. … The US economy is much more mature in its business cycle, and that’s why the fed is reacting earlier, if I may say so, in terms of calendar, but not in terms of the business cycle. … You know, they are simply much more advanced in economic recovery. And do not doubt that ECB will react when we will see it necessary. In fact, the December decision already show that we have decided to stop PEPP pandemic programme, okay, at the end of this quarter. And so we are reducing support to the economy. But the business cycle is not that advanced for us to do it now. Okay? Different economies, different timing of policies. But when we will see that we are at our target of our medium-term 2%, then of course we will react accordingly. And, with the current dynamics of inflation, it seems that this is a very likely possibility that we will reach this target. That means that if our forecast, which we will have again in March, and June, if we will see it necessary, we will act. … monetary support has been very important for the economy to survive this crisis, but it will not go on forever. We will start reducing it. Rates will go up, and fiscal policy has to take note of that.’

‘We are flexible in our decisions, we are data-driven … and we can change our view at any monetary policy meeting, which takes place every six weeks.’

06 January 2022

‘Don’t be misguided that we won’t raise rates, or that we won’t cut the support if necessary. Of course we’ll do our job.’

‘…flexibility is the name of the game.’

‘We should take it step by step. We’ll have another forecast in March, we’ll have another in June, and then we’ll see more how things develop with inflation.’

Ending asset purchases by end-2022 and raising interest rates in early 2023 is a ‘possible scenario’, but the ECB should avoid ‘rocking the boat.’

‘We shouldn’t surprise the markets and catch markets unaware of what’s going on. The step-by-step approach is very important.’

Lane (ECB):

11 January 2022

‘In our December projections we assessed that inflation at the end of 2021, including in the month of December, was going to be high. But we also believe that inflation will fall this year, and that it will go below our 2% target in 2023 and 2024. This is driving our monetary policy assessment. We are looking beyond the inflation we have right now: monetary policy is based on the medium term.’

‘The 5% inflation number in December is unusually high. This is dominated by the fact that energy went up by 26% last year. The key issue for us as the central bank is: do we see changes in household and firm decisions? Do we see changes in wage behaviour? But we do not see behaviour that would suggest inflation will remain above our target into the medium term.’

‘…inflation will not only fall this year but will settle below our target in 2023 and 2024. The criteria for moving interest rates up are therefore not in place. This remains our view. As the year goes by, we will have more data and will continue to assess the situation.’

‘The data we have, make it quite unlikely that the criteria we set to raise interest rates will be fulfilled this year. Next year and the year after that, the same criteria will apply: these criteria are very clear and the market can study them. But let me focus on one element, we have a cross-check: to raise interest rates, we need to see sufficient progress in underlying inflation. The pandemic makes it more difficult to interpret indicators of underlying inflation. It will take some time to filter out the effects of the pandemic – base effects, supply bottlenecks and so on − and to have a proper assessment of what is going on with underlying inflation. We have highlighted on a regular basis that the central element in understanding underlying inflation is to find out what happens to the trend in wages. We will be looking at wage settlements throughout the year. Behind prices are costs, and the most important cost in the economy is wages. Labour costs are a big part of the overall price level, and labour costs tend to move on a more persistent and more gradual basis. Energy moves are abrupt, energy can go up and down in a volatile way. But a significant move in the persistent and underlying source of inflation is unlikely unless you see wages picking up quite a bit. Until now, the wage data do not indicate any major acceleration in underlying inflation.’

‘It is important to see foreign exchange as part of the pandemic cycle. In 2020 we had a euro appreciation. In recent months, some of that appreciation was reversed. Compared to pre-pandemic levels, we had an initial appreciation of the euro, and now a depreciation. It is not a major element. I would not overly focus on the exchange rate.’

‘There is a crystal-clear difference. In the United States and the United Kingdom, the assessment is that inflation will not stabilise at the target of around 2% unless there is a monetary policy tightening. The discussion about monetary tightening there depends on the assessment that inflation will remain above target: then monetary tightening is considered necessary. Our assessment for the euro area is different − inflation is expected not only to go back to the target but also to fall below the target − therefore our monetary policy reaction is different. This is the key issue.’

‘It is important to recognise the pervasive impact of the pandemic on inflation. Look at the three pandemic years, that is, 2020, 2021 and 2022. In 2020, we had low inflation or even disinflation. And this was one of the motivations for us to react with the pandemic emergency purchase programme (PEPP): inflation was too low. The ECB has a symmetric view: too high inflation and too low inflation are equally undesirable. In 2021, the world economy and the European economy recovered more quickly than expected. There was a fast recovery driven by vaccinations, demand was strong and supply could not keep up due to bottlenecks. In the initial stage of the pandemic, some countries reacted with special measures, such as the VAT cut in Germany, which drew up prices when it was reversed in 2021. We have a lot of special factors that are leading to unusually low inflation in 2020 and unusually high inflation in 2021. I see 2022 as a transition phase, gradually going out of the pandemic. The high pressure on inflation in 2021 will be fading this year, but 2022 is still part of the pandemic cycle. And when the pandemic is over, in 2023 and 2024, inflation will stabilise at a lower level, at about 1.8 per cent, which is much closer to our target compared to what we had before the pandemic. Inflation is not just going back to its pre-pandemic level. We have made progress by providing monetary policy support and fiscal support. The economic recovery in 2023 and 2024 in the euro area will bring inflation closer to our target.’

‘Bottlenecks are another temporary factor: if there is a shortfall in production today, it means there is going to be more production later on. The order book is very good. Overall, in Europe we see a solid growth engine this year, next year and the year after that. This applies also to Italy. First, there is the bounceback from the pandemic. Italy was hit very hard in 2020 and it had a strong recovery in 2021, even if some sectors, such as tourism and travel, are not back to normal. Next Generation EU (NGEU) is another engine for growth and Italy is amongst the primary recipients. This is where I see the difference between the pandemic and the great financial crisis: we now have medium-term growth engines − NGEU will last for several years. Moreover, this time the banking system provided support for the recovery. The banking system is stronger. Now, there is more support for the recovery.’

‘What is important is that we reiterate our flexibility when it is appropriate. And then we have the specific reminder that, as we move into the next phase in the recovery, we said we have a mechanism, PEPP reinvestments, by which we can deal with fragmentation risk.’

‘With the TLTROs, the decisions are driven by banks: so long as TLTRO funding is available, it is up to banks to decide whether to replace TLTROs with funding on the market. As for the ECB balance sheet, there is a clear sequence: net purchases stop before the first interest rate increase, and only well after the first increase in interest rates will the central bank think about shrinking its balance sheet. This principle is valid for all central banks, it is fairly universal. But the ECB is further away from increasing interest rates than some other central banks. So the debate on when to start shrinking our balance sheet is also further away; the shrinkage of our balance sheet is much more a topic for the future than for today.’

‘Investors, academics, they all know very well that in a world of low interest rates, rates eventually go up and there are implications for asset prices. Any bank, insurance company or pension fund will allow for this risk. Regulators and supervisors also think a lot about this. So it will not come as a surprise that at some point in time rates, short-term rates or long-term rates, will go up. But I also disagree that monetary policy has a significant surprise element. This is in contrast to major financial crisis episodes, for example what happened in September 2008, which came as a big surprise. It’s important for central banks to be clear, to be predictable. And I think we are very clear on interest rates and we are very predictable. The world can adapt to higher rates, and many institutions will already have allowed for this risk in their planning.’

07 January 2022

‘That [Eurostat flash estimate for December HICP] is broadly in line with what we expected. We’ve been clear, in recent weeks and months, that there is a peak of inflation at the end of 2021. And this number of 5% in December should be interpreted in the context of the pandemic. The pandemic in 2020, the first year, led to unusually low inflation. Some of that reversed in 2021. And now, in 2022, we have a third leg of this pandemic episode, where we do think this year inflation is going to come down. It’s going to be above where we want it to be in the long term, but this three-year period – 2020, 2021, 2022 – is basically part of a pandemic cycle in inflation. So in that sense, it should not be -- I think -- interpreted in terms of comparing to historical norms. The pandemic is a unique episode. Only a few weeks ago, in our December meeting, we looked at the prognosis for this year, for 2023, 2024, and our analysis is that inflation will be coming down in 2022. And in fact, we project inflation to be a little bit below our target in 2023 and 2024. So yes, when we hear numbers like 5% in December 2021, that sounds so strange, after a long period of low inflation, but again, to repeat we do think that the inflation pressures will be easing over the course of this year. And in fact, we think inflation in 2023 and 2024 will be a little bit below where we would like it to be in terms of our target.’

‘We always -- when we look at inflation -- recognise there are risks on both sides. There are risks that inflation could be above our forecasts, but also risks that inflation could be below our forecasts. So we have to look at both of those scenarios. So of course, there is a lot of attention to be paid to the scenario of inflation being above our forecast, And we will be monitoring the situation, and I think I've repeatedly said actually that the most important element of what we need to look at is what’s going to happen to wage behaviour over the course of this year.’

‘So, in the December numbers that came out this morning, energy prices, the whole energy category, rose by 26 per cent in 2021. Now let me also, of course, remind you that in 2020, energy prices fell. So a part of this is just a reversal. But the fact that energy prices have risen so much is a major concern. So let me generalise this point: of course, we have to think about it in terms of the inflation consequences, but the European economy is a major importer of energy. Collectively, Europe paying so much more for energy inputs is a major economic issue. Now the fact that prices have risen so much does mean -- compared to last year’s rate of increase -- there’s probably less upside this year. But there are factors we need to look at, with geopolitical issues among them, for sure. On the other hand, what we do think is: supply will shift, pressures should ease in the aggregate this year. In the oil market, we think supply pressures will ease. But as you indicated, the gas market is quite important for energy in Europe. And there are all sorts of different dynamics going on there. But I would remind you, of course that the supply responses are happening there as well, in terms of, for example, the shipping of liquefied natural gas around the world being redirected to Europe. So we will keep an eye on this. It’s a very important issue that’s much broader than the ECB issue. The fact that energy prices have gone up so much is a major economic policy issue in general.’

‘We do think [the December staff forecast] captures a lot of what is most likely to happen. And so, in terms of forecasts, it’s reflecting the most likely scenario. But … we will be paying attention to both upside risks and downside risks to that forecast. And the energy sector is a very prominent index. We’ve just had that discussion, that there are forces on either side in relation to energy inflation. But probably the most important message in this is: we have monthly data, as we’re talking about today. We will have new forecasts in March, in June, in September. So as the new data come in, whether it comes in stronger, exactly on track or weaker than we expected, the ECB will always be responding because we have a new strategy. And we’re crystal clear: that strategy is, we're intent on delivering inflation stabilised at 2% in the medium term. So anything that threatens inflation above 2% over the medium term we will be responding to. Equally, any force that threatens to push inflation below 2%, we will also respond to. So this is a very clear strategy. And that essentially will guide us.’

‘Right now, in our December forecast, we’re looking at 2022, we’re looking at 2023 and we’re looking at 2024. Now, why do we look at these three years? Because monetary policy essentially works over a 18 month / two-year horizon. So any monetary policy move we take today would mostly show up in the inflation data in 2023 and 2024. Less so in 2022, because inflation takes a while to respond to monetary policy. So “durably” means it would be essentially a mistake to respond to inflation that’s high in 2022 but below target in 2023 and 2024. And that is essentially the notion of durability: unless we think the inflation pressure is going to remain above 2% in 2023 and 2024, it would be a mistake to tighten policy in response to inflation that’s high right now.’

‘So moderately above target is a very important concept. And essentially what we need to look at is: is there any sign of today’s high inflation becoming embedded in expectations? Because, of course, if people expect the inflation rate of 3.2% in 2022 to persist in 2023, 2024 and beyond, then it may change pricing behaviour, wage behaviour in a self-fulfilling way. So that is really the criterion: are we seeing inflation, persistent inflation, being converted into actions, into new types of wage-setting behaviour, price-setting behaviour? And so, if inflation is temporarily above target, people understand it’s not going to last. That’s very different to if inflation – let’s say, the 3.2 number we have today. If that 3.2 number is expected to repeat, that would be a problem. But what we don’t see is evidence of that. What we see is not just our own forecast, but the behaviour of consumers, the behaviour of firms, the financial markets. All agree with us in the sense of believing that, more likely than not, inflation in 2023, 2024 will be below our target, not above our target.’

‘Yes, [that it is highly unlikely that interest rates change in 2022] remains the case. We went through this comprehensive assessment in December. And again, to repeat, we do think inflation in 2022 will be temporarily above our target. But we do think inflation is going to come down below our target in 2023 and 2024. We try to be super clear about the criteria we use in making interest rate decisions and, going over what we talked about, when we think the high inflation is not going to be durable, the case for altering our interest rate policy is not there. But, of course, let me repeat: we will have new data coming in all year long. And you can expect the ECB to be paying a lot of attention to all of that data. And again, it’s data about what’s happening this year. It’s also data about the future. I mean: are we seeing changes in labour markets? Are we seeing changes in energy markets, in goods markets? So it’s always two-sided. One focus is on what’s happening right now. The other one is trying to get a little bit of a crystal ball answer and work out: are there structural changes in the economy that might affect our views about the later years? But right now, going back to what I said earlier on, one of the big issues for us this year is: what’s happening in terms of wage behaviour. We do expect wages to pick up; that reflects – quite – the fact that the labour market has been more resilient in the pandemic, thanks of course to extensive government supports many labour markets. And if we have a stronger labour market in the coming years, then we should have stronger wage behaviours than before the pandemic. So, to some extent, that’s going to be what we want. But of course, we have to keep an eye out on whether wages will move beyond that and move into the kind of second-round effect, which would be something of a concern.’

Lagarde (ECB):

14 January 2022

‘Today, though the number of infections in Europe remains very high, we are moving out of the emergency phase of the pandemic.’

‘Today, we expect GDP to exceed its pre-pandemic level in the first quarter of this year. This difference owes much to Europe’s combined policy response. … This has laid the groundwork for a strong recovery – much stronger than we imagined even a year ago. But there is still a need for stabilising policy as we navigate our way out of the pandemic.’

‘The rapid reopening of the economy has led to steep rises in the prices of fuel, gas and electricity. It has also led to prices increasing for durable goods and some services, as demand outstrips constrained supply. Year-on-year inflation in the euro area reached 5% in December, with around half coming from energy prices. These same factors are in turn weighing on growth in the near term, which slowed at the end of last year. Higher energy prices are cutting into household incomes and denting confidence, while supply bottlenecks are leading to shortages in the manufacturing sector. We expect the drivers of inflation to ease over the course of this year. But we understand that rising prices are a concern for many people, and we take that concern very seriously. So let me reiterate that our commitment to price stability remains unwavering. We will take any measures necessary to ensure that we deliver on our inflation target of 2% over the medium term. That is why, at our last Governing Council meeting, we recalibrated our policy measures, allowing for a step-by-step reduction in the pace of our net asset purchases, moving gradually from around €80 billion per month to €20 billion per month over the course of 2022. We also ensured that we have the flexibility to respond to a range of circumstances. At the same time, we concluded that monetary accommodation is still needed for inflation to settle at 2% over the medium term.’

11 January 2022

‘We understand that rising prices are a concern for many people, and we take that concern very seriously. But people can trust that our commitment to price stability is unwavering, which is critical for the firm anchoring of inflation expectations and for confidence in the currency. The whole Governing Council is united in pursuit of this goal.’

16 December 2021

‘We did not want to have a transition that would be hurting, and we also need to continue this progress towards our target and arrive at target, which we are not at yet at this point, which is the reason why we decided to increase the volume of purchases under the APP, but to increase it with a decline over the course of quarter two, quarter three and quarter four. Now, we're not making any specific commitment, if you read carefully our statement. We land at €20 billion in October, and we keep it opened, and we will maintain it at €20 billion until such time when we arrive at our target, which is the 2% over the medium term.’

‘Given the uncertainty, we also wanted to have as much flexibility and as much optionalities available. Hence, the reason why on the account of PEPP we've decided to extend the reinvestment period at least by one year, and we've also, as I said in relation to PEPP, we've also decided to keep it open-ended. We are driven by data, and we will be reviewing next March, next June, next September, as we receive updated projections. We will reassess, and as it says very clearly in the statement as well, we will adjust in either direction depending on the data that we receive. But suffice at this point to indicate that, under the present circumstances, as I have said before, it is very unlikely that we will raise interest rates in the year 2022. That still stands. But we have to be very attentive to what data tells us, and we will do so at each and every monetary policy meeting, and even more so when we get regular projections that are either ECB only, or ECB and national central bank projections.’

‘…about the impact of omicron, again, we are venturing in the realm of uncertainty. It will have impact, but in the first place we should acknowledge that our economies have become more resilient, stronger, and are more capable of adjusting wave after wave after wave, and variant after variant. So we don't know yet a lot from the scientific world as to the actual hardship of this virus and how bad it is relative to delta, for instance. We are still waiting for this data and this information from those who know, but the economy is more resilient. So it might have a dampening impact on demand, because people will consume less; people will go around less; people will be under restrictions, but it might also have an impact on the supply side as well. The balance between the inflationary or deflationary impact that omicron will have is still totally uncertain, which is why, as I said, in view of this uncertainty, and with the strong recovery, we believe that it is the right place to gradually decline over the course of time, but keep flexibility and optionality in order to respond to change of circumstances.’

‘We had a very, very large majority to support the overall package. So there were a few members who did not agree with one or the other element of the package, and therefore did not support it all, but I can tell you that it was a very, very broad majority that supported the whole package.’

‘So in relation to our inflation projections for 2023 and 2024, which are at 1.8% respectively, a small 1.8%, and a slightly higher 1.8% for '24, we are really making progress towards target. Are we at target, given that our target is 2% over the medium-term, and looking at the three criteria of our forward guidance? Not quite. Is there an upside risk? There is possibly an upside risk, but I think that staff, in putting their projections together, have in particular anticipated some impact on wages. We are, as you know, looking very, very carefully into wages, into negotiations, to determine how much of a second-round effect there would be on inflation. When we look backward, when we look at what's happening just now, we don't see much of that, and the numbers are not telling us that we are seeing second-round effects and that wage negotiations have delivered or are about to deliver numbers that would actually lead to second-round effects. But in the projections that have been produced by staff, drawing on the NCBs, the national central bank projections as well, there is quite a high level of wages that has been taken into account. So yes, of course, there could be a stronger recovery. There could be stronger wages being delivered. This is really going to be a factor also of two things that we are uncertain about, as I have indicated. How will the price of energy evolve in the course of the next few quarters? Is it going to be as elevated, and more elevated – there has to be a dynamic – than what we have seen so far? It's probably going to stabilise, but there is a level of uncertainty about it, for certain. The same goes for the adjustment between supply and demand, but it is probably to be expected that consumption patterns will resume in more normal ways, and that there will not be that sort of catch-up demand that we have observed. In the same vein, it is reasonable to think that supply will adjust. So on those two accounts, energy is probably projected to stabilise; supply and demand will adjust, we believe, in the course of '22. And on the wage account, and how much of a second-round effect it would have, as I said, we are extremely attentive to what happens on a weekly basis, but what we are seeing now, certainly, is significantly below the levels that have been factored into the projections that we have. So we certainly hope that we reach our target in the medium-term, and the efforts that we are deploying are intended to that effect.’

‘…about PEPP. As I said, we want flexibility, we want optionality, and as part of the flexibility we say very clearly – and I'm going to read again that paragraph, which is important 'Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.' Pretty straightforward, but as always, it is going to be a decision by the Governing Council. So it's not something that will happen randomly, by the way; it will require a decision by the Governing Council on the recommendation of the Executive Board. We say 'net purchases', we don't say a particular amount, or emptying the balance of the envelope that we would have at the end of March. So it's clearly at the determination of the Governing Council, and depending on the circumstances.’

‘On TLTRO, as you know, it has provided ample liquidity at very attractive rates, and it has really been an incentive for banks to continue lending, and in the bank survey that we conduct on a regular basis, they are always indicating that TLTRO and TLTRO special conditions have been very effective in supporting the financing of the economies at enterprise and household levels. Clearly, as planned, and given the financing conditions that are available, we currently expect that the special conditions applicable under TLTRO IIIwill end in June 2022. This is really based on the currently favourable assessment of banks' funding and liquidity conditions, and the smooth banks-based transmission of our monetary policy. This does mean that the support transmitted through the TLTRO3 will end, because banks are going to continue to benefit from the attractive TLTRO III conditions. The first operation will only mature in September of '22, and the final one will mature in December '24. So banks are going to continue to benefit from those attractive conditions, unless they decide to elect for an early repayment, but otherwise, it will continue to be available. We will remain very attentive and we will monitor very carefully those favourable financing conditions going forward, in order to make sure that our monetary policy is transmitted properly throughout the banking system.’

Schnabel (ECB):

16 January 2022

‘[High inflation], of course, has to do with the pandemic. When these very strict lockdowns were lifted, the economy rebounded unexpectedly quickly. This means that the demand for goods rose very strongly and the companies were initially unable to keep up with their production. This led to supply bottlenecks and very sharp price increases, especially in the energy sector. And we assume that many of these factors will be reversed in the course of this year. And in addition, we have also taken the first steps to gradually reduce the expansionary monetary policy. And if there should be indications that inflation will indeed remain permanently high, then we would also raise interest rates in the future.’

14 January 2022

‘We view [current inflation rates] with some concern, as they are higher than we initially expected. And we fully understand many people’s worries about the drop in real wages and interest income – all the more so as people on lower incomes are hit particularly hard by higher inflation. We take that very seriously.’

‘Our decisions are based on a medium-term perspective covering around one to three years. We expect that inflation will fall significantly over the medium term. That is why we are not raising interest rates now, as some are calling for. Any measures we might take today will only have an effect with a lag. The current rate of inflation won’t be affected, only the future one. Most forecasts – our own and others − indicate that the surge in inflation caused by the pandemic will be followed by a marked decline. In our projections, medium-term inflation will even fall back below our target of 2%, even though we acknowledge that the projections are now subject to great uncertainty. That is why we should not raise interest rates prematurely, as that could potentially choke off the recovery. But we will act quickly and decisively if we conclude that inflation may settle above 2%. A precondition for raising interest rates is to end net asset purchases; and our December decision is a first step in this direction.’

The high cost of a policy mistake is ‘exactly why we don’t base our decisions solely on economic models but also conduct surveys about expectations among households and firms, for example. This enables us to cross-check the plausibility of the projections. And these surveys do indeed show upward risks with respect to inflation. We are aware that monetary policy bears a huge responsibility for people’s prosperity. But premature action by monetary policy would also come at a price: it could hold back the nascent recovery, and that would jeopardise jobs.’

‘I know that some people in Germany take this view [that the ECB’s inaction so far reflects its fear that the euro debt crisis might flare up again, first and foremost in Italy, and that stock markets might collapse], but it’s not the case. Our actions are guided solely by our price stability mandate. Public borrowing by individual countries has no bearing on the Governing Council’s decisions. How financial markets will respond to the exit from our expansionary monetary policy measures is obviously an aspect that we need to consider because it affects the financing conditions for households and firms. But that is an entirely different matter to keeping interest rates low purely to help certain countries repay their debt.’

‘…when calculated over a longer period, inflation has not increased as much as suggested by latest figures. If one compares prices today with prices two years ago, one sees that average annual inflation in Germany in December was just 2.5%, as prices actually fell in the first year of the pandemic.’

‘I know that particularly the rising energy costs are a severe problem for many people right now. One of the reasons why energy prices have risen so sharply is that economic activity picked up strongly after the easing of the strict lockdown measures. In turn, the demand for energy took off, and supply was not able to catch up quickly. This caused prices for raw materials to rise at a pace that took many by surprise. Monetary policy cannot reduce the price of oil or gas. Instead, we are asking ourselves whether second-round effects will result from the high energy prices. This would imply that other goods and services would also become more expensive and wages would start rising, which could lead to a more persistent increase in inflation.’

‘There are ongoing debates about the impact of the green transition on inflation. If it leads to higher inflation, monetary policy needs to react under certain circumstances. This is especially the case if higher inflation threatens to become entrenched in people’s expectations, or if the green transition triggers an economic boom that in turn leads to rising prices. The ECB is committed to price stability. The transition to a climate-neutral economy will require a change in relative prices, and the prime responsibility for this rests with the governments. The sooner we succeed in creating low-carbon alternatives, the smoother the transformation will be.’

08 January 2022

‘While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even have to keep rising if we are to meet the goals of the Paris climate agreement.’

‘Central banks … will have to assess whether the green transition poses risks to price stability and to which extent deviations from their inflation target due to a rise in the contribution from energy to headline inflation are tolerable and consistent with their price stability mandates. … there are instances in which central banks will need to break with the prevailing consensus that monetary policy should look through rising energy prices so as to secure price stability over the medium term.’

‘In our baseline scenario, the current energy shock is expected to fade over the projection horizon. The Eurosystem staff projections are based on gas and oil futures prices, which suggest that energy prices should decline measurably this year, thereby significantly contributing to the projected decline in HICP headline inflation over the medium term. Such technical assumptions, however, are surrounded by significant uncertainty. In the past, futures prices have often significantly under- or overpredicted energy price inflation. These risks are arguably even larger today. To see this, it is enough to look at the profile of the projected inflation path: the decline of headline inflation to levels below 2% at the end of the projection horizon hinges on the assumption, derived from futures curves, that in 2023 and 2024 energy is not expected to contribute to headline inflation. History suggests that such a profile would be unusual. Since 1999, energy has contributed, on average, 0.3 percentage points to annual headline inflation. Sensitivity analysis conducted by Eurosystem staff suggests that it is enough for oil prices to remain at November 2021 levels for HICP inflation in 2024 to reach our target. The scale of the energy transition, and the political determination behind it, implies that these estimates could be conservative. Potentially protracted supply and demand imbalances related to “transition fuels”, such as gas, as well as the fact that carbon prices are likely to rise further, and to extend to more economic sectors, mean that the contribution of energy and electricity prices to consumer price inflation could be above – rather than below – its historical norm in the medium term. The energy transition therefore poses measurable upside risks to our baseline projection of inflation over the medium term.’

‘The question, then, is: if energy inflation were to prove more persistent than currently anticipated under our baseline scenario, at what point could we no longer afford to look through such a shock? I see two scenarios where monetary policy would need to change course. The first would occur if we were to detect signs that inflation expectations have become deanchored. Consumer price expectations are particularly susceptible to changes in the prices of goods that we purchase frequently. Energy, and petrol in particular, are part of this basket of goods. Over the past year, consumer price expectations for the next 12 months have increased sharply. In October, when energy accounted for more than half of the rise in measured inflation, they reached the highest level since the euro was introduced in 1999 and have remained close to record highs since then. The experience of the 1970s, when rising energy prices triggered a harmful price-wage spiral, emphatically demonstrated that allowing inflation expectations to drift away from the target makes it significantly costlier to bring inflation back to target, both in terms of lost output and higher unemployment. So far, however, there are no signs of broader second-round effects. Wage growth and demands by unions remain comparatively moderate. But in an environment of large excess savings and protracted supply disruptions, the energy transition may lead to inflation remaining higher for longer, thereby potentially raising the risks of inflation expectations destabilising. In this case, monetary policy would need to respond to, rather than look through, higher inflation to preserve price stability over the medium term. The other scenario in which policy would require adjustment is if the nature of the shock were to change. … Rising oil prices due to stronger aggregate demand, for example, are associated with an increase in real economic activity, calling for a different monetary policy response than if oil prices were to rise in response to supply disruptions in the oil market. A carbon tax may share some of the characteristics of an adverse oil supply shock. Higher energy prices could weigh on economic activity and thereby put downward pressure on consumer price inflation in the medium term. In this case, monetary policy should “look through” temporary deviations of inflation from its target. But a carbon tax differs from an adverse oil supply shock in two fundamental ways. One is that the transformation of our economies through large-scale public and private investment programmes and the subsequent adoption of more efficient and greener technologies is expected to boost, rather than weigh on, economic growth and thereby support wages and aggregate demand. The second aspect is that, for an energy-importing economy such as the euro area, oil supply shocks are negative terms-of-trade shocks, raising inflation and transferring wealth abroad. But a carbon tax is ultimately a domestic levy that shifts financial resources from the private to the public sector. … An emerging strand of empirical evidence finds no robust negative effects of carbon taxes on GDP growth and employment. If anything, the evidence is consistent with a modest positive impact. As such, if the future path of energy prices threatens to push headline inflation above our target in the medium term, and if growth and demand prospects remain consistent with firm underlying price pressures, monetary policy needs to act to defend price stability.’

‘Monetary policy, for its part, cannot afford to look through energy price increases if they pose a risk to medium-term price stability. This could be the case if prospects of persistently rising energy prices contribute to a deanchoring of inflation expectations, or if underlying price pressures threaten to lift inflation above our 2% target as rising carbon prices and the associated shifts in economic activity boost rather than suppress growth, employment and aggregate demand over the medium term.’

22 December 2021

‘Uncertainty is very high, as it has been throughout the pandemic. In general, I think the recovery continues. But owing to the recent wave of infections and the new variant, we are seeing headwinds in the short term. Now we’re looking at a weaker fourth quarter and this is likely to spill over to the beginning of next year. However, we expect a stronger rebound thereafter, so activity essentially shifts over time. This has been a recurring pattern during the pandemic. Households in the euro area have accumulated considerable savings, which supports the recovery. Hence, we see the recovery as being delayed rather than derailed.’

‘All those factors [behind high inflation] are likely to either reverse or at least become less pronounced over the coming year. Take supply bottlenecks: we don’t know how quickly it will happen, but it’s clear that over time they will be resolved. Similarly, it’s highly unlikely that energy prices will continue to go up at the same speed. And lastly, base effects will disappear. We know that inflation is going to be elevated for a certain period of time, but also that it’s going to decline over the course of next year. We are less certain about how fast and how strong the decline will be.’

‘Most economists hadn’t expected the extent of the increase in inflation. That’s why we are increasingly relying on surveys of companies and households to better understand what is happening. Some companies are telling us they expect the supply chain bottlenecks to last into 2023. We are well aware of the uncertainty around our inflation projections. There is a risk to the upside. Another factor that plays a central role is wage developments. Current data point to moderate growth. However, we also learned from our survey among companies that they expect wage growth to pick up. It’s something we are monitoring very closely.’

‘One of the trickiest questions is whether the economy is undergoing some fundamental structural changes that are not yet reflected in the models. Are we going to go back to the disinflationary environment that we had before the pandemic? Or are we entering a new phase that may be characterised by inflationary rather than disinflationary shocks? Take climate change as an example. Previously, when oil prices were going up, shale oil producers quickly increased their levels of production, which put downward pressure on prices. That is not happening to the same degree now. This can probably be explained by the fact that, owing to the green transition, there is less incentive to invest in shale oil facilities. If that’s true, we are perhaps going to see stronger upward trends in oil prices in the future.’

[Whether we are entering a new normal] ‘remains to be seen. We should follow a risk management approach so that we can quickly respond should we see signs that inflation will stay more permanently at a level above our 2% target.’

‘We have taken an important step towards the normalisation of our monetary policy. This has to be a gradual process – it can’t happen all at once. If we responded too quickly, there would be a risk of choking the recovery by tightening financing conditions too abruptly. We are taking a step-by-step approach to normalisation, the pace of which can be adjusted to the incoming data. We need to retain optionality to make sure that we sustainably reach our 2% target.’

‘The reason why our policies have been accommodative for so long is that inflation was stubbornly low. Despite all the measures we have taken, it has been hard to get medium-term inflation back towards the 2% target. Over the past year, however, we have made substantial progress, and it seems we are on the right path to achieving our target in a more sustainable manner. This is a precondition for policy normalisation.’

‘Because the interest rates were already very low, we had to use new tools, which have proven highly effective. But the effectiveness of some instruments diminishes over time. We have already bought a lot of bonds, and the balance of the benefits and costs of additional bond purchases deteriorates as the economy gains ground. This is why we slow down purchases now. But given the prevailing uncertainties, this has to be gradual, also with a view to ensuring the smooth transmission of our policy across the entire euro area.’

‘I hope [it is possible to imagine a return to a normal monetary policy]. The developments over the past year give reason for cautious optimism. Before the pandemic, we were in an environment of relatively low growth and too low inflation for many years. But now we are seeing that inflation is picking up and inflation expectations are realigning with our target of 2%. This is precisely what can help us get out of the low growth, low inflation environment and back to a more normal world.’

Visco (Banca d’Italia):

30 December 2021

‘Prices have been affected by the transient nature of factors such as freight and transport costs, which have risen sharply due to global supply bottlenecks. When the rise in energy prices - which has cyclical, structural and geopolitical causes - ends and when in Germany, for example, the effect of the VAT increase wears off, core inflation will return to the levels expected in the last exercise we conducted in the Eurosystem. After average increases of 3% next year, but gradually decelerating, then we will have prices growing just under 2%, so close to our target.’

‘There will be a reduction in the pace of securities purchases in the course of 2022, but these will not stop before the end of the year; therefore, the so-called "tapering" will not be completed until 2023 and very favourable financing conditions for the economy will continue to be maintained. We have also stated that the increase in official rates, which are negative, will take place later. The reason for this is precisely related to our inflation forecasts and the factors that we believe will prevail in the coming years.’

‘There is divergence in the Governing Council. The forecasts that we will fall below 2% in 2023-24 are obviously subject to both downside and upside risks. According to some of my colleagues, the latter may be prevalent. But we need to think about at least two of the underlying factors: one energy, the other related to company margins and wage growth. Now, on the latter, we have an assumption of 3% growth every year for the next three years. Let us remember that in the United States wages are rising by 4% and in Europe we are below 2%, as has been the case for the past twenty years.’

‘On oil prices, futures indicate that they are still high, but already down from their November highs. Gas is a different matter, because there is a very important geopolitical component. The high price levels of fossil energy cannot be compensated for by a reduction for everyone, because we are in a phase of ecological and energy transition. Moving towards renewables may lead to higher relative prices. Excessive costs for some categories, or for some areas of the Eurozone, can be compensated for by fiscal measures. The ECB's Governing Council will have to ask itself in depth about the relationship between relative prices and absolute inflation.’

‘At the moment, we do not see any second-round effects from energy prices prices - to which above all we owe the rise in inflation - on wages and margins, so I remain basically calm. I think the risks are balanced and not asymmetrical to the upside. In any case, we are all extraordinarily careful to check month by month what the determinants of inflation are, how they move: labour market, demand, wages.’

Knot (Dutch National Bank):

30 December 2021

‘I would say that new virus variants will indeed increase the current problems rather than slow down inflation. After all, the demand for products and services remains largely unchanged while there are problems on the supply side. Then you can get more inflation. Still, I think it is almost certain that price increases will ease next year. Many underlying factors in Europe are really temporary, like the one-time German VAT increase last January. That will no longer play a role in the inflation rate from next month. Also, energy prices, such as gas and oil, will have to continue to rise very sharply if they are to continue to push up inflation next year. I do take a slightly different view from some others in Frankfurt. The central bank published an estimate in mid-December that inflation would return to 1.8% after the end of next year. Personally, I think it is just as likely that we will remain above 2%. Not far above 2%, but still. It was my input to the ECB meeting on 16 December. It could indeed [be higher because of Omicron], but for now I'm assuming that Omicron has little effect on inflation. And if we do end up higher? Then we will have to accelerate the exit from this loose monetary policy. In any case, all the switches are already set to end the remaining purchase programme at the end of next year. And once that winding down is complete, the policy rate could go up in early 2023.’

As to whether other Council members have this time frame in mind, ‘that remains to be seen, but I think so. A lot depends on how the economy develops next year - a year is a very long time.’

‘Look, monetary policy always creates division. An interest rate increase is always good for savers, bad for borrowers. When interest rates are lowered, it works the other way round. But extreme policies, such as those implemented over the past seven years, have more extreme distributional effects. To the extent that we at the ECB have contributed to low interest rates, we have contributed to the division in the housing market. So to the fact that mostly young people can't afford a house because prices have risen so much due to the low interest rates. But also to the generation conflicts in the pension world, where young people are now pitted against old people. Extreme stimulus policies work by driving up the prices of assets such as shares or real estate. And who owns that property in the first place? It is people at the top of society. That is how you get wealth inequality. So I want to make it clear that I am aware of these kinds of consequences of our policy.’

30 December 2021

‘What is clear is that the start of 2022 will also be dominated by the pandemic and by elevated uncertainty. I am concerned about the health situation. But our economies have learned to cope better with each new covid shock. With each new wave the economic damage has been less severe than with the previous one. The Delta variant did not even lead to a recession again. Omicron may slow and delay the economic recovery, but it will not derail it. And for us as the ECB, what Omicron means for inflation is even more important. The likelihood that Omicron will increase inflation is at least as high as the likelihood that the variant will reduce inflation. So our monetary policy response will have to be quite different from the first wave in March 2020.’

‘Omicron is not yet reflected in the ECB staff projections. But we already discussed possible downside risks to economic activity from Omicron at the meeting. The information since then has confirmed this development. Omicron will dampen growth at least in the first quarter. But in earlier phases of the pandemic, declines in GDP have been quickly offset in the following quarter. People are also continuing to spend money, albeit less on services and more on goods and housing. That should contain its impact on growth.’

‘Inflation can go either way because of Omicron. Further supply bottlenecks would be inflationary. Temporary declines in aggregate demand would initially put downward pressure on inflation. We have to monitor and remain vigilant. In any case, the situation is fundamentally different than in March 2020, when it was clear that strong demand effects would precede any supply effects. This is what happened, but the intensity of inflation has undoubtedly taken us by surprise.’

‘But if you look at the composition of inflation now, we are confident that inflation will ease in 2022. For some factors it is certain that they will fall out of the statistics after twelve months. … Moreover, another good part of current inflation is driven by bottlenecks in international deliveries, which are also temporary by nature - even if it is unclear how long this will last. Opinions differ, however, as to whether we will end up with an inflation rate below 2%, as the ECB staff projections suggest. It only takes a decline that is a bit less pronounced for us to remain above 2%.’

‘I am one of those who are not entirely convinced that inflation will fall below 2% again. In that sense, the December meeting was a turning point for me. These were the first projections on the basis of which we could no longer confidently say that medium-term inflation will indeed fall below 2%. Medium-term inflation projections have not always been very accurate. Especially in times of structural changes, models are of limited use.’

‘…it is safe to say we are very, very close to “mission accomplished”. The risks to inflation are clearly tilted to the upside, and I believe our forward guidance no longer has to be an obstacle for us to raise rates if we wanted to.’

‘We have spent eight years performing a kind of rain dance for more inflation. Now we suddenly have more inflation. But uncertainty remains high. That makes me a little cautious to cry victory. There is too much uncertainty to respond head over heels now. Uncertainty calls for gradualism. That is why I supported the decisions in mid-December. I am comfortable with a scenario where we use 2022 to gradually unwind bond purchases. We will reduce the purchases from €80 billion a month to €20 billion from October 2022. €20 billion creates the option for us to end the net purchases in one step at any time. This would leave our hands completely free in 2023. But if inflation continues to surprise on the upside also into 2022, we can end the bond purchases sooner and move market expectations of the first rate hike further forward.’

‘I perceive the negative side effects to be larger with prolonged bond purchases. Their impact on housing market access, old-age retirement schemes, and wealth inequality can also undermine social cohesion which I find increasingly worrisome. Such factors should also find their way into our enhanced proportionality assessment, suggesting they should be ended first. Additionally, we should not unduly flatten the slope of the yield curve. Maturity transformation is an essential financial service that warrants an appropriate return. So there are good arguments for the current sequencing.’

‘Flexibility is our most important tool to counter fragmentation. And for me, avoiding fragmentation is a necessary precondition for monetary policy normalisation. Preparing for gradual monetary policy normalisation is appropriate now. But it will not succeed if accompanied by recurrent bouts of turbulence in bond markets.’

‘We have ruled out yield curve control. We are now taking our foot off the “gaspedal” and for me it is crystal clear that the general level of euro area bond yields will gradually rise. That is also desirable in view of the inflation trend. But we must avoid an excessive widening of interest rate spreads that would have a differential impact on different parts of the euro area. The governments will have to adapt to the new reality. And as long as borrowing costs rise gradually, governments should also be able to adjust.’

‘We have so far ruled out a rate hike based on the current outlook. If new data change something about the outlook, we can react at any time. We meet every six weeks, and every six weeks we can adjust our language, which would have an immediate impact on market expectations for lift-off. My baseline still excludes 2022 but not 2023.’

‘Materialization of upside risks to inflation might require a more rapid turnaround. If we want a gradual and smooth exit, it is therefore even more important that we start early. The last thing you want in such a situation is to fall behind the curve. Once you fall behind the curve, it takes an abrupt, shock-wise correction to get back ahead of it. We must not fall behind the curve under any circumstances.’

‘Our job is to ensure that high inflation does not become entrenched through second-round effects. And we will do what is needed to prevent that. There should not be the slightest doubt about that.’

‘We stand ready to adjust our instruments in either direction. And the risks to inflation are clearly on the upside. The combination of these two observations suggest that future policy tightening is more likely than renewed easing.’

Holzmann (Austrian National Bank):

30 December 2021

‘We have a very clear mandate as a central bank and that is to maintain price stability. If, as a result of a pandemic-related economic wave-like sequence of crises and recoveries, inflation settles in well above our target of 2%, then we have to act - and we have acted. Starting with the decision on the ECB's first new monetary policy strategy in 18 years, to the decision to phase out the pandemic emergency purchase programme (PEPP) and initiate a gradual move away from negative interest rates, we have responded to the new realities in a correspondingly timely manner.’

‘The decisive factor in the new year will be to gradually phase out negative interest rates and unconventional monetary policy and to avoid any proximity to monetary state financing.’

‘2021 was a difficult year with numerous challenges, whether of an economic, monetary or socio-political nature. But I think, looking back, this year is like a glass of water half full. I can say the glass is half full or half empty, depending on whether I am an optimist or a pessimist. Personally, I am an optimist at this point.’

‘Even though this year has been anything but easy, I remain an optimist. We are watching the developments very closely. That is important, because with shorter event cycles, it is only possible to drive by sight. The greatest strength of monetary policy - its ability to act very quickly and adjust to new circumstances in a very short time - is especially in demand now and in the coming months.’

22 December 2021

‘If we see that ... in the inflation rates that have been realised, the decline is not as ... expected ... then in a sense the alarm bells are ringing, and what could be done then? We in the Council can always reduce or halt the purchases that are still outstanding in the APP. And if that happens, it will be a price signal to the markets, because we have decided that interest rates will only be raised after the purchases have been suspended or stopped. That means that in an extreme case it would be possible that this year [2022] … data-driven, purchases would be suspended … and even, if one wants, at the end of the year or beginning of next year, the interest rate hike would take place, roughly at the same time as the third interest rate hike in the US. We are always a bit later.’

‘As always, forward guidance is supposed to guide the financial markets, but it is not something that is an ironclad law. But normally if we say we don't need any more purchases now because our inflation target in ‘23 and ‘24 is already at or above 2%, then that would certainly be a strong signal that also the interest rate will rise in the ... following two quarters. If, and we don't expect this, but just to give an example, inflation were to rise … extremely, i.e. with second- and third- round effects, then one could also imagine that what I have already brought up in discussion, that in this case one could well imagine raising interest rates beforehand and not waiting until the purchases are phased out, so as not to upset the markets. That got some, but not a lot of support in the Council ... but ... things are flexible and so I think in an extreme case there could be the flexibility as the case may be, but it's not very likely.’

‘On the question of inflation target achieved, 1.8% is not particularly distinguishable from 2% over a distance of one or two years, which leads to a different assessment of whether it has been achieved or not. The ECB has ... tried to show here that we arrive at below 2. There were indeed a number of people who said, yes, I think we have already reached 2%, or the difference is not so big that it should not be articulated like that. It has some influence on the policy, but not a significant one, and yes, there were differences, and I don't give any information about my voting behaviour at the meeting.’

‘… the supply chain disruption was more severe and longer lasting, and again, the economic as well as technical explanation is surprisingly not so clear. ... And in both areas we are now assuming, yes, gas price increases will still be there at the beginning of ‘22 due to ... the delayed pass-through to consumers ... And in the supply chains there is ... no significant reason at the moment ... why this should continue. And that explains why the development is assessed that way. What is certainly the case, however, where there are differences in assessment, is the question of the upside risk, where some of the Council colleagues also believe that the upside risk is higher than is perhaps assumed and that we should therefore be very attentive, very vigilant, and perhaps ready to act if this development occurs.’

‘The single greatest source of uncertainty ‘is probably something that is not really built into this forecast, if you will, it’s the security policy and global economic discussion, because if that happens, there could be a very, very large reduction in the economic area … And on the price side, what we can't really estimate yet, despite all the close scrutiny of the data ... is the question of second- and third-round effects. ... So far the wage development is such that we have no surprises … but it would be possible. And the second aspect is on the pricing side of the companies. Currently it doesn't look like companies are taking extreme advantage of that, but that could still happen. That could trigger second- and third-round effects ... and that would then cause higher inflation values.’

18 December 2021

‘What is assumed, however, is that after peaking at the end of 2021, inflation will decline steadily in 2022.’

‘As long as the projected inflation rate is below 2%, further monetary policy measures are needed. But, what we have done ... we have already made substantial restrictions in the purchase programmes in Thursday's decision.’

‘There will be interest on savings accounts again when inflation is at a level that is our target variable. Then it will be possible to raise interest rates here again.’

‘But I can assure you that if there are differences in the voting behaviour, there are not big gaps here, but rather nuances that play a role, for example in the assessment of where inflation lies at the end of the planning horizon.’

There are indications that there is a risk that inflation will be higher. But one will be able to check this assessment very, very quickly when one sees next year what the inflation realisation is. If there is not this sharp decline that is being talked about at the moment, then everyone, including other colleagues, will certainly also revise their views, and we will of course change our monetary policy orientation.’

‘Inflation, as it is forecast, will move towards 2%. Whether it comes below 2% in the final forecast, or above, will determine which measures of monetary policy are adjusted. All of us in the Governing Council are ready to put measures in place if inflation should increase, if the inflation forecast should increase, then existing measures that are still in place can be reduced, suspended, and then there will also be an increase in interest rates again.’

‘If things change, if there are higher inflation forecasts, then we will do what we promised when the purchase programmes expire. Only then will there be an interest rate hike.’

If inflation were to go to 3% beyond next year, that would ‘absolutely’ be a reason to act and raise the policy rate.

‘We are aware that this fiscal dominance is an issue that concerns us all. However, I cannot see this dominance from the decisions we have taken so far, also because there are enough people in the Council who are quite aware of the issue and would also correspondingly demand counteraction and would also articulate themselves accordingly.’

‘I think it was a very balanced decision overall [on Thursday], with comments in both directions.’

‘Our assessment, which is also reflected in the forecasts, is that we expect a weakening of the upswing, i.e. that the economic development will not be as good, but that despite everything the recovery will be very strong and that we will already reach the level of 2019 again at the beginning of 2022, and that the economic development will continue to be above 4% for the year.’

Centeno (Banco de Portugal):

16 January 2022

‘We have defined an inflation target of 2%, which it is permitted to exceed as long as it is at 2% over the two-year horizon. This is the current situation. This increase may not be so temporary, like the crisis, which makes it difficult to define what is temporary if we measure it in quarters or years. But, from a monetary policy point of view, this is solved because it has a defined horizon. If inflation in two years' time is below 2%, we don't have to react in advance to that increase. This is not to say that we do not want a normalisation of monetary policy, but to ensure that the conditions have been created so that the stimulus of the asset purchase programmes can be reduced and that in a subsequent phase there will be interest rate hikes. Rates close to zero are not comfortable either for monetary policy or for the functioning of the economy…’

‘In 2021 we gave a prominent role to the climate issue and green finance in the monetary policy strategy. The ECB cannot be absent from this debate. It is foreseeable that the price of fossil fuels will rise and then stabilise, but also that they will be replaced by new technologies that will have the opposite effect on the price structure. The ECB must know how to read these transitions and maintain a less warlike and hawkish attitude towards the necessities of the European economy.’

28 December 2021

‘We are taking the signs of the inflation rate very seriously, but we are also aware that many of the factors that justify this price increase are associated with the pandemic’, he said. ‘Therefore, we have to wait and be patient, central banks are one of the few economic agents that can be very patient to allow the whole pandemic process to stabilise and normalise the economy. But we are not going to do it idly and, therefore, we are going to adapt the pace of purchases [of debt] to the new reality’, he continued. ‘We already did this at the December meeting and we will continue to do so. All institutions have an inverted U-shaped inflation forecast, peaking in late 2021 and early 2022, with a more or less slow deceleration throughout 2022. We will have time to react.’

Rehn (Bank of Finland):

22 December 2021

‘A different situation applies when the worst phase of the pandemic’s economic effects is over. Central banks’ monetary policies can begin to be gradually normalised as the economy recovers and the inflation outlook changes.’

‘The changing state of the economy and the factors pulling it in different directions should now be taken into account in economic policy. The pandemic is not yet over, and the road ahead could be very bumpy. Moreover, the effects of the COVID-19 crisis are still being felt strongly across the economy, and this includes rising inflation.’

‘In the euro area, faster inflation than in recent years also looks set to continue longer than previously forecast, although many of the factors driving inflation are by their nature transitory.’

‘The price of energy could stay high for a prolonged period, and the production bottlenecks will not disappear overnight. However, by themselves they will not lead to a prolonged rise in inflation, unless they cause significant second-round effects and a wage-price spiral. Wage inflation in the euro area has so far been moderate. However, in the current exceptional circumstances, inflation forecasts are attended by a large measure of uncertainty.’

‘If inflation threatens to climb too high, the ECB’s monetary policy will work to prevent this by reducing the purchase programmes and refinancing operations as well as by raising policy interest rates. This is how an independent central bank that has been set the primary objective of price stability operates.’

17 December 2021

‘There is considerable uncertainty about the path which inflation will take, and I’m well aware that rising inflation feeds through to our everyday lives. The factors that have been driving inflation this year will not themselves lead to a longer term upsurge in inflation, unless they are accompanied by second-round effects and a wage-price spiral.’

‘Bringing the pandemic under control remains central both in terms of people’s health and for the economy.’

Müller (Eesti Pank):

21 December 2021

‘… looking ahead, it is difficult to imagine that this rate of increase in energy prices will continue and that, as a consequence, energy price inflation will start to fall over the next year’, he continued. ‘Of course, the fact that price growth is slowing down does not mean that price levels will fall sharply - we are talking about a slowdown in growth. However, it would be logical that energy prices will come down from today's peaks.’

17 December 2021

‘The outlook as a whole is optimistic: the economy is recovering rapidly from the crisis, unemployment is falling to an all-time low and people's incomes are rising. At the same time, the sharp rise in prices in recent months has come as an unpleasant surprise to everyone, and it is also forcing euro area central bankers to adjust their plans. … Almost half of the rapid rise in prices is due to higher energy prices, but the prices of more and more other goods and services are also rising. It is clear that such a rapid rise in energy prices will not last long, which is why we are expected to be close to the moment when the general rise in prices will start to slow down again. It is also reasonable to assume that as the effects of the pandemic mitigate and companies adjust, supply problems will decrease, which has pushed up the prices of many goods.’

‘… the longer the price increase remains relatively fast, the more likely it is that it will be passed on to more and more goods and services. Therefore, the Governing Council of the European Central Bank cannot ignore the accelerated rise in prices, even if a slowdown is expected in the near future.’

‘The changed inflation outlook requires a change in the monetary policy stance. Understandably, however, this is being done with caution, as uncertainty about near-term economic developments remains high.’

‘For me, what is important is the change of tone in the messages of the Governing Council. The acceleration in price increases and the improvement in the economic situation will allow the central bank to reduce the injection of money into the economy and to clearly set a course of "normalisation" of central bank policy. This is already reflected in financial market expectations that the ECB could start raising interest rates in early 2023. In the Governing Council's decisions, we are no longer just concerned about a slowdown in economic growth and dangerously low price rises in the long run, but are also prepared to react to the possibility that the pace of price growth in the euro area may not slow back to 2% fast enough. In that case, we are also prepared to tighten monetary policy more rapidly than described above.’

de Guindos (ECB):

13 January 2022

‘Inflation is not going to be as transitory as forecast only some months ago. The assessment of risk for inflation is moderately tilted to the upside over the next 12 months. And the reasons are quite simple. First, supply side bottlenecks are going to be there and are more persistent than we and many expected in the past. And energy costs are going to remain quite elevated.’

20 December 2021

‘Uncertainty in the economy weighs heavily. Before the South African variant emerged, we already had a major rebound of infections in Central Europe. That immediately created elements of uncertainty and obscurity. That said, we have to bear in mind that in Europe in 2020-2021 the recovery has been intense, it is going to be more than 5%. The second and third quarters saw very strong growth. And although in the fourth quarter we lost a little bit of activity, it continues to be an expansive quarter. The recovery is there, we have moderately downgraded our forecasts for 2022 for the euro area. But for example, at the beginning of next year we will reach the level of income we had at the beginning of the pandemic.’

‘Although inflation is a global phenomenon, we cannot compare what is happening in Europe with what is happening in the United States or the United Kingdom. Inflation in the US is higher than in Europe. It has a much more expansionary fiscal policy than ours. And let's not forget that their unemployment rate is 4%. They are in a different position to us and they have been taking measures according to those circumstances which are not ours. Our inflation is being more persistent, not as transitory as we had projected. It has to do with factors such as delays in the logistics sector, bottlenecks in the supply of intermediate goods. All of that together with demand growing strongly, has led to inflation that is not as transitory as we had expected. We project inflation to be above 3.2% in the first half of next year. And it will start to fall and be below 2% by the end of next year. These are projections in an environment of enormous uncertainty.’

‘We set up an emergency programme to deal with the pandemic. This programme was due to end in March next year. We have ratified that termination and thereafter we will continue with a procurement programme which is our normal programme. It is very important to bear in mind that this emergency programme was for exceptional circumstances. The volume of purchases has been to avoid a financial crisis that would accumulate to the economic and health crises. That has been achieved. Interest rates for all economic agents have been kept at very low levels and a tightening of financial conditions that would have led to a debt crisis that would have overlapped with the economic and health crisis has been avoided.’

‘The ECB's debt purchases have injected liquidity and avoided a rise in interest rates and a breakdown in the financial markets. It has been an intervention that has allowed vulnerable countries such as Spain, with very high public debt ratios, not to have to worry too much about what was happening with interest rates or what was happening with the famous risk premiums. At the moment the Spanish 10-year bond is paying an interest rate below 0.40. This has allowed all economic agents to benefit from the financing conditions. It has not only been governments, but also companies and families. The intervention of Europe and the ECB has been crucial for countries in the aftermath of a brutal health and economic crisis.’

‘What I can tell you is that beyond the variant there are several issues. First of all, the percentage of the European population that is vaccinated is much higher. I have experienced it, the effect of infection when you are vaccinated is much more limited. Secondly, governments have been learning, the measures that are being taken are no longer so generalised, they are much more surgical. Avoiding the spread of the pandemic by minimising the economic impact. Thirdly, economic agents have learned to live with this new situation. The market economy is learning from these environments.’

Wunsch (National Bank of Belgium):

17 December 2021

‘There’s a lot of uncertainty about 2023 and 2024, but my take is that we’re essentially at target. Whether you’re at target or just a little bit below or a little bit above doesn’t matter so much. What I’m a bit concerned about is the fact that we’d insist so much on still being below target.’

On faster tapering, ‘that’s to me not the big issue. The big issue for me is the narrative that doesn’t recognize enough that there seems to be an inflation issue in the world and we seem to see it very differently.’

‘We used to have low inflation rates and we were expecting to converge to the target. But today is very different. Now we’re clearly above target. We have an average inflation over four years that’s clearly above 2%.’

‘If we don’t believe that we’re going to have any kind of second-round effects, if we don’t believe our monetary policy is effective, at some point, we’re going to have a problem. Because otherwise we’re in a situation where we’re never going to exit.’

Vasle (Banka Slovenije):

17 December 2021

‘Inflation will remain elevated in the coming year and will converge towards the 2% target by the end of the forecast horizon.’

‘Risks to the economic outlook are high and evenly distributed, depending mainly on energy price developments and conditions in the supply chains.’

‘The reinvestment of the maturing principal of the PEPP securities has been extended by one year and will continue at least until the end of 2024, thus ensuring all the necessary flexibility of the programme to address the fragmentation in the euro area linked to the effects of the pandemic. We are also ready to resume net purchases after the PEPP ends in March 2022, should this be necessary to address negative shocks linked to the pandemic.’

‘We expect that the period of significantly more accommodative TLTRO III conditions will come to an end in June next year. We will also consider the appropriateness of calibrating the two-tier interest rate on surplus reserves.’

‘Our decisions were also based on new forecasts. Their key message is that the economic impact of the pandemic in the euro area is diminishing, so that we expect high economic growth and very favourable labour market conditions this year and next.’

Stournaras (Bank of Greece):

10 December 2021

‘… progress in vaccinations is a major deterrent to the transmission of the pandemic and has contributed to the lifting of social distancing measures and the restart of the economy. However, we cannot yet say for sure that we have turned the page. The risk of serious mutations, such as the 'Omicron' we are currently facing, remains high and may lead to new waves of the pandemic, with serious repercussions for society, but also for the global economy, including the euro area. Under no circumstances should we be complacent. All relevant bodies need to be vigilant for the effective management of the consequences of the pandemic. It is essential that they continue to take steps to restore economic prosperity and promote social cohesion for all euro area citizens.’

PEPP ‘net monthly purchases will last at least until March 2022 and in any case until we judge that the pandemic crisis is over. It is considered very effective in containing the rise, due to high uncertainty, in government bond yields and the divergences between them. At the same time, the smooth functioning of the monetary policy transmission mechanism is ensured in all euro area countries. The effectiveness of the programme is mainly due to the pioneering flexibility in the composition of the Eurosystem's securities markets.’

‘… in the discussions on the strategy it was considered appropriate to build on the lessons learned from previous crises and to recognise the effectiveness of direct and meaningful monetary intervention through less conventional tools. That is why the recast of the strategy states that, in recognition of the policy interest rate threshold, the Governing Council will use these tools on a case-by-case basis, will continue to respond flexibly to new challenges and will consider new policy instruments when necessary.’

‘For macroeconomic stabilisation to be successful, monetary policy needs to continue to be complemented by targeted and coordinated fiscal measures.’

Scicluna (Central Bank of Malta):

03 December 2021

‘In the international financial markets there is no consensus whether the current inflation is transitory and that it will retreat to levels below Central Bank inflation objectives over the medium term or not. In any case, at the ECB, it is fair to say that the jury is still out. Within a fortnight at the Governing Council we should have a clearer picture of the outlook and the appropriate monetary policy decision is then taken.’

Panetta (ECB):

24 November 2021

‘[S]o long as higher short-run inflation does not feed into inflation expectations and wage and price-setting in a destabilising way, monetary policy should remain patient. We should not exacerbate the risk of supply shocks morphing into a demand shock and threatening the recovery by prematurely tightening monetary policy – or by passively tolerating an undesirable tightening in financing conditions. We should remain focused on completing the recovery, returning GDP to its pre-crisis trend, as the condition for achieving self-sustained inflation at our target in the medium term. To this end, we should keep using all of our instruments for as long as warranted, with the necessary flexibility to support the transmission of our policy stance throughout the euro area on its uncertain path out of the pandemic.’

‘The downside risks to economic activity may be growing. We should monitor the risk that a long-lasting negative supply shock prevents the economy from reaching full capacity. Globally, supply bottlenecks now appear to be slowing the recovery. That drag is affecting forward-looking indicators of activity in the euro area, which are plateauing and in some cases already pointing downwards. It may soon become visible in actual GDP growth. Supply-side disruptions and the uncertainty regarding the economic outlook also look to be weighing on the already unsatisfactory recovery in investment in major economies. In parallel, the rise in energy prices will likely pull back demand in the euro area: a 10% rise in oil prices typically reduces consumption by 0.28% over three years, and oil prices have risen by around 60% in 2021. Since energy demand has a low price elasticity, this could spill over into lower spending on non-essential services. In addition, rising energy prices may have important effects on firms’ employment decisions.’

‘[W]e should not forget that, regrettably, another major wave of infections is under way in the euro area, triggering renewed restrictions, some already introduced, with others potentially on the way. This could weigh on economic activity and, in particular, consumer confidence, further holding back wage demands.’

‘So, if the sources of higher inflation today do last longer, there is little or no evidence at this stage to suggest that they would feed into wage-price spirals or a de-anchoring of inflation expectations in the euro area. There are, instead, signs that they could weaken the recovery and reduce underlying inflation pressures. And we should not forget that in the last decade insufficient domestic demand growth in the euro area resulted in inflation that was persistently below our aim and in the accumulation of a price level gap that remains significant.’

‘All in all, on the basis of the available information, there seems to be little chance of sustained inflation above 2% in the medium term.’

‘[T]he surge in the number of infections and the renewed introduction of pandemic-related restrictions in some euro area countries mean that the pandemic is not over yet. … an inappropriate, sharp reduction of purchases would be tantamount to a tightening of the policy stance. Net asset purchases … need to be calibrated to help ensure we reach our target, avoiding an undesirable, premature increase in long-term interest rates. … so that we can continue to transmit our policy impulses across the entire euro area, the flexibility that has served us well in past months should become an integral element of our asset purchases. This will enable us to act – if necessary – in an environment where the exit from the pandemic may have asymmetric effects. We should not tolerate any financial fragmentation which could impede the transmission of monetary policy throughout the euro area.’

Makhlouf (Central Bank of Ireland):

23 November 2021

Policy tightening while the recovery is still ‘highly uncertain and incomplete … could prove more costly than the risks stemming from the current spike in inflation’ and ‘could slow economic growth unnecessarily, which could prevent inflation reaching our target in a sustainable manner.’

‘[T]he judgement that an immediate monetary policy response is not warranted – that patience is an important and worthwhile virtue – is reasonable and in the present circumstances correct’, but there are also ‘risks to the inflation outlook.’

‘If current trends in inflation persist, the case for monetary policy action becomes stronger. Incoming data do not currently show evidence that would lead us to think that inflation pressures are becoming persistent, but this could evolve and we must remain vigilant and cognisant of the risks.’

Monetary policy must be data-driven and ‘prepared to respond if the evidence starts to point to a need for this earlier than we had expected. When the evidence changes, we should not hesitate to change our approach.’

‘And in the wake of the remarkable levels of uncertainty, we should also maintain optionality in our policy tools and not locking ourselves into commitments that put our price stability objective at risk.’

Forecasts are subject to ‘a remarkable level of additional uncertainty and complexity’, but ‘[o]ur judgement today is that we expect the global drivers of current inflation to recede gradually during 2022.’

Wage-price spirals of the past are ‘a world we do not want to return to and I do not expect us to do so … In addition, higher inflation rates today should be viewed in the context of a prolonged period of too-low inflation in the euro area. … Recent data for the euro area does not suggest, at least thus far, that higher inflation in 2021 is feeding into broad-based higher wage demands, although the upheaval in the labour market makes it more challenging than ever to extract timely and accurate insights from the data.’