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

4 February 2022

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

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. Updates are made on a periodic basis.

The current version supersedes that published on January 26 and includes comments from (names in bold have comments added since previous version):

de Cos (Banco de España):

20 January 2022

‘All this leads us to believe that inflation will remain relatively high in the first half of this year and then, after that, it will start to fall. It could end up, in the case of Spain, below 2% even at the end of the year. ... And there are two risks here. The first is derived from energy prices, which in turn derive from geopolitical tensions ... The second has to do with wage-margin dynamics and how these could end up affecting the inflationary process. ... So far, not only in Spain, but also in the rest of Europe, we are seeing wage moderation.’

‘By 2023-2024, inflation should return to below 2%, which is our target. ... But, of course, if this macroeconomic scenario changes, in particular the inflation scenario, then obviously monetary policy will have to change. With the conditions we have today, including the inflation forecasts ... an increase in interest rates in 2022 is not to be expected.’

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.’

Villeroy (Banque de France):

24 January 2022

‘On the inflation situation, there is an inflation hump, which is undeniable. I'd like to clarify what I mean by hump: we've forgotten that a year ago inflation in France and in the Eurozone was more or less zero. Today it is around 3% in France, less than in the Eurozone, which is at 5%. But we estimate that, taking into account the gradual stabilisation of energy prices and the fact that supply difficulties are going to be reduced, inflation in France - this is our forecast from last December - will return to below 2% by the end of the year. You can never be sure of a forecast, but this is the quality forecast that we are making today. It is not a blind certainty, and if necessary the European Central Bank and the Banque de France will do what is necessary to bring inflation back to around 2% over time.’

‘We should rather have a stabilisation, then a decrease in this inflation. But once again, this is the role of the monetary policy that we are conducting, with Christine Lagarde and the European Central Bank. Christine Lagarde said last week that monetary policy must be a shock absorber for the crisis. This means that it must not be a brake on growth, nor must it be an accelerator of inflation. So we have to determine the right pace of monetary policy normalisation. There is no money printing today, there is monetary policy support when it is needed: remember, a year or two ago, everyone was worried about deflation. Now we have to normalise monetary policy gradually, this is not the situation in Europe. We must not do it too late either, so we are very pragmatic, looking at the real evolution of the economy and inflation. This gives the French a guarantee that we will bring inflation down to around 2% over time.’

‘We are extremely vigilant about inflation: I understand this concern very well, and I share it. I said very clearly this morning what our forecast for a gradual decline was, and what our commitment was. It is our mandate, and that is why we are independent, with the European Central Bank, to bring inflation down to around 2% over time. I believe that this is the best response we can give to the French.’

‘But if I look at the economic situation, which is our domain, today there is good growth and there is too much inflation, and this is linked to Covid and the recovery. But if we look ahead, even if only two years from now .... the picture should be reversed, and that's what we're saying: looking higher and further ahead, we should have good inflation, back to around 2%, but on the other hand we wouldn't have enough growth.’

‘I believe that we must, over the next 10 years, and this will not be done all at once, aim for a progressive reduction in debt. It's possible…’

22 January 2022

In proportion to the strength of the economic recovery, there are tensions on energy prices and then supply difficulties with certain raw materials or semiconductors. So that's what gives the inflation hump. This hump has been a little bit higher and a little bit longer than what we were anticipating last spring, but, again, that's everybody's expectation. What we see today, as do most forecasts, is that inflation should gradually decline over the course of this year, because energy prices are stabilising and supply difficulties should diminish. And so in our central forecast, inflation in France should come down to below 2% by the end of this year. But I want to insist on two things, because this question is very important. The first is that we are coming back to something that is not the pre-Covid regime of too low or almost zero inflation ... We are without doubt coming back to a new inflation regime closer to our 2% target. And the second thing I would like to stress is that I have just told you a quality forecast, the best we can make today. It's not a blind certainty. We have our eyes wide open at all times to the real economic data and the dialogue with entrepreneurs and economic players. And if inflation were to become more persistent, have no doubt about our ability, our willingness to act to bring inflation back to around our 2% target on a sustainable basis. This is a very important guarantee that I am giving to the French, that we are collectively giving to European actors.

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.’

Lane (ECB):

25 January 2022

‘In the near term, there are some risks from the Omicron variant. But I think it's increasingly clear that the impact is only for a few weeks. So it is not turning out to be a factor that will influence the activity levels for the year, it's more the activity levels for a few weeks. In that sense, I think there's less concern about Omicron than we had in December. In terms of the overall pandemic, I think it is fair to say that the recovery so far has been stronger than expected − compared to, for example, early 2020 when the pandemic hit. In the initial months of the pandemic there was a lot of concern. But essentially, when the vaccines have been rolled out during 2021, it turned out that the euro area economy and the world economy has recovered more quickly than expected. And looking to this year, 2022, we expect another strong year of recovery. So essentially, there's been a strong recovery, supported by a lot of policy measures, both fiscal policy and monetary policy. I think in overall terms the sense is that, between the public health measures and other measures, it's turning out that we can hope that the euro area can recover quite well from the pandemic.’

‘We should think about these years of the pandemic, 2020, 2021 and 2022 as part of a pandemic cycle. In the first year 2020, inflation was relatively low. In the second half of 2021, inflation turned out to be quite high. And then, as we look into this year, 2022, we think inflation will remain high at the start of this year, but will fall later this year, especially towards the end of the year. So it's a year, essentially, where in the first part of the year, we'll still see inflation remaining high. But we do expect it to fall quite a bit later this year. We are clear from our December forecast that we expect inflation − in overall terms for this year − to be around 3.2% in the euro area, and then to be below 2% in 2023 and 2024. Compared with the peak, that's quite a big decline. We will see exactly the timing of how quickly inflation falls. So rather than focus on month by month, we have a clear vision in terms of the overall direction: that the inflation rate will fall later this year. And in fact, … our current view from December is that inflation will fall below the 2% target in the next couple of years.’

‘I think we are always clear that we’re guided by our intentions to deliver an inflation rate of 2% over the medium term. So we will adjust all of our policies − whether that's asset purchases, the targeted lending programme, our interest rates − to deliver that goal. You've given me a hypothetical, the hypothetical is: what happens if inflation is above our forecast. So let me in turn make clear that what is very important is whether inflation will essentially settle at around our target of 2%, which would be essentially what we want, or whether there might be signs of inflation being above 2% in a significant way for a significant amount of time. And if we saw the data coming in to suggest that inflation would be too high relative to 2%, then of course we would respond. We also have been clear on our sequence. The first decision under that scenario would be to end net purchasing. And only after ending net asset purchases would we look at the criteria for raising the interest rates. So we will be driven by the data, driven by our assessment. And every month, every quarter, we're going to learn more about where the data are going.’

‘We spend a lot of time looking at the interlinkages. One linkage is that an increase in the cost of living may be a factor in wage negotiations. We think that is clear. The question is how much, because, remember, energy is both a direct cost to the consumer, but also a cost to other firms. Rising energy prices can also mean rising food prices, rising prices of goods and services. We are also examining how much the increase in energy prices might show up in rising goods prices and services prices. So far, we do not see a big response of wages. We do expect a response of wages but what is critical is how big. Because, remember, in the euro area, for inflation to be around 2% and allowing for a typical increase in labour productivity of about 1%, then wages should be growing around 3% a year in the euro area on average to be consistent with the 2% target. We are not, right now, seeing wage increases in that zone. But of course, we will continue to look at this throughout the year.’

‘I think this [inflationary pressure from the energy transition] is a complicated issue. Let me also emphasise that what we have right now is an increase in global energy prices. The euro area imports energy from the rest of the world. So this is a very different scenario from a scenario, which we would expect to occur in the coming years. Which is essentially, if there’s, for example, policies that increase the price of carbon, as part of the transition away from a high-carbon economy. If we see an increase in the price of carbon because of taxes or regulation, driven by domestic policy, those revenues from a carbon tax, for example, can be recycled in the domestic economy and can stimulate the economy. Whereas what we have right now is different. We have an increase in import prices from the rest of the world. And this is reducing living standards, increasing the import bill. It has a negative channel to lower incomes, lower consumption. So I think it's a very interesting, very important debate about the future of green energy policies. That is playing some role right now. But the main role right now is a global issue, rather than the transition. So we will return to this topic, no doubt.’

‘Let me mention three scenarios [where the ECB could hike interest rates]. And again, to repeat, we're examining hypotheticals here. One scenario is in fact that the forces that generated low inflation before the pandemic essentially become visible again after the pandemic. So one scenario is that the world economy will return to quite low inflation rates. A second scenario is that some of these headwinds will not return and, in fact, it may be easier for us to deliver our target of 2%. So that is a kind of middle scenario where inflation will stabilise at 2%. And then the third scenario is, if inflation picks up and there is a risk that inflation will be significantly above 2%. In this third scenario, where inflation is significantly above 2% on a persistent basis, then that will call for a monetary policy tightening. We would have to respond. In the middle scenario where inflation stabilises at 2%, then clearly over time we would normalise monetary policy. The policies we need to fight very low inflation would no longer be needed if inflation were stable around 2%. And in the first scenario where inflation is significantly below 2%, then the policies that we have employed to fight low inflation would still remain relevant. So this is the way I think about the world, but there are three scenarios. One, we remain with a low inflation problem. Two, we stabilise -- in a kind of smooth way -- inflation around 2%. And three, if inflation turns out to be persistently above 2%, we would have to tighten. And so those are three very different scenarios.’

‘In the December round of projections, the assessment was that, in fact, we saw inflation returning to below 2%. But we also emphasised that in a world of uncertainty, as we have more data come in, of course the data can change. But in the euro area context, I would say that it's also possible that we may enter a world where inflation stabilises around 2%. I find it less likely to think about a scenario where inflation is persistently, significantly above 2%, which would require a serious tightening. That scenario, would, I think, in the context of the euro area, be less likely than the other two scenarios.’

‘What we've seen in this pandemic is: yes, governments have borrowed more, and some types of firms have borrowed more. But households have been saving a lot. In the banking sector, we also have banks which are better able to handle debt, because they have increased their capital positions. So, when you have a situation where, essentially, in the euro area, debt levels have gone up for the sovereign and for some corporates but have gone down for households, and where the banks, that are kind of in the middle of the system, are in better shape, then I think it's a different scenario to ten years ago. And then the other issue is: we think the trend level of interest rates is lower today than ten years ago. So, when interest rates go up, it's from a very low level. And that's important.’

‘Geopolitics always matters. I think if you look at the history of the world economy, the European economy, geopolitical events matter a lot via trade, via global prices, via uncertainty. So, of course, we will be looking very closely at such factors. We already talked about the very high energy prices. And of course, there's a connection between higher energy prices and these tensions. So of course, it's very directly relevant for us.’

Lagarde (ECB):

03 February 2022

‘The euro area economy is continuing to recover and the labour market is improving further, helped by ample policy support. But growth is likely to remain subdued in the first quarter, as the current pandemic wave is still weighing on economic activity. Shortages of materials, equipment and labour continue to hold back output in some industries. High energy costs are hurting incomes and are likely to dampen spending. However, the economy is affected less and less by each wave of the pandemic and the factors restraining production and consumption should gradually ease, allowing the economy to pick up again strongly in the course of the year. Inflation has risen sharply in recent months and it has further surprised to the upside in January. This is primarily driven by higher energy costs that are pushing up prices across many sectors, as well as higher food prices. Inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year. The Governing Council therefore confirmed the decisions taken at its monetary policy meeting last December… Accordingly, we will continue reducing the pace of our asset purchases step by step over the coming quarters, and will end net purchases under the pandemic emergency purchase programme (PEPP) at the end of March. In view of the current uncertainty, we need more than ever to maintain flexibility and optionality in the conduct of monetary policy. The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.’

‘Economic activity and demand will likely remain muted in the early part of this year for several reasons. First, containment measures are affecting consumer services, especially travel, tourism, hospitality and entertainment. Although infection rates are still very high, the impact of the pandemic on economic life is now proving less damaging. Second, high energy costs are reducing the purchasing power of households and the earnings of businesses, which constrains consumption and investment. And third, shortages of equipment, materials and labour in some sectors continue to hamper the production of manufactured goods, delay construction and hold back the recovery in parts of the services sector. There are signs that these bottlenecks may be starting to ease, but they will still persist for some time. Looking beyond the near term, growth should rebound strongly over the course of 2022, driven by robust domestic demand. As the labour market is improving further, with more people having jobs and fewer in job retention schemes, households should enjoy higher income and spend more. The global recovery and the ongoing fiscal and monetary policy support also contribute to this positive outlook. Targeted and productivity-enhancing fiscal measures and structural reforms, attuned to the conditions in different euro area countries, remain key to complement our monetary policy effectively.’

‘Inflation … is likely to remain high in the near term. Energy prices continue to be the main reason for the elevated rate of inflation. Their direct impact accounted for over half of headline inflation in January and energy costs are also pushing up prices across many sectors. Food prices have also increased, owing to seasonal factors, elevated transportation costs and the higher price of fertilisers. In addition, price rises have become more widespread, with the prices of a large number of goods and services having increased markedly. Most measures of underlying inflation have risen over recent months, although the role of temporary pandemic factors means that the persistence of these increases remains uncertain. Market-based indicators suggest a moderation in energy price dynamics in the course of 2022 and price pressures stemming from global supply bottlenecks should also subside.’

‘Labour market conditions are improving further, although wage growth remains muted overall. Over time, the return of the economy to full capacity should support faster growth in wages. Market-based measures of longer-term inflation expectations have remained broadly stable at rates just below two per cent since our last monetary policy meeting. The latest survey-based measures stand at around two per cent. These factors will also contribute further to underlying inflation and will help headline inflation to settle durably at our 2% target.’

‘We continue to see the risks to the economic outlook as broadly balanced over the medium term. The economy could perform more strongly than expected if households become more confident and save less than expected. By contrast, although uncertainties related to the pandemic have abated somewhat, geopolitical tensions have increased. Furthermore, persistently high costs of energy could exert a stronger than expected drag on consumption and investment. The pace at which supply bottlenecks are resolved is a further risk to the outlook for growth and inflation. Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher.’

‘Market interest rates have increased since our December meeting. However, bank funding costs have so far remained contained. Bank lending rates for firms and households continue to stand at historically low levels and financing conditions for the economy remain favourable. Lending to firms has picked up, supported by both short and longer-term loans. Robust demand for mortgages is sustaining lending to households. Banks are now as profitable as they were before the pandemic and their balance sheets remain solid. According to our latest Bank Lending Survey, loan demand by firms increased strongly in the last quarter of 2021. This was driven by both higher working capital needs, stemming from supply bottlenecks, and increased financing of longer-term investment. In addition, banks continue to hold an overall benign view of credit risks, mainly because of their positive assessment of the economic outlook.’

‘Summing up, the euro area economy continues to recover, but growth is expected to remain subdued in the first quarter. While the outlook for inflation is uncertain, inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year. We will remain attentive to the incoming data and carefully assess the implications for the medium-term inflation outlook. We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term.’

‘Concerning inflation: with the upside surprise that we have seen first in December, second in January, I can tell you that there was unanimous concern around the table of the Governing Council about inflation numbers and obviously the impact this has on the near term and the impact this has on our compatriots in Europe. We know that the burden is first and foremost borne by those who are most vulnerable, most exposed and who face the day-to-day hardship of having to put up with higher prices. I can assure you that that concern was across the board and around the table in equal numbers. We had a very thorough and in-depth discussion about inflation precisely and were focussing on the latest information we have, but also the impact that it will have on our medium-term outlook. That is clearly something that will be examined in more depth at the time of our March Governing Council meeting, when we produce more projections – which we have not on this occasion – when we can harness all the latest data that we have, where we can also have more information about the job markets, about wages and where we can really analyse in depth what the impact is on our medium-term projections. We are all driven by the same mandate, which is price stability. We are all concerned to take the right steps at the right time, and I think there was also a concern and a determination around the table not to rush into a decision unless we had a proper and thorough assessment based on data and the analytical work that will take place in the next few weeks. That's on your first point concerning the inflation numbers.’

‘On the other question of the rate hikes: you know, I never make pledges without conditionalities and it is even more important at the moment to be very attentive to that. As I said, we will assess very carefully, we will be data dependent, we will do that work in March. I think it will take us into the analysis of what are the drivers behind inflation in the short term, what are the drivers behind inflation in the medium term, and how the whole outlook and medium-term projections look like. Let's not forget that we will continue doing so on the basis of our forward guidance, that we will continue to observe the sequence that we have agreed, and that we will be gradual in any determination that we make at the right time on the basis of data.’

‘The United Kingdom has had a history of much higher inflation than what we have had in the euro area; that's point number one. The critical difference now between our respective economies, the critical one – there are many other ones – but the critical one has to do with the labour market, where clearly there is a lot of pressure on wages, where there is scarcity of workers for jobs that are available, and where - I don't want to take a political stance, but I think that there was a lot of non-UK labour force that eventually had to leave the United Kingdom which has not been totally replaced, and where the shortage of workers is actually having a bearing on the forces of the labour market in the UK. So that's really in essence what is causing the significant difference between the two.’

‘On the wage front: what we are seeing and that we can really celebrate is that the euro area is at the lowest unemployment number it has ever been. 7% unemployment is a record number. The second aspect of that labour market is that our participation of employees in the labour market is back to the level where it was pre-COVID. So on those two accounts we have good news to celebrate. What we are not yet seeing is a significant movement in terms of wage increases. We are not seeing a lot either in relation to wage negotiations. That normally should be the next step that we see, with lower unemployment, more people leaving the furlough schemes under which they were operating, and the output gap closing gradually and the economy returning to full capacity. We should see movement, and we are not seeing a lot of it yet. Now, of course a lot of the information that we are getting statistically is backward-looking, but we are also very attentive to what is happening and what is likely to happen. That is actually taken into account to a certain extent in our projection numbers, but clearly what will happen in the next few weeks and what we can see, both for our March meeting and then later on our June meeting, will be critically important to determine whether the three criteria of our forward guidance are fully satisfied.’

‘It is a fact that we have removed [from our monetary policy statement] the portion that says in both directions. We now say the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term. I think “as appropriate” – which we debated within the Governing Council – captures the vast array of optionalities that we have available depending on the data that we receive, and as, hopefully, some of the uncertainty we have around clears off. So we thought that “as appropriate” was perfectly adequate to cover all the moves that we could take and all the optionalities that are available for us. I think based on recollection - because we debated that a little bit – the “in either direction” was inserted once to really indicate that there was a change of tack and that we were no longer in that low inflation environment for such a long period of time. That was inserted in the December monetary policy statement. We are clearly receiving data that inform us about the high level of inflation, certainly the upside risk to our projection, particularly for the short term, and that is the reason why we thought that “as appropriate” would cover all the optionalities that we have.’

‘… providing forecasts, elaborating projections is a difficult exercise that is based on the assumptions that you make and on the models that you use. I have full confidence that staff do their best to include all the sensible, reasonable, rational assumptions that they can. I can assure you that they go through a whole array of scenarios: what if, what if, what if. They use the models that they use – that many of you listening to me are also using. It is hardly surprising that most projectionists, most forecasters have also been surprised by the inflation numbers in particular in December and January. Very few of them could've anticipated the energy shock, the massive shock that is hitting our economies around the world, but particularly so in Europe, where we are so vastly export-dependent when it comes to our energy. That clearly has an impact that was not anticipated because it was not in the assumptions. Now, all the work that is done by staff to elaborate on those projections, all that work is also assessed by the Governing Council and each and every Governor of each and every national central bank is consulting with their staff as well. Their staff are also feeding data into the aggregate projections that we produce at least in one case out of two every year – sorry, two out of four. But the determination is made by the Governing Council. Indeed, there is an element of discretionary judgement. We don't take projections just at face value and this is particularly relevant in the current circumstances given the level of uncertainty, given the geopolitical risks around. There has to be an element of judgement that actually belongs to the table of the Governing Council.’

‘I don't make pledges without conditionalities and I did make those statements [that it's “very unlikely” that we will raise interest rates this year] at our last press conference on the basis of the assessment, on the basis of the data that we had. It was, as all pledges of that nature, conditional. So what I am saying here now is that come March, when we have additional data, when we've been able to integrate in our analytical work the numbers that we have received in the last few days, we will be in a position to make a thorough assessment again on the basis of data. I cannot prejudge what that will be, but we are only a few weeks away from the closing time at which we provide the analytical work, prepare the projections for the Governing Council, and then come with some recommendations and make our decisions. I think it all goes back to: how do we make our decisions? We make them on the basis of data, we make them on the basis of the forward guidance when it comes to interest rates. We make them gradually because we are not here to rock the boat, if I may say. We are going to use all instruments, all optionalities in order to respond to the situation – but the situation has indeed changed. You will have noticed that in the monetary policy statement that I just read, we do refer to the upside risk to inflation in our projection. So the situation having changed, we need to continue to monitor it very carefully. We need to assess the situation on the basis of the data, and then we will have to take a judgement.’

‘…what's my prediction about the medium-term inflation? Well, again I'm very sorry to say, but we do assess risk to the upside for the near term, particularly for the near term. We're not excluding, but we say particularly for the near term. We will know better what impact it will have on the medium-term inflation. Let me just say one thing: we are getting much closer to target and this is so because in the medium term there are factors, drivers of inflation that are helping us finally reach - hopefully - that target. That has to do with the labour market that I was discussing earlier. That has to do with the broad-based inflation that we have, which concerns more than 60% of the items. It has to do with the inflation expectations which, whether based on surveys or market-based, are now heading very close to or at target. So this is all a good development and I'm saying that with a concern because I know how much hardship it imposes on all of us Europeans, and particularly those who have to fill up the tank and who have to put food on the table, because it is hard. Prices are going up very much at the moment. We see them continuing to stay high for a few more months, but then declining over the course of '22 and then our medium-term numbers, we will have more certainty at our March meeting.’

‘I opened this press conference by saying how all Governing Council members were concerned about the inflation numbers which were at a very surprising level, by all accounts, and whoever are the projectionists and the forecasters. Of course, we went into the analysis of: is it more supply, is it more demand? We all know that monetary policy can have a stronger impact on demand and that the impact on supply particularly if it is imported supply as is the case with energy price increase, is going to be more limited. I would have a little caveat on that one because clearly, the longer it lasts, the higher the likelihood of second-round effects there will be. In that case, obviously monetary policy has a role to play. I think that we are all concerned that we have a mandate which is to deliver price stability, which is to make sure that inflation is at target in the medium term, which is the strategy that we have adopted, all of us. We know the limits of what can be done and when it can be done, but we know that action has to be taken when the conditions are ready for that.’

‘When it comes to interest rate hikes, we have a forward guidance which has been approved by the Governing Council which identifies three pillars or three criteria, if you will, that need to be satisfied in order for rates to be hiked. I don't want to insult you by repeating those three criteria, but I will actually! We have the inflation at target, which is 2%, well ahead of the projection horizon; we have, second, the durability so that we see it staying at target until the end of the horizon; and third, we need to see underlying inflation that is sufficiently strong to determine progress towards target. We will apply these three criteria at each and every step of the way, and we will determine if and when they are satisfied in order to possibly hike rates. But don't forget that we also have a sequence, and the sequence is that we will not hike rates until we have completed net asset purchases. So I think what comes first comes first; we have to look at net asset purchases. We are conducting a step-by-step guide of those net asset purchases. We will determine in March what is the assessment, on the basis of the data that is then available and we will see what pace, what speed, what amounts we will apply to this net asset purchase programme for the rest of '22.’

‘I will simply say that the geopolitical clouds that we have over Europe, if they were to materialise, would certainly have an impact on energy prices and, through energy prices, an increased cost throughout the whole structure of prices. It would also impact growth as a result of reduced income and possibly as a result of reduced consumption and deferred investment. The pure economic impact would certainly be more significant than what we are seeing at the moment in terms of prices. We are very attentive to that and by the way, we include that in our scenario when we prepare the projection and the work that is submitted to Governing Council members at the time of the next Governing Council meeting.’

‘…it's obvious that monetary policy has to continue to support the economy and you mentioned it yourself: the whole panoply of instruments that we use, that are currently working, is also explaining some of the good results that the economies are showing at the moment.’

‘On the upside surprise: we did not only use the word upside in relation to surprises; we used it in relation to risk. Risk is to the upside in our projection. We hardly ever – I'd have to double-check in the last 20 years, we may have in the past – but in the recent past we have not actually mentioned, we have not included in our monetary policy statement the characterisation of risks in relation to inflation. I think that is a very explicit indication that it might very well be significantly higher than what we had expected over the course of the year, and possibly higher than we had anticipated at the end of the year. Risk is to the upside, in particular in the near term.’

‘Actually we have not discussed TLTROs at all in this particular Governing Council meeting, and it's one of the items that I'm sure we will debate at our March meeting, or later actually. I think they end in June '23 if I recall, yes.’

‘I think I said that there was general concern around the table about inflation and the impact it has on our fellow Europeans. Equally, there was general consensus about the outcome of our decision. I wouldn't call it a monetary policy decision, so to speak, because what we are doing is we are continuing the normalisation of monetary policy and we are considering what will possibly happen and what options we offer ourselves, what optionalities will be around in response to the uncertainty at future monetary policy meetings. That's what we did in depth and very thoroughly today. There was general consensus on these issues around the table, I can assure you.’

‘Now, you asked me a question about the spreads: I would like to just observe that we are not seeing any such development. While yields have moved up, spreads have not widened in any significant manner. So we very much look into these matters very carefully and we have no reason to believe that it is going to be different. If it was, we are obviously going to respond and we have all the tools, all the instruments and the adequate flexibility if it is justified.’

‘It is the case that the very high inflation numbers that we observe are at least 50% caused by energy prices. Oil, gas, electricity and they all interrelate, gas having a stronger bearing than in previous years because of the price mechanisms depending on the length of contract and all the rest of it. I will spare you the details, but 50% of the current inflation is caused by energy prices. If the ECB was to first of all reduce and finish its asset purchases, and then raise interest rates in short order, do you think it would have any impact on energy prices? No, it is not in the ambit of monetary policy to decide the price of the barrel that is organised predominantly outside of Europe. Now, true that most of those contracts are in the US dollar currency but if I look at the significant appreciation/depreciation, it varies a little bit. The euro has depreciated a little bit. I don't want to be in the wrong numbers, but it's no more than 3% over the course of the last 12 months. I don't think that we can attribute to the European Central Bank the high cost of energy which impacts 50% of the inflation and the price paid by the consumers. Having said that, the European Central Bank and its Governing Council at large are focussed on its mandate, which is price stability. We are going to stick to the objectives that are set by the Treaty; that is price stability at 2% in the medium term. Believe me, as soon as it is required and the conditions are satisfied, we will act because it is our duty and we shall do so.’

‘Well, how do you hike interest rates? By hiking interest rates. And clearly, we will have a very sophisticated determined approach and analysis to doing that. We will only do that in the sequence that we have fixed for ourselves, and which has been agreed, which is that we will look at net asset purchases first, gradually, on a data-dependent basis. Then we will look at interest rates. … Shortly before is probably a little shorter than just before, and that again is going to be in the estimation of the Governing Council, data dependent, and based on the assessment that is conducted. I would say this: we are not there yet for the reasons that I have just mentioned, which are that we will be very faithful to our sequence. We are still conducting net asset purchases. We will stop the Pandemic Emergency Programme net asset purchases in March and then we will look at the net asset purchases under the APP. Don't assume too much in terms of the immediacy of hikes; we will not be complacent, but we are not going to be rushed into a process. We will follow the sequence that we have set for ourselves. We will verify the forward guidance criteria and we will be gradual in whatever we do.’

‘On the second-round effect, don't get me wrong: what we are saying is that we are not seeing wage increases that would be likely in the conditions of the markets as they are, where we are seeing unemployment as low as it has ever been, where we are seeing participation back to the level where it was pre-COVID, and where gradually the output gap is closing and there is less and less slack in the economy. We are waiting for that movement on wages and our duty of course is to make sure that through a second-round effect, that would not be addressed by monetary policy, inflation would run out of control and would spiral. This is not what we are seeing, and we certainly don't want to see it, but I am not here saying that there should be wage moderation. There is clearly an adjustment to be had which I am hoping we will see in the course of '22. That would be the economic logic of what we are seeing at the moment. By the way, as I am finishing on that question, I think we should be a little bit cautious about what I am hearing a lot, which is constant comparisons between the US and the euro area, the Fed and the ECB. We are really operating in different environments, with different economic data. Just to give you an example: our demand here in the euro area is pretty much back to where it was pre-COVID. In the US it is 30% up. Ask yourself why; this is because of this massive fiscal stimulus that the US economy has had, unlike the euro area, where it has been more moderate, not excessive and which is producing the sort of measured pace at which some factors are significantly improving.’

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.’

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):

18 January 2022

‘[N]ext to the ability, supervisors need to have the “will” to act. Supervisors must be willing and empowered to take timely and effective action, to intervene in decision-making, to question common wisdom, and to take unpopular decisions. When you come to think of it, a lot of this also applies to other typical central bank mandates, such as monetary policy, payments oversight, and, more generally, preserving financial stability.’

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.’

Holzmann (Austrian National Bank):

30 January 2022

Whether inflation will go back down ‘is the big question. We don't know, but what we do know is why inflation has jumped so much. Remember, until last summer we thought we had problems with too little inflation. ... That is, until recently we had the problem of not reaching 2%. What is happening now - it is important to understand this - is that since last summer we have had a series of shocks: a shock in energy prices that has taken place, but also a shock in food prices, also due to energy prices. And this has led to inflation suddenly rising to 4 or 5%, contrary to all forecasts, because the shocks could not be predicted. Now the question is, starting from here, let's assume, let's hope that it will go down again. But the whole thing depends on the economic policy behaviour of the institutions in all countries. Meaning the following: if nothing happens, we expect it to go back towards 2% at the end of the year. But if the current shocks lead to excessive wage demands, or if individual companies push through their price demands, which are not justified, then second-round effects can occur. And these second-round effects can lead to inflation declining very slowly or even exploding as happened in the 1980s. And then it becomes very expensive, but also very painful. We at the ECB stand ready to take action. What we are doing at the moment, if you really want to, is looking millimetre by millimetre at how prices are developing, what the reasons for that are, to determine how and when we will act.’

‘The US is in an economic situation, in a cycle that is far ahead of the Europeans. The macro-economy by half a year or nine months, the financial cycle also. This means that what the US does, we will also do marginally. Second point is, the US has a much higher inflation rate ... And the third point is, the US, if you look at the history of the 70s, 80s, has known a very, very high inflation rate, which was extremely difficult to fight. This means that the US is inclined to act more quickly in order to prevent the difficult situation of the 1980s from occurring again. What that means for the ECB now is that we have a situation where we have an inflation rate that we don't like, far from it, but we have better prospects than the US to get back to the 2%. Also, if you look closely at the data, in the US there are already the first signs of wage inflation. We don't have that in Europe yet. This means that in the US we have to act more strongly to keep this at bay, which is not yet the case in Europe.’

‘[Y]es, we have inflation that is far too high for us, but at the moment, our calculations are still such that we will not yet reach the 2% for 2023 and 2024. That means that if we now had inflation rates that were high at the end of the year, 3%, with no chance to go down, then of course we would act.’

‘The energy transition will probably require a great deal of initial investment. These are gigantic sums, which unfortunately have not yet been properly estimated. And that means that there will probably also be price effects associated with it. This means that inflation will probably be higher for several decades in the future than the 2% we currently have.’

24 January 2022

‘It is probably the case that in 2022 inflation will not go below 2% ... probably we will be at 3% or more. So the question, if it goes back in ‘23 and ‘24 in the direction of 2%, what needs to be done in addition to what has been done now? ... That is, what has to be done now to rein inflation in a little bit, in what interest rate steps do you go up here? And here I think it will be the case that very large interest rate steps will not happen in Europe to the same extent as in the USA, which also has higher inflation rates. ... There is a lot to be said for saying, especially if inflation is high again in March and especially in June, that’s it, we will stop in three months' time and then initiate interest rate steps. And I have already tried to put a bit of pressure on and said that interest rate steps can also be taken before the programmes expire. ... This was actually rejected by my closer colleagues in the Council, but in the US this is already part of the discussion...’

‘Will inflation stay transitory, or .... will it stay high? We don't know. The ice age was transitory too ... We don't want it to last that long. But there is a lot of evidence that there are some transitory elements. Which ones will dominate, we don't know. But what we do know is that if we have uncertainty, then you hold back in making decisions, but on the other hand, late decisions can be very expensive. That's also why in the US, as in Europe, some people have gone out and said we need to take a foot off the gas a little bit quicker. ... Reacting too late can be very, very expensive.’

‘At the international level, there are many things we don't know. China worries me a lot, what's going to happen there in the next period economically, but also pandemically. The Fed is going to change. The Fed is still dominant. That means interest rate changes are going to hit us whether we do anything or not. That's an important point. But also the emerging markets. When the dollar raises interest rates, emerging markets start to sweat. And they've already had the pandemic, they had high debt before, and their health will spill over to us.’

‘We always try to be data-driven, and the next forecast is not until March again. Then we will have new data. And the question then in March and also in June is, what do we do if inflation is still as high as it is now? Do we say, “Well, we'll wait, it will get better?” Or do we do something? But what do we do then? Do we stop then, meaning we say the APP has to end now? And then with what frequency do we go into rate hikes? Like the Fed, we go up; so what are the interest rate steps that are then taken, and on the basis of what level? And one last point, which is very important then also: how quickly do we then say that we not only no longer buy new debt, but also repay the existing debt? Do we wait a bit, or do we do it immediately? And on the basis of which economic correlations do we base everything on?’

‘The energy transition will only work if the relative prices change, which also means ... that we still have no justification to know, if we rush into new technologies now, how much we have to invest here first in order to have lower prices, energy prices, in two, three or four decades compared to the current ones. ... The costs are very real, they have to be borne ... The assumption of zero inflation, energy inflation for '23 and '24 was something I also found out very late, but still ... criticised ... because it gave the impression that we could get below the 2% and then have monetary policy. I think that's something that won't work.’

‘Eventually it can happen, if it's been some time, some months, maybe some years. ... over 2%, that it comes to a de-anchoring ... If that's the case, of course then it will be difficult to get back with the instruments, but also … the credibility of monetary policy, so the central bank ... These inflation expectations are very, very important.’

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.’

Rehn (Bank of Finland):

23 January 2022

‘The economic development is fraught with exceptionally high uncertainty. In this situation, caution is better than indulgence. In other words, it is better to proceed gradually and then make adjustments when we have more clarity and more reliable data.’

‘We communicated our gradual approach to monetary policy normalisation in December. What will be decided in the coming meetings depends on the data. Personally, I expect the economic data to remain relatively good despite the impact of the omicron variant.’

‘That [this would clear the way for interest rate hikes in 2023] seems logical to me if there are no new economic disruptions.’

‘I assume that the drivers of inflation will ease in the course of the year and that price increases should be around 2% in the next two years according to our forecasts. But the uncertainty of the forecasts is high because many factors, from Omicron to geopolitical turbulence in the energy market, are currently at play.’

‘Energy is indeed a very important factor for inflation, not only oil but also gas and electricity. Energy currently accounts for about half of the increase in the inflation rate. But we have made relatively cautious forecasts based on market prices and futures contracts. We therefore assume a Brent oil price of $70 in the medium term. That does not seem to me to be an unrealistic estimate. In November 2020, it was still at $40, and most recently at $87.’

‘Yes, forecasting oil prices is always difficult and especially now. The US has helped stabilise prices for about 15 years through its shale production of oil and gas, but the effect is currently wearing off because of changes in investment behaviour and preference for green investments. And energy policy decisions in Germany have an impact on price fluctuations and thus on uncertainty about inflation.’

‘The so-called second-round effects are decisive. The question is whether the high prices lead to correspondingly high wage increases. So far, at least, we have not seen this on a broad scale.’

‘The USA is ahead of us in the business cycle. Moreover, the labour market there is extremely tight, many people apparently left it during the pandemic. Our situation is quite different. The labour supply has remained largely stable, also thanks to the short-time work programmes.’

‘There are differences from country to country, but at least in the foreseeable future we don't expect [bottlenecks in the labour market in Europe]. We are watching the collective bargaining very closely. In Finland, for example, there was just an important collective agreement for the metal and tech sector, which provides for a wage increase of 2%.’

‘We base our decisions on a wide range of real-time economic indicators. In addition to forecasts, the assessment of the current economic situation is also important. Moreover, monetary policy has a significant lagged effect on inflation. Therefore, we also have to base our decisions on the future inflation outlook.’

Müller (Eesti Pank):

04 February 2022

‘Companies' assessments of the outlook for the coming quarters are very positive - demand for goods and services remains strong. The main constraint on growth is the supply difficulties of the various components. Unemployment in the euro area is already at an all-time low, although unlike in Estonia, the acceleration of average wage growth is not yet seen in the larger countries. At the same time, entrepreneurs in other countries are also complaining about the lack of specialists and skilled labour. And, of course, high energy prices are a concern. If they persist for a long time, they will take away most of people's income than usual. As a result, people and businesses will have less room to spend the rest - other goods and services will be bought less, and growth in the euro area could slow down.’

‘Contrary to expectations, price growth in the euro area accelerated further in January, reaching 5.1%. However, the reasons for the rapid rise in prices are still the same - the sharp rise in energy prices and the difficulties in supplying many goods. These problems cannot be influenced by central banks. However, for whatever reason, the European Central Bank needs to take into account that price pressures may be more persistent than expected a few months ago.’

‘In this context, it is important that a number of other central banks, led by the US Federal Reserve and the Bank of England, have already taken a much clearer stance on tightening interest rate policies. At the same time, it must be emphasized that the economic situation and the upward pressure on prices in America, for example, are different from what we see in the euro area. The extent and persistence of price pressures can be assessed through so-called core inflation, excluding energy and food price volatility. We see that core inflation in the euro area was 2.3% in January, while the US comparable figure is almost 5.5%. It is therefore understandable that the European Central Bank has somewhat more time to tighten monetary policy. But as recent price statistics show, this time may not be too long.’

‘All in all, of course, the rise in prices, which has remained close to 5% in the euro area for longer than was expected by the euro area central banks in December, is the best tone for discussions in the Governing Council. In this context, it is particularly important to emphasize that the European Central Bank is ready to adjust its plans for the near future if necessary. For example, in the Governing Council of the European Central Bank, we may review how quickly we complete bond purchases, which should have lasted at least until the end of this year. All indications are that it is time to move in a clear direction to reduce the European Central Bank's support for economic recovery.’

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.’

Wunsch (National Bank of Belgium):

26 January 2022

‘Looking at the more recent data, my reading of the inflation numbers we see now in the euro area is that they have very little to do with the policy we have been conducting, and it is hard to believe that leaving the economy in freefall would have been a good idea. My reading is also that higher inflation is a product of rising energy prices, and changes in consumer behaviour provoked by lockdown, social distancing restrictions and so on. These have contributed to a shift in demand away from services towards goods. As I see it, these have been the main factors leading to a return of inflation. I think it is important to point that out now, because some people seem to believe that we could have avoided the current inflation spike or that it would be the result of our policies. This does not mean we should not react if inflation remains above 2%, but I truly believe our reaction to the crisis was adequate. The difficult question is whether we can really get to the 2% target in a durable way. For almost a decade, we have been clearly below target, and now it appears that transitory higher inflation is going to be longer than expected. Are we going to securely land around 2%? To me, that remains an open question. We certainly want to go there, but we might again be dominated by events beyond our direct control that could push inflation either side of that 2%.’

‘What comes out of our models is that inflation will be slightly below 2% in 2023 and 2024. Then you can have long discussions about the accuracy of these models and whether they can capture the nature of the Covid shock. My reading of the situation is not focused so much on these issues. The real discussion should be whether the exact level of inflation will matter so much. Inflation will most likely hover around 2% – it could be 1.8% or it could be 2.1%. The question is, “Does it matter?” And that’s why I was not very comfortable with the forward guidance that we have, because forward guidance works best in a world where everything is evolving in a very gradual way. I would also favour forward guidance in a world perfectly reflected by models, where you start with inflation at 1% and inflation progressively goes up. That’s no longer the situation we are in today. We are at 5%, and there is a lot of uncertainty about inflation developments. So, what does it mean? We are clearly above 2% today; on average over a four-year period starting in 2021, we would be over 2%. I don’t know what it means to be on target or not when you have these fluctuations in inflation. Would it make a big difference if in our projections [for 2022, 2023 and 2024] whether we had 1.8%, 2.1%, 1.8%, or 2.1%, 1.8%, 2.1%? I don’t think it should matter much. I have some sympathy for those who say that “if we say today that we are on target, we have to raise rates, we have to hike on the basis of our forward guidance”. I wouldn’t hike today either. There is uncertainty, we are coming out of a situation where we had a long period of inflation below 2%. We should stick to our sequencing, starting with reducing, and then stopping, net asset purchases, and then we should start hiking. So if the focus is on 1.8% because we don’t want to say today that we are on target, because we want to gradually normalise policy, I’m fine with that. But I’m still a bit uncomfortable with this stress on 1.8% for several reasons. One, it’s not like our inflation forecasts have been that precise in recent years – we have to admit it and show some humility. The second reason is that we could convey the impression that it matters a lot whether inflation is slightly below or just above 2%. Either way, I would exit from an extremely accommodative monetary policy. If inflation projections start to fluctuate around the target, it can’t be the case that at 1.8% our response is negative rates and QE [quantitative easing], and when inflation reaches 2.1% we halt QE and take rates into positive territory. Then what happens if inflation falls back to 1.8%? We cannot have that kind of discontinuity when inflation is volatile. In this regard I am with [ECB executive board member] Isabel Schnabel when she says the green transition is going to create volatility. We are going to face bottlenecks on a regular basis, and these are not only going to come from energy prices. They could be related to new batteries, copper prices… In this environment, the concept of purity around 2% with inflation being stable cannot be taken for granted. We need to be open to the possibility that inflation is not going to be that well behaved. All in all, I am with those who think inflation will go down, although I don’t know whether it is going to end up below or over the target. I would say either way we have to figure out how to implement a gradual exit from extremely accommodative policies to less accommodative, and maybe, at some point, not accommodative anymore. If indeed we have a positive output gap, employment gap and inflation stabilises around 2%, we would have to adopt a more neutral monetary policy. In relation to our strategy review, I do agree that when you face a big shock with the real economy you need to overreact when you are close to the lower bound. That was unanimously decided during the strategy review. However, the problem is that we are moving to a world where the trade-offs, the negative impacts of ultra-loose monetary policy, start to appear in terms of financial stability, in terms of house prices… You also need to face facts. If you tried something for eight years and it did not work perfectly, you also need to take that into account. If you try something for that long and it still wouldn’t prevent below-target inflation, despite our accommodative actions, despite the pandemic boosting inflation to 5%, etc, then we might have to raise quite fundamental questions about the framework. But we are not there. The base case is that we are returning to our target, or very close to it within the projection horizon. If that materialises, it would be mission accomplished.’

‘The criticism [that the ECB has a poor record in forecasting inflation] is to some extent unfair. We use a wide set of models. But indeed, when you’ve had 10 years of low inflation, models do project low inflation. At some point, we need to recognise that, and be open to the fact that we might be confronted with structural changes. And if this is the case, it’s going to take 10 years for models to include that in their predictions. So, as to this criticism that our models are bad­ – OK, maybe, but how can you do it much better? For a number of years we’ve had core inflation very close to 1%, irrespective of the economic situation. The fact that models now do not capture big moves in inflation is largely unavoidable. But … I do agree that this means policy-makers need to take some distance, and maybe be less reliant on models. I would not want our monetary policy to be excessively reliant on a projection over a two- or three-year horizon, the quality of which we know is relatively poor. This would be way too mechanistic.’

‘There can be some discussion about whether we should be a bit faster or slower, but what is important to me is that based on our projections we start tightening. What matters is that we move away from an extremely accommodative policy to a less accommodative policy, and that we do it gradually. There will be different views regarding how fast this process needs to take place, that’s part of the game. As already mentioned, my concern is more about the narrative, that we insist so much that we are still below 2% at the end of the projection horizon.’

‘I am not very comfortable with forward guidance because it ties your hands to some extent: circumstances matter. Likewise, I am a bit afraid that by creating new instruments on a regular basis we are trying to anticipate a problem that we may end up not having – or not as initially foreseen. Instead, I would rely more on the fact that we proved in the past we could provide flexibility when required. That generally has been to secure the smooth transmission of monetary policy. By being too specific on these issues, you run the risk of tying your hands and being tested by the markets. I would rather maintain that we are ready to be flexible if needed. There is a fine line between securing the transmission of our monetary policy and letting the market price risks adequately. I would not try to hardcode it.’

‘We should make a big distinction when there is a crisis situation like the one created by Covid, when we were clearly below the target and there was a risk the economy would go down the drain. There was unanimity on what we did. I clearly agree with those that said the channel by which monetary policy was efficient were non-standard measures that facilitated a fiscal response. In these very specific circumstances, fiscal policy will make sure that you can protect your economy. But what is important here is that there was no explicit co-ordination. It just happened to be the fact that we wanted to support the economy, fiscal policy took the lead and ECB measures helped fiscal in providing an adequate response. But I would be very reluctant to extrapolate that complementarity in situations when the economy is doing well, and when labour markets are historically tight. Now is the time for fiscal and monetary authorities to remove some accommodation, to rebuild buffers. On the banking front we did that after the financial crisis of 2008. And, thankfully, during the pandemic, banks have been part of the solution rather than a source of instability. That is because we built a stronger banking system year after year. The name of the game now is for both fiscal and monetary authorities to rebuild buffers. I don’t want to be in a situation where we’re starting to normalise policy so slowly that you’re faced with the next shock when your balance sheet is still big. It’s not like we would run out of ammunition, but you risk building up ever higher levels of debt, at which point you would start facing financial stability risks.’

‘When faced with rising energy prices, if one thinks these are transitory, there is indeed a tendency to “look through” them when setting monetary policy. The challenge here is that temporary may be longer than what most expectations indicated a few months ago. So, some patience is warranted. But we cannot afford another five years of QE and negative rates. It would mean 13 years. We have a unique opportunity to re-anchor at 2%. If it does not work despite a gradual normalisation, if it lasts too long, then we have a structural problem.’

‘The theory says that when we’re faced with the lower bound you need to try a forceful monetary policy reaction to get back to target as soon as possible. When I became governor, my perspective was: if we just give it a try, and then another small try, it is going to be a never-ending story. So, ‘let’s give it a good try’. And I said it from day one: ‘if it works, fine; and if it doesn’t work, then I would not double the bets each time. So, the perception is that I have become more hawkish. But it is just that I believe it is time for a gradual exit after many years of very supportive monetary policy.’

‘Not really [concerned about the policy gap between the ECB and the Fed and the BOE]. We started with a lower inflation, our core inflation today is slightly above 2%, nothing dramatic. We know there have been some base effects such as the reintroduction of the VAT tax in Germany, and we believe energy prices at some point will come down. We need to see whether in the coming months there is indeed a decrease in inflation, or whether current levels last a bit longer than expected. If over the next quarters we have inflation surprises on the upside, then we may need to consider reacting faster. But I’m really fine with waiting to see where inflation is going before we get nervous. Again, if we look at core inflation today, and take into account base effects and energy prices, we are close to target. Over a one-year horizon, it’s not like we are wildly overshooting our goal and that the situation is not under control.’

‘Inflation dynamics, while of course being influenced by monetary policy, are driven by factors that we don’t fully control or maybe even understand. Taking strong commitments in these circumstances exposes you to surprises ‘on the ground’. Beyond that, I have never believed that the fine-tuning of inflation expectations is feasible or would have a major impact on inflation. The impact is relatively limited. I am also sceptical about our capacity to stick to commitments. For forward guidance to be really relevant, you need to commit to doing things you may not like to do. And then, as time goes by, it may appear that you indeed do not want to do what you have committed to. Forward guidance also tends to rely heavily on models and projections. This adds uncertainty beyond that of your reaction function. So, when the markets do not seem to agree with you, is it because they have another view on inflation or on what you intend to do? It is not always easy to tell.’

‘There was unanimity on our strategy review. A bit less on our forward guidance. And I was indeed one of the dissenting voices for reasons I already explained. But the idea that one should use unconventional instruments (or instruments previously referred to as unconventional) when close to the lower bound remains. And the idea that we should hike when inflation is expected to settle durably at 2% will also remain. The only case that is more difficult is if we would fall back to below 2% after a number of years above. I guess there will be various readings of the forward guidance then.’

‘If inflation rises above 2%, we all agree that we should hike. And we all agree it should be gradual. How gradual will depend on the inflation numbers.’

‘We are currently having quite a big energy shock. The transition to a greener energy mix does not necessarily need to lead to such high prices. Wholesale electricity prices have recently been higher than the cost of many forms of green energy or traditional power plants, such as gas or even coal, even with carbon capture. The hike in prices in three months’ time was more than we would expect from energy transformation over thirty years. However, I do believe that as much as we will try to engineer a smooth green transformation, this transition will entail some phases of higher volatility. We are likely to suffer under-capacity in some sectors of global value chains during the transition. I would expect prices in the goods energy sector to become more volatile in the future. Energy prices have always been volatile, but I would expect battery prices, and maybe the prices of commodities, to become more volatile. This transition is going to be difficult to co-ordinate. It may also mean that inflation will not durably set at any stable level.’

Vasle (Banka Slovenije):

04 February 2022

‘After a moderation in growth at the turn of the year due to a remarkable increase in the number of coronavirus infections, we expect favourable trends later in the year. Financial markets are characterised mainly by expectations of a faster withdrawal of central bank accommodation, with interest rates rising slightly as a result. Against a backdrop of excess demand and strong price pressures in the international environment, inflation in the euro area is at multi-year highs. The outlook for a moderation in the coming quarters is accompanied by increasing risks that it will remain at higher levels for longer.’

‘At the same time, we maintain the ability to react quickly to any change in the situation. The post-pandemic recovery in the euro area continues. Real GDP was 4.6% higher year-on-year in the fourth quarter of last year, bringing the level of economic activity back to pre-crisis levels. While economic growth has slowed somewhat in recent months due to congestion in global supply chains, high energy prices and a worsening epidemiological picture, we estimate that economic growth will rebound later in the year, despite high uncertainty. Thus, despite a temporary slowdown in economic activity, we estimate that the continuation of the post-pandemic recovery is not at risk and growth is expected to pick up later in the year.’

‘Rising energy prices and continuing bottlenecks in supply chains suggest that price growth, although expected to slow further over the course of this year, could persist at elevated levels for longer than expected. Although the main contributors to high inflation continue to be strong energy price inflation, broader inflationary pressures also remain elevated.’

‘Volatility in financial markets, while elevated, remains within expectations in the light of the unwinding of accommodative monetary policies. Borrowing costs for both sovereigns and the private sector have risen again, while equity prices declined in January 2022. Euro financial markets have continued to function well and liquidity is satisfactory. Recent data on euro bank performance also suggest that bank interest rates for households and businesses remain at low levels and lending activity remains encouraging, supporting the prospect of a continued economic recovery.’

Against this backdrop, we are continuing the gradual tapering of securities purchases set out in December, even after yesterday's meeting of the Governing Council members. In line with the December decisions, net purchases under the pandemic purchase programme will end at the end of March 2022. At the same time, monetary policy needs to maintain a sufficient degree of flexibility to respond in a timely manner to signs of sustained inflationary pressures. The members of the Governing Council are therefore ready to adjust all monetary policy instruments, if necessary, in order to stabilise inflation at the 2% target in the medium term.’

Stournaras (Bank of Greece):

24 January 2022

‘The European Central Bank is not going to tighten monetary policy because we are in a different phase of the economic cycle in Europe than America or Britain, for example. Even yesterday Mrs Lagarde made statements and said: "Don't expect the European Central Bank to raise interest rates this year". I absolutely agree. There are many reasons. For example, before the pandemic we all feared that we had fallen into what we call a structural recession in Europe, with very, very low inflation. Not too many things have changed. The pandemic increased inflation because it created barriers to production. When the pandemic goes away - which it seems to be going away - those barriers will be removed, so inflation will start to fall from the middle of this year. So, in Europe we see no reason why monetary policy should be tightened, apart of course from the gradual removal of the measures, the emergency measures for the pandemic.’

‘So, we are given a window of opportunity to get the investment grade. But we should hurry to get it, because the benefits of it outweigh the benefits we will get because of Greek bonds and the European Central Bank, as it will attract capital. … We, here at the Bank of Greece, do not rule out that it will happen towards the end of '22 and certainly in '23. As long, of course, as there are no negative external surprises.’

‘In '21 [Greek] growth will possibly surprise, perhaps approaching 9%. Here at the Bank of Greece, the latest estimates show that it will be around 8.5 to 9%. So, we will have very large growth in '21, but also in '22 our models show that 4.5 to 5% is possible. So, this growth will act as a bridge to the fiscal contraction that absolutely needs to be done, so that we do not have problems with the sustainability of the public debt.’

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):

24 January 2022

‘In the euro area, as mobility returns toward pre-pandemic levels, we expect growth to pick up strongly again this year, before slowing towards more historical average rates in 2023 and 2024. Turning to home, overall the story on the Irish economy is very positive. We are in good shape. The economy is proving very resilient to the pandemic. Each successive wave of the virus is having a reduced economic impact, and we expect this trajectory to continue. Recent restrictions have also caused some disruption but they have not dampened or derailed the overall momentum of the economy.’

‘Let me turn to inflation. Is it temporary? Is it transitory? When asked this question, I often think about Niels Bohr the Danish physicist who supposedly said, “Prediction is very difficult, especially about the future”. I think this is especially true when we experience a global shock like the pandemic that has led to profound change in our communities, economies and societies. There are many things we know, like where price pressures are emanating from. And we have taken appropriate monetary policy decisions in response. But there are many things we do not know. Not many of us would have imagined when doing our start-of-the-year reflections in January 2020 that we would be working from home and living with restrictions on many sectors of the economy for most of the next two years. So we do need to show some humility when making (or attributing) simplistic statements. The key question is what is driving inflationary dynamics and what can we reasonably expect in the short to medium term. Having reached highs of 5% in December, inflation across the euro area is expected to remain elevated in the near term. We expect it to remain above 2% for most of this year but our forecasts project it to settle below our 2% target in 2023 and 2024. … While the rate of inflation is expected to decline, in Ireland it will remain above pre-pandemic levels and risks to the inflation forecast are judged to be on the upside.’

22 January 2022

‘The inflation we are experiencing now … there are three broad reasons for it. One of them is … simply base effects … that will tend to wash out fairly quickly. … Euro area inflation up to now, a big factor in it has been changes to German VAT rates, which are going to leave the calculation of inflation shortly. Secondly … the fact that supply cannot keep up right now with the increased demand. And we do see over the course of this year those supply bottlenecks being repaired, those blockages … getting opened up. So we do see inflation falling during the course of this year. And the third reason we’ve got inflation where we have right now has to do with energy prices. And that’s a bit more complicated story, but again, we do see that challenge as not persisting. So, we do see inflation falling, it’ll probably, in the euro area, stay over 2% throughout the course of this year, but it’ll fall from the levels it’s been at, where it was at the end of 2021. The big challenge for us at the … European Central Bank … will be to keep a very close eye on whether there are any … second-round effects of inflation. So, if, for example, we start to see wages rising without corresponding increases in productivity, that would signal to us the risk that we’re going to get into a bit of a wage-price spiral, which is really what fuelled inflation back in the 1970s, in particular. … So, if we see risks of those sorts of second-round effects happening, then we will definitely be taking action at the European Central Bank to manage that. But otherwise, one of the things which has been a feature of economies over the last decade has been very low rates of inflation, which have also led to very low rates of interest. … As we’re now coming out of the pandemic, we’re seeing economies recover, so we may, over the coming years, or we should see monetary policy becoming a bit tighter to what it was over the last two or three years. Now what is the pace of that change? I think that’s uncertain and to be seen. At the moment, my own view is I don’t expect interest rates to go up … in 2022, but we’re going to have to keep a close eye on that. I mean, elsewhere in the world, I mean, the UK, the Bank of England put up interest rates at its last meeting. We expect the Federal Reserve in the United States to put up interest rates at its next meeting. But in Europe, I think we’re probably on a slightly slower track to see what you might describe as normalisation.’

Šimkus (Bank of Lithuania):

26 January 2022

‘There is uncertainty, and I agree it has increased. But I don’t have evident facts that the projections have changed so substantially that we should start discussing whether the inflation outlook has changed to one that’s far beyond our 2% objective.’

Inflation developments are ‘more or less in line with our projections’, with risks ‘to the upside’.

The ECB’s policy path does not need to change ‘yet … If the question is what if the information changes and if the ECB is ready to act to the changed economic environment, then my reply would be yes.’

The ECB should end asset purchase programmes ‘shortly’ before hiking rates. ‘From a credibility point of view I think it’s important to keep that sequence. [But] I would refrain from putting a number of days or weeks or months on that time frame.’

Tensions owing to Russia are ‘an even bigger uncertainty’ than Omicron. ‘The situation adds uncertainty; if it escalates, it will obviously have an impact on our economies, on the Lithuanian economy, on the euro-area economy. We, Europe and the others need to find a decision leading to de-escalation, as further escalation means huge loss, and not only in terms of economic wealth but also losses in terms of lives.’

Herodotou (Central Bank of Cyprus):

23 January 2022

‘The ECB's interventions were very important for the recovery of the euro area. The ECB's monetary policy, combined with government loan guarantees, loan disbursements and other fiscal policy measures, has helped to mitigate the negative economic impact of the pandemic, but also to maintain low interest rates and generally favorable financing conditions. As a result, the rate of credit expansion in the euro area as a whole, but also in Cyprus, recorded a significant increase. In our country, the growth rate of net loans to non-financial corporations reached 4.2% in November 2021 compared to 2.1% in 2020 and 0.8% in 2019. At the same time, the assistance of the ECB's emergency temporary program for the purchase of assets due to a pandemic (known as PEPP) has amounted to € 1.59 trillion. until January 7, 2022 of which € 2.4 billion in Cypriot bonds have been purchased mainly by the CBC. This program has contributed to reducing the yield of Cypriot bonds from 2.25% in April 2020 to 0.82% in January 2022, i.e. significantly reduced the cost of government debt. As a result, the ECB's policy has helped reduce the cost of borrowing in Cyprus, while reducing the cost of repaying government debt has helped to facilitate liquidity from the markets to help Cypriot businesses and households directly.’

Kažimír (National Bank of Slovakia)

04 February 2022

‘Looking at developments in the euro area, it is important in my view to say:

• I expect inflation in the euro area to remain at higher levels for longer than we expected
• Risks related to future inflation are clearly upwards today
• The fact that we have not tightened despite the surprises of the December and January inflation figures does not mean that we will delay the reaction
• We will be wiser in March, we will have more data, we will know more about how the economy, the labour market is developing and how rising prices are turning into wages. We will also know whether geopolitical risks will ease or not.’

‘Further developments in world commodity markets will be a key issue. Current expectations in global commodity markets do not indicate a further significant rise in energy prices this year or in the years to come. At the same time, a gradual normalisation of the situation in global logistics, production and supply of raw materials and components is expected. Even if commodity prices do not fall, stabilising their level by definition means that inflationary pressures from this source will disappear.’

'…the important thing is how fast prices are rising. The modest rise in prices is healthy and stable. Price growth at levels around 7% is not desired. The level that is fine is 2%. That is our goal, where we want to get inflation. We are doing everything we need to gradually be where we want to be and fulfil our mandate of price stability.'