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

28 February 2022

By David Barwick – FRANKFURT (Econostream) – The following is a reasonably complete compendium of the most recent comments made by European Central Bank Governing Council members with respect to monetary policy. Updates are made on a periodic basis.

The current version supersedes the one published on February 21 and includes comments from the following (those whose name is in bold have commented since the previous version):

de Cos (Banco de España):

23 February 2022

‘...the available information suggests that, under the most likely scenario and in the absence of further shocks, the pick-up in inflation observed to date should start to decelerate in the course of 2022. However, over time some risk elements have been gaining weight which, if they materialise, would lead to a greater persistence of this phenomenon. ... a significant part of the inflationary rebound is explained by the evolution of energy prices, although food prices have also increased their growth rate, as well as the usually less volatile components. … Beyond this breakdown by component, three factors, which are not entirely independent of each other, can be identified behind the generalised increase in the rate of change of prices. The first of these is linked to the sharp deceleration in the prices of many goods and services that could be observed in the first months of the pandemic. This has led to the emergence, from March 2021 onwards, of important base effects that have contributed significantly to the acceleration in prices. These effects are being particularly strong in those components that relate to mobility or social interaction, such as non-electrical energy goods or some services. In particular, the base effect generated by these two components would have explained around one-fifth of the acceleration observed in the euro area inflation aggregate between March and December 2021, and somewhat more, around one-quarter, in the case of Spain. The second factor behind the acceleration in inflation is linked to the strong recovery in economic activity following the worst moments of the pandemic, insofar as it has entailed a strong increase in overall demand, which is being particularly strong in the case of some groups of goods. However, not all production processes have kept pace with this upturn in demand, which has generated intense bottlenecks in many production processes and has led to a rise in the prices of a wide range of intermediate goods used in these processes. At the same time, distortions in the global maritime transport network have led to delays in delivery times, which have also contributed to price increases for many goods. In fact, the industries in which intermediate goods used in the production process have become most expensive are those in which supply difficulties have been most pronounced. The pass-through of these higher costs to final selling prices would, up to end-2021, have been partial, according to the evidence available, although it would have shown an upward trend over the year. This is suggested by the results of the Purchasing Managers' Index (PMI) and the Bank of Spain's Survey of Business Activity.’

‘The nature of the three factors mentioned above suggests that, in the absence of additional shocks, the pick-up in inflation observed to date should start to decelerate in the course of 2022. First, pandemic-related base effects will cease to be relevant from spring 2022 onwards, helping inflation rates to moderate thereafter. Second, as global supply adapts to existing demand, bottleneck-related cost increases can be expected to be corrected. Finally, as noted above, a considerable part of the price increase in the wholesale electricity market is linked to higher gas prices. It is true that it is very difficult to predict developments in this market, where geopolitical considerations are a very important conditioning factor. Nevertheless, the futures markets for this hydrocarbon point to a fall in its price over the next two years, although this price would still remain well above its historical average. However, even a hypothetical situation of price stabilisation at high levels would have a dampening impact on inflation in terms of year-on-year rates, which would fade away one year after the onset of stabilisation. Moreover, the upsurge in the pandemic in recent months has led to some deterioration in the economic outlook, serving as a reminder that the pandemic crisis cannot yet be considered over, even as economies have shown an increasing degree of resilience to each new wave of the disease. Moreover, the dependence of the euro area countries on imported energy means that the shock we are experiencing means a deterioration in the terms of trade, with negative effects on agents' real incomes and, therefore, on consumption and investment, and, consequently, on activity and prices. The high savings accumulated by households during the crisis - estimated at more than 6% of GDP for the euro area - should mitigate these negative effects, although this has been concentrated in high-income households that normally have a relatively low propensity to consume, while the current inflationary shock is particularly negative for low-income households, which devote a higher share of their income to the prices that are rising the most, reducing their capacity to consume other goods or services. Not forgetting that, although estimating the degree of slack in the economy is particularly difficult in the context of the pandemic, given also the heterogeneous effects of the latter by sector, it should be borne in mind that, although the level of real GDP in the euro area has recovered to the pre-pandemic level of real GDP by the end of 2021, the gap with respect to the trend that preceded the crisis is still very high. Thus, in contrast to the United States, the degree of economic slack in the euro area aggregate remains significant. And, according to the available macroeconomic forecasts, this gap is expected to persist in the coming quarters and to close only towards the end of the medium-term horizon (2 to 3 years). However, there are some not inconsiderable uncertainties hanging over this scenario of gradual normalisation of inflation. The first of these would arise from a scenario of a less pronounced correction in energy prices than suggested by futures markets, as a result, for example, of a resurgence of geopolitical tensions. The second relates to a possible further pass-through of the observed increases in energy and non-energy intermediate product costs to the prices of all consumer goods and services. In fact, over the course of 2021 this pass-through has been clearly increasing across the various HICP headings. Thus, in December 2021 only 35% of the goods in the euro area consumer basket still showed price increases of less than 2%, rising to 40% in the case of the underlying indicator (with higher proportions in the case of Spain, of 56% and 65% respectively). And, looking ahead, prolonged cost increases - for example, because of delays in resolving bottlenecks or because difficulties with normal gas supplies in Europe become more protracted - would reduce the likelihood that corporate margins can continue to absorb these cost increases, thereby increasing pressures on headline inflation. A third source of uncertainty arises from a possible feedback loop between price and wage increases (so-called "second-round effects"). The low levels of inclusion of wage indexation clauses in collective bargaining agreements compared with previous periods suggest that, at least in the short term, such effects would be contained.11 In addition, until the end of 2021, the impact of second-round effects is likely to be limited, at least in the short term. Moreover, until the end of 2021 the average wage increase agreed has been relatively modest. In the case of Spain, up to December this figure was 1.5%, three tenths of a percentage point less than in 2020. In fact, the increases agreed in newly signed agreements - which, logically, respond more quickly to changes in economic conditions than in the case of agreements signed in previous years - increased over the course of 2021, but did so very moderately, from 1.1% in January to 1.5%, in cumulative terms, in December. However, some signs of labour shortages appear to be affecting a growing number of industries, which could weigh on wage demands in the future. Moreover, a longer duration of the current episode of high price increases would also increase the likelihood of such second-round effects. Moreover, some structural factors support the view that inflationary pressures could moderate beyond the short term. In particular, it is not clear that the structural disinflationary trend observed prior to the pandemic has come to a halt. Thus, one feature of these trend developments was the apparent weakening of the link between the degree of cyclical slack and price and wage growth. This decoupling has often been associated with demographic developments, globalisation, the automation of production processes or the expansion of e-commerce, all of which are said to have contributed to a moderation in the wage demands of workers and the ability of firms to expand their margins. And so far, there is no evidence that the incidence of most of these factors has slowed down significantly and permanently after the pandemic. On the contrary, it may have intensified for some of them. And, as a possible new disinflationary force, negative effects on economic growth and inflation seem conceivable as a result of the gradual fiscal consolidation process that will almost inevitably be forced by the deterioration in the general government deficit observed during the pandemic and the need to counter the impact of population ageing on public finances. However, there are also forces that would tend to offset these disinflationary effects in the future. A notable example is the energy transition, which will continue to put upward pressure on the cost of greenhouse gas emission allowances. In addition, the fight against climate change discourages investments in fossil fuel industries, which will, during a transition period, increase the costs of energy generation. A second example is the possibility, sometimes mentioned, of a slowdown, or even a reversal, in the process of trade globalisation. In particular, it cannot be ruled out that, in the post-pandemic context, the preference for cost savings induced by the relocation of production will diminish in favour of greater security of supply. Moreover, the activation over the next few years of investment projects associated with the NGEU programme could provide an additional boost to the demand for certain goods and professional profiles, with a consequent positive effect on certain prices and wages.’

‘The rise in inflation has been remarkable in terms of its magnitude and the speed with which it has developed. This increase in the rate of change in prices is proving to be stronger and more durable than the consensus of analysts had expected just a few months ago. The increase is broadly driven by specific factors, mostly linked to the pandemic, the incidence of which is expected to decline over the course of 2022. Thus, most analysts' forecasts and sentiment indicators point to rates of change in consumer prices for the euro area as a whole remaining high in 2022, but close to 2% in 2023 and 2024. For their part, market indicators of long-term inflation expectations remain at levels just below 2%. Even so, it is clear that the degree of concern about this inflationary episode has been rising among policy-makers and risks to the inflation outlook are on the upside, especially in the near term. With the prolongation of the period of cost increases, there is an increased risk that cost increases will be incorporated more broadly into final prices and negotiated wages, which would increase inflationary pressures, even if there are no clear signs at present that this is happening on an appreciable scale. Avoiding this feedback loop - which, insofar as it occurs in one euro area country but not in the rest, would ultimately adversely affect its competitiveness and, therefore, its activity and employment - is, in any event, in the hands of economic agents in that country. In this respect, while excessive and generalised wage increases would, in the current context, be counterproductive, increases consistent with the evolution of productivity and demand of individual firms are clearly desirable. Indeed, balanced wage developments in line with these determinants would contribute to achieving our medium-term inflation objective in a sustainable manner and, in parallel, to avoiding the emergence of undesirable second-round effects. On the other hand, fiscal policy needs to focus its support on the most vulnerable sections of society that are being hit hardest by the consequences of the pandemic, as well as by the inflationary pick-up, limited in the case of the corporate sector to viable companies, and with temporary measures that do not additionally increase the structural public deficit. The inflationary pick-up is an additional argument to justify that support should be selective and that a generalised fiscal impulse should be avoided, which, if it were to occur, could lead to an increase in the bottlenecks already existing in the most stressed sectors, eventually filtering through to additional inflationary pressures. In parallel, fiscal policy needs to adopt a medium-term perspective in which fiscal consolidation, once the recovery is established, becomes a priority. In the case of monetary policy, we have decided to gradually reduce the pace of our asset purchases over the coming quarters and to end net purchases under the Pandemic Emergency Purchase Programme (PEPP) at the end of March. In addition, our forward guidance, which makes the first interest rate increase conditional on inflation developments and forecasts at any point in time, is maintained as a key reference for future monetary policy developments. Specifically, our forward guidance contains a fundamental commitment, which is that we will only raise interest rates when three conditions have been met: that actual underlying inflation is consistent with convergence on the 2% target, that medium-term inflation expectations reach 2% and that inflation expectations at the mid-point of the forecasting exercise (around 18 months) also reach 2%. It is in this conditional sense that our forward guidance should be understood. This guidance not only conditions the first interest rate hike, but also the end of the purchase programmes, given that we have announced that the asset purchase programme (APP) will last until shortly before we raise interest rates. In any case, given the high uncertainty at present, we need to keep flexibility and options open in the conduct of monetary policy more than ever, so that the Governing Council of the ECB stands ready to adjust all its instruments, as appropriate, to ensure that inflation stabilises at its medium-term objective of 2%. Moreover, in this context of uncertainty and with medium-term inflation expectations showing no upside risks of de-anchoring from our symmetric 2% target, any normalisation of policy must be very gradual. All our measures of neutral nominal interest rates in the economy are very small, which reinforces the need to maintain this gradualism. The direction is clear, but we should not jump to conclusions about its timing. It will be gradual and data-dependent. In short, monetary policy, like all other economic policies, must remain attentive to possible future developments. Although the current situation is a far cry from that which characterised the oil price shock of the 1970s, the lessons learned then, when the damage from a tolerance of high inflation rates was large and long-lasting, should not be ignored. The likelihood of a similar scenario is very small, but that episode should serve as a reminder that policymakers must be careful to strike the necessary balance between providing patient support for the recovery while preserving the ability to act quickly if necessary.’

17 February 2022

‘…let me emphasise that these conditions [of forward guidance], related to the medium-term inflation outlook and linked to underlying inflation, seek to avoid a premature tightening of our monetary policy in the face of increases in inflation above target when these are considered to be temporary or caused by some volatile or exogenous element, such as energy prices. Finally, with respect to the APP, the Governing Council expects net purchases under this programme to end shortly before it starts raising the key ECB interest rates. Therefore, there is “chained forward guidance” whereby the horizon for net asset purchases remains linked to the moment in which the next interest rate hike takes place.’

‘In any case, inflation has surprised us consistently on the upside over the last few quarters, and also in the most recent months. Moreover, these surprises do not relate exclusively to the energy and food components of the HICP, but have translated somewhat to core inflation as well. In parallel, energy futures curves have been steeper throughout this year. And higher inflation in 2022 also increases the probability of second-round effects, in a setting of continued labour market improvements in the euro area. Indeed, the fact that inflation may remain above 2% for the rest of this year (albeit on a decelerating path), will place upward pressure not only on this year’s wage negotiations, but also on those taking place next year. The existence of this backward-looking component in the wage-setting process is a stylized empirical fact and, as such, is included in some of our own forecasting tools. In a context in which an increasing number of companies are identifying labour shortages as a factor limiting their production, the probability of observing second-round effects on wages is also higher. It´s important to emphasize that avoiding this feedback process is in the hands of each country’s economic agents. And were it to occur in one euro area country only, it would have an adverse impact on that country’s competitiveness and, therefore, on its activity and employment. At the same time, one should take into account that, although widespread excessive wage increases would in the current context be counter-productive, increases consistent with the productivity growth and demand of each individual firm are clearly desirable. Indeed, balanced wage increases in line with these determinants would contribute to the lasting achievement of our medium-term inflation target and, also, to preventing the emergence of undesired second-round effects.’

‘In the medium term, which is the relevant time frame for monetary policy, the expectation that inflation will moderate is maintained. Indeed, despite the evident short-run upward pressures on inflation, the most recent survey and market-based indicators keep pointing to a medium-term outlook for inflation rates in the euro area broadly in line with our 2% target. Wage growth also remains moderate. Against this backdrop, in recent months the probability of inflation stabilising at around 2% in the medium term has clearly increased but there is no perceived risk of it remaining persistently above that level at this stage. In any event, the outlook for inflation is admittedly highly uncertain. Geopolitical tensions could lead to further increases in energy prices, which could feed back into wage rises and an inflationary spiral. Other matters, such as the resolution of supply bottlenecks, are also subject to great uncertainty. All in all, the risks to inflation are on the upside, particularly in the near term.’

‘I would also like to stress that the economic situation in the United States is different from that in the euro area. First, as I said before, medium-term inflation expectations in the euro area remain anchored at around our 2% target level, while in the United States these expectations lie significantly above 2%. US inflation numbers have also been higher. In January the consumer price index (CPI) increased year on year by 7.5% in the US. In the euro area, the HICP rose by 5.1%. Second, it should be noted that, while in the euro area both GDP and private consumption are still far from their pre-pandemic trends, in the United States these measures of broad economic activity have fully recovered, partly as a consequence of the more forceful fiscal policy response in this country to the COVID-19 crisis. Third, while a significant part of the current inflationary pressures in the euro area is driven by exogenous and external factors, such as energy prices (to which the euro area economy is particularly sensitive), in the United States there are significant domestic pressures, especially in the form of extraordinary wage growth, which contrasts with the relatively subdued dynamics seen in euro area wages so far. As an illustration, core inflation stood at 2.3% in January in the euro area, compared to 6% in the US. Fourth, a rather significant part of the current high-inflation episode in the euro area can be interpreted as a negative shock to our terms of trade, given our high dependency on external sources of energy. This is very different to the situation in the United States and therefore its consequences are also expected to differ. In this regard, high inflation and subdued wage growth (like we have observed so far in the euro area) imply a substantial decline in real incomes, which could translate into lower consumption and investment, and, therefore, into weaker underlying inflation dynamics beyond the immediate short term. Even though part of these negative effects have been mitigated so far by fiscal policy in many countries − where measures have concentrated on compensating, at least partially, low income households for the higher energy prices − looking ahead it is unclear how persistent this policy support may be.’

‘First, in this setting of heightened uncertainty, we have underlined the need to maintain optionality and flexibility and to remain attentive to the incoming data and forecasts in order to correctly adjust our monetary policy stance. As we have stated on numerous occasions, the ECB stands ready to act at any time and to adjust all of its instruments as deemed appropriate. But, I insist, the near term is plagued with uncertainty, in terms of pure inflation dynamics but also in relation to several geopolitical risks which could potentially be highly disruptive. That is why, now more than ever, we must maintain optionality and flexibility. Second, forward guidance remains the anchor for monetary policy. As I explained before, for our first interest rate hike to be implemented, all three of the well-known conditions need to be met. Another crucial element of this forward guidance is the sequencing of the exit strategy, whereby we will not raise interest rates until net purchases under our asset purchase programme have come to an end. Third, given what I have just said regarding inflation prospects, we cannot rule out the possibility that all the conditions in our forward guidance will be met sooner than we had expected some months ago. And as a result, movements in our monetary policy towards normalization seem more likely. In the coming months, we will have to decide how to exercise our optionality. And as far as this how is concerned, the key word should be, in my view, gradualism. In other words, I see no reason to overreact. This view is based on several considerations. We first have to take into account that the length of the medium term, which is the time horizon of our monetary policy orientation, is dependent on the state of the economy and the nature of the shocks hitting it. When demand shocks prevail, the medium-term horizon is shorter and closer to the standard transmission lag of around two years. When supply shocks prevail, and there are no serious risks that inflation expectations might be contaminated by the effect that these shocks usually have on actual inflation, the medium-term horizon tends to be longer, because of the resulting trade-off between inflation and economic activity. Thus, in a context in which inflation expectations remain anchored at around our 2% symmetric target, the economy is confronted with an exogenous price shock, and there is still some economic slack, a premature tightening of monetary policy would only add to the negative consequences of that shock for demand and, therefore, for medium-term inflation. Moreover, in a highly uncertain scenario, including geopolitical tensions in Ukraine, the ECB should not constitute an additional source of uncertainty, but should rather maintain a clear, gradual and predictable path for its policy. This gradualism is also justified by the fact that our estimates of the natural interest rate in the euro area remain very low, which should serve as an anchor as to the level around which our policy rates might stabilise in the longer run. Indeed, the nominal interest rate that markets appear to consider the terminal level for our rate cycle is extremely low. And, according to optimal monetary policy theory, the lower the terminal rate the longer one should spend at the lower bound and the more gradual should be the rise towards the terminal rate after lift-off. Finally, an important dimension of flexibility in our monetary policy that we should not overlook is the focus on avoiding financial fragmentation in the euro area, in particular when the impact of the pandemic has been and remains very heterogeneous across countries and sectors. In December last year, we decided to retain this flexibility in the PEPP reinvestment phase, which was extended until the end of 2024. We should now use this 14 flexibility proactively and monitor whether it is sufficient to ensure our monetary policy is appropriately transmitted across the euro area.’

‘I am convinced that the ECB’s new monetary policy strategy … constitutes a solid basis for the conduct of our monetary policy. This is so, not just looking ahead to the coming decades, but also for coping with the current high-inflation episode. In this respect, I believe that, in a highly uncertain environment, a careful assessment of the implications that current developments have on medium-term inflation expectations is key, and that the optionality and flexibility that we retain should be exercised gradually and predictably. The direction in which we need to head is clear, but we should not draw premature conclusions as to the time frame. The process will be both gradual and data-dependent.’

08 February 2022

‘Since the last forecast of the European Central Bank ... the available information shows ... a further upward surprise in inflation. Those are essentially the data that have been released in both December and January. ... And those surprises have affected both the energy component and the food component, but also the core. ... In parallel, what we have also observed is that the energy futures curves show a higher level throughout this year than they did in December... And this higher inflation during 2022, well, I think what it does is it increases the probability of what we economists call second-round effects, in a context in which, in addition, the evolution of the labour market continues to be positive in the euro area. And therefore, that also implies that risks to inflation are skewed to the upside, particularly in the short term, at least as long as this current episode of high volatility and high energy prices persists. ... Over this medium-term horizon, inflation is still expected to moderate. Over the past few months, the likelihood of medium-term inflation being in the vicinity of 2% has probably increased, but there is no perceived risk of inflation being persistently above that level in the medium term. In this respect, I think it is important to underline that inflation expectations in the euro area are currently slightly below 2% and that wage growth remains subdued. I also think it is important to underline some of the differences with the United States, because this is a comparison that is being made on a regular basis. And in the case of the euro area ... the energy component is the main factor behind price growth. Not the only one ... but it is the main factor. ... In any case, I think that perhaps the most important thing to underline is that the level of uncertainty about the inflation scenario is very high. The geopolitical tensions that we are experiencing, for example, the ones we all have in our heads, for example in Europe, well, it is clear that they could lead to new increases in energy prices that could feed back into these wage increases and an inflationary spiral. The evolution of bottlenecks, for example, is also very uncertain .... It is also uncertain to what extent the pick-up we have seen in inflation and the persistence of this inflation could lead to a further fall or a more persistent fall in real household and corporate income, which could ultimately also have a negative effect on consumption and investment, and therefore ultimately on inflation. ... more than ever, it is necessary to maintain optionality, it is necessary to maintain flexibility and it is necessary to maintain dependence on incoming information in order to adjust the monetary policy stance appropriately. The fundamental anchor of our monetary policy remains what we call the forward guidance on interest rates.... This forward guidance includes, first of all, a sequence whereby we will only raise interest rates after we have completed our purchase programmes. And furthermore, this forward guidance requires that for this first interest rate increase to take place, three conditions must be met which are well known and which affect the inflation forecast over the medium term, over an 18-month horizon ... and the observed underlying inflation also. These conditions must be met - all three must be met at the same time - they must be met in order to ... avoid a premature tightening of our monetary policy. And I think it is also very important to stress that in this context of uncertainty and with medium-term inflation expectations showing no risks of de-anchoring to the upside, any normalisation of monetary policy must be very gradual. All our measures of the economy's natural nominal interest rates are very low, which also adds to the need to maintain gradualism. ... The direction of where to steer our monetary policy is clear, but I think we should not jump to conclusions about its timing, it will be gradual and it will also be data-dependent.’

Villeroy (Banque de France):

23 February 2022

‘But let me start with a few words about Ukraine. We are obviously monitoring closely the geopolitical developments, and their possible economic and financial implications. Let me already stress that the direct exposure of French financial institutions to Russia remains limited, but the SSM called all European banks to enhanced vigilance on cyber risks. We will assess in our Governing Council in March the more indirect consequences on inflation and growth, and we will be facts driven: more than ever, optionality – about the right monetary stance – and flexibility – to guarantee the right monetary transmission – are the two names of the game for our policy.’

22 February 2022

‘I do not believe that inflation is taking hold lastingly, but the inflation bump is higher and longer than expected. This hump is mainly explained by energy, for which prices rose by 19% in France in January, due in particular to the crisis in Ukraine, and by supply difficulties in industry and construction associated with the very strength of the recovery. In France, we are quite close to the top of the hump, which should be reached in a few months, and then there will be a gradual decline this year followed by a drop below 2%. We are nevertheless very vigilant. This is a very sensitive issue for our fellow citizens, especially the most disadvantaged. Our commitment is to bring inflation down to around 2% in Europe, which should mean below 2% in France.’

‘Inflation, when comparing the harmonised price index, is 3.3% in France, 5.1% in the Eurozone and 7.5% in the US. The problem is therefore less strong in the Eurozone than in the United States and less strong in France. There are several reasons why we are relatively less affected by the sharp rise in energy prices: the high proportion of nuclear power, government measures to cap the rise in gas and electricity prices, which are effective even if they are costly for public finances, and the fact that petrol taxes are fixed, which acts as a shock absorber.’

‘Core inflation, apart from the more volatile energy and food prices, is much higher: 6% in the US, 2.3% in the euro area. The US recovery was earlier; the economy is overheating with demand well above the pre-Covid level: this is linked in particular to the Trump and Biden administrations' oversized checks. The US, at near full employment, is also experiencing greater pressure on the labour force. This is manifesting itself in the "Great Resignation" and leading to strong wage increases.’

‘Our forecast does not correspond to this perception [of a risk of impoverishment because wages are not rising as fast as prices]: purchasing power will be preserved this year on average. But it is up to social negotiation, which is decentralised, to decide on salaries and to take account of inflation. In sectors that are attractive, such as the hotel and restaurant industry, high increases are justified. But we should not move towards an overly general standard for wage increases based on the top of the “hump”: in a year's time, inflation will be much lower. There is a risk of fuelling a price-wage spiral, in which everyone would lose out, starting with employees. The best guarantee of increased purchasing power in the future is moderate inflation and stronger growth.’

‘Once we get out of the current inflation hump, we will move towards a different inflation regime in the Eurozone than before Covid, one that is lower and closer to our 2% target.’

‘For ten years, we have been below the target. We have always said that this is not a fetish, to be respected every month to the decimal point, but a medium-term objective, to be achieved over time. Today, we are gradually reducing monetary support. In March, we will stop the exceptional measures linked to Covid. The next step will be to stop the other asset purchases. I would argue for doing this around the third quarter and keeping our options open depending on the evolution of inflation. Time is of the essence in order to avoid mistakes: we should not act too late at the risk of letting inflation get out of hand, nor too early at the risk of slowing down the recovery. There is no need to decide now on the date of a future interest rate hike.’

‘Our compass is price stability and inflation brought down to around 2%. We guarantee that in the medium term, within two years, we will return to around 2%. To achieve this, we are independent, and therefore we will resist any pressure from indebted countries. The ECB is not there to finance the deficits of the French state or any other country. If it bought debt securities, it was to avoid the threat of deflation in recent years.’

15 February 2022

‘…the Ukrainian crisis shows that uncertainty isn’t going away any time soon. The euro area, like many other economies in the world, is entering a crucial phase in the recovery from the covid-19 crisis. There is good news, there is bad news and the two are very much related to each other. Unemployment has fallen to its lowest level in the history of the euro area and real GDP surpassed its pre-crisis level in the final quarter of 2021. On the less positive side, shortages of materials, equipment and labour persist in some sectors whilst others still operate below capacity. This lopsided economy plus sharply higher energy and food prices caused headline inflation in the euro zone to accelerate to 5.1% in January. Core inflation is only at 2.3% but significantly higher than one year ago (1.4%). At our recent Governing Council meeting on 3 February, we acknowledged that “inflation is likely to remain elevated for longer than previously expected.” As Christine Lagarde said, these forces are expected to play themselves out gradually as the economy re-equilibrates and returns to its potential growth rate and the impact of the energy price shocks dissipate.  I will not comment further on the expected outlook for inflation – this will be for our next projections on the 10th of March.’

‘In the face of uncertainty, not being precommitted is an absolute imperative. The two most important words for Central Bankers recently are “agility” and “humility” – frankly, these are more than just words, they are the daily reality for us. Jay Powell rightly promises to be “humble and nimble”. We at the ECB stress this new principle of “optionality”: it means in a risk-management approach that we must broaden our policy space, to be able to respond to a broader spectrum of possible inflation scenarios as Philip Lane explained in a recent interview. The trick is obviously to articulate this increased optionality whilst at the same time giving sufficient predictability to economic agents to reduce the adverse effects of uncertainty.’

‘About the course, our commitment is crystal clear: we will do what is necessary to bring inflation back firmly and durably to around 2% within our projection horizon. This reassurance is key to keeping inflation expectations close to 2% whatever the short-term uncertainties are. We have a duty to do it, we have the capacity to do it, and have no doubt we shall do it. To keep this course, the first compass is our sequencing: we will end net asset purchases first, then raise the key interest rates, before eventually starting to reduce the balance sheet. Uncertainty and speculation about the order in which things will happen is unnecessary and easily avoidable. Furthermore, the logic of sequencing is closely linked to the use of the APP as a stance measure that reinforces the effect of forward guidance on short-term interest rates; if we wish to withdraw monetary accommodation, we should first release the accelerator pedal by stopping adding stimulus. By the way, if we started to raise rates before the end of net purchases, the risk would be to excessively flatten or even invert the yield curve. The fact that the reduction of the balance sheet occurs only in a third step is intended to avoid a brutal impact of the withdrawal of accommodation: the presence of the ECB in the markets, via reinvestments, allows us to contain these destabilising risks including on fragmentation. Hence, the direction of the navigation is clear. But as I have already said recently, we will retain our full optionality about its pace: its calendar will remain gradual, state-dependent and open in moving from one stage to the other. The second compass is our forward guidance on interest rates, as adopted last July.’

‘Let me at this stage turn to more open questions and give more personal reflections on how to increase this optionality:

• The first option we’ll have to consider - at our March meeting - is the calendar of net asset purchases. Keeping them open ended from October would not be appropriate, as (i) as a principle, it ties our hands for too long: I said earlier that calendar based guidance shouldn’t go beyond some months in the prevailing uncertainty (ii) in substance, there is now much less reason to continue pressing the gas pedal while increasing our asset stock, as inflation is converging towards our 2 % target “from above”. I still believe it’s useful to have some transition between the end of net PEPP purchases in March and the end of net APP purchases: but this reduction could follow a bimonthly or monthly pace instead of a quarterly one, and APP purchases could therefore end in Q3, at some point to be discussed.
• In parallel, another way to enhance optionality could be to remove the word “shortly” from the forward guidance on asset purchases. This would be a possibility to break the quasi automatic temporal link between the two instruments whilst retaining the sequencing. Optionality would mean that the lift-off could possibly take more time, if warranted.

This temporal decoupling could give more scope for fine-tuning, which is an advantage in uncertain times. Rather than forcing ourselves to act on both instruments almost simultaneously (which could fuel fears of an excessively brutal effect), we could give ourselves more time and consider the latest inflation outlook before deciding about the calendar of rate hikes: a decision that anyway we don’t need to make before our June meeting. Any speculation about this calendar of future lift-off is at this stage premature.’

‘Let me stress here an important semantic point about our monetary stance: the steps I am discussing here are about the normalization of our monetary policy, not about tightening. It’s still the exit from exceptional instruments and an extremely accommodative monetary policy (increase of the already large assets stock, negative interest rates). It’s the first phase of a gradual return towards a more neutral stance, which we are still far from. Tightening would be another story, going beyond a neutral stance, which is not within our present policy horizon. Let me then remind you of the three state-dependent criteria on our forward guidance: “the Governing Council sees (i) inflation reaching 2% well ahead of the end of its projection horizon; (ii) and durably for the rest of the projection horizon; and (iii) it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term”. Today, in my personal judgement, it might be considered that the first criteria (with a headline inflation significantly above 2% since summer last year and expected to remain there for months ahead), and the third one (with underlying inflation around or above 2% by most definitions) are fulfilled. At this stage, according to our December forecasts, the remaining one (about inflation remaining at or above 2% for the rest of the projection horizon) is not met. This could possibly change in the next quarters. However, we should be mindful of the uncertainty surrounding our 3-year inflation projections in the extraordinary context we are going through, especially when price pressures are originating from sector-specific supply constraints with moderate signs of contagion so far to wages. And there is one additional element, calendar based, introduced by the sequencing: any rate hike should only happen after date X, the end of the net asset purchases. We should not pre-empt this calendar:  it is about the credibility of the sequencing, and also about some caution on the most fragile of our criteria - the medium-term forecast-based one.’ This brings me to a key reminder: the forward guidance never calls for an automatic decision, and always preserves our possible assessment. In our own wording, it is an “expectation”, and the Governing Council has to “see” and “judge”: even if and when the three criteria will be fulfilled, we could take into consideration exogenous or exceptional contingencies, including geopolitical ones. One last optionality after lift-off would be about the pace of further rate hikes. In particular, some market participants anticipate a scenario where we could pause or adjust rates significantly more slowly after having exited from negative territory. This is not a preset course, but this would be a possibility as our hands here are completely free.’

‘We should obviously keep optionality as we navigate this course. But we will also retain flexibility: to ensure not only the right stance of monetary policy, but also its right transmission throughout the euro area, in terms of asset classes and jurisdictions. Optionality and flexibility strengthen each other in our path towards a smooth normalisation: on the one hand, gradualism will help to avoid possible markets overreactions; on the other hand, we explicitly stressed the need for flexibility already in December, “under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardizes the attainment of price stability”. This is not a question of moral hazard or supporting any country unconditionally, still less about tolerating any form of fiscal dominance. It’s about avoiding risks of unwarranted fragmentation: having, if needed, in our “virtual toolbox”, some “contingent option”. It would work partly – but not necessarily solely – through PEPP, including its reinvestments and possibly resuming its purchases under certain conditions. More generally, maintaining our high stock of assets until the third step of our sequence gives us through our reinvestments more leeway on the markets.’

10 February 2022

‘Our business survey at the beginning of February confirms that the French recovery is solid and resists Omicron. It supports our growth forecast, which should be at least 3.6% for 2022. Our survey also highlights the persistence of supply difficulties, which companies believe should be resolved by the end of the year. But above all, 52% of companies are experiencing recruitment difficulties. In the long term, the main obstacle to French growth is this shortage of skilled and unskilled labour. … I want to stress one essential point: today, the French economy is experiencing high growth and too much inflation, but in two years' time, this picture should be reversed. In 2024, inflation will probably be back around 2% and growth will have returned to its pre-covid trajectory of 1.4%, which is too low to bring us back to full employment. It is desirable and possible to set a more ambitious target, around 0.5% of additional potential growth per year: then full employment and debt reduction may finally be on the horizon, but within ten years rather than one year. … The speed of the "French vehicle" over the last two years was due to the fact that the fiscal and monetary accelerator pedal was fully pressed. And we had to. But you can't press the accelerator indefinitely because it comes up against two limits: the public debt for the budget, and inflation for the currency. Today, the issue is therefore different: it is the efficiency of the engine. We need to remove the brakes on the cruising speed of our economy, and this must be done through reforms.’

‘We still think it is a bump, but higher and longer than expected. But remember, a year ago, inflation was at zero in France and even negative in the eurozone, so there was concern that it was weak. This is one of the surprises, in an absolutely unprecedented post-Covid context. The current level, at 5.1% in the euro zone and 3.3% in France, is probably close to the top of the hump, which will be reached in a few months' time. Incidentally, French inflation is well below the eurozone average, mainly due to better control of energy costs. These obviously play a large role in the current rise. If we look at "core" inflation, excluding energy and food, it is 2.3% for the euro zone and 1.7% for France, and therefore much closer to our 2% objective. But we also have to keep an eye on this. We, the European Central Bank and the Banque de France, together with Christine Lagarde, are giving a strong guarantee to the citizens of Europe and France: we will do what is necessary to ensure that inflation returns to around 2% in the long term. We assuredly have both the capacity and the will to do so.’

‘There are justified wage increases in certain sectors that are attractive, for example the hotel and restaurant industry. What seems essential is that increases remain negotiated at branch and company level, as close as possible to the economic and social reality. Measures that are too general would run the risk of a price-wage spiral that would be detrimental to everyone. However, we are not seeing this at this stage in France, nor in the euro zone. After the "bump" of 2022, we can then expect inflation to reach 2% and per capita wages to rise by an average of 3%: thus a gain in purchasing power, extending the 8% cumulative increase since 2015.’

‘Time horizons should not be confused. The current energy crisis is mainly the result of the sudden resurgence of global demand, while supply is constrained by past investment shortfalls and geopolitical tensions. The debate, on the other hand, is about the medium and long term. The effects of the ecological transition will be spread out over time, at least until 2030, and probably beyond. It could have two opposite effects: a higher carbon price - which is desirable - would increase the cost of certain products; conversely, a disorganised transition would weigh on growth and ultimately on inflation. So, modesty is called for: we do not yet know what the overall effect of the ecological transition will be on prices, but we are actively working on this "climate economy", with our Paris-based Global Network (NGFS).’

‘We announced that we would proceed in sequence, with a gradual normalisation: first the end of net debt purchases, then a rate hike and finally only the end of the reinvestment policy (of securities already purchased that come to maturity). The direction of the journey is clear, but the pace of the sequence of steps will depend on the observed inflation and the economic situation.’

10 February 2022

‘We will update our figure in March. I would say today at least 3.6% [2022 growth] in France, because we have good results for the first quarter.’

‘On inflation … obviously … there is much uncertainty. … But I would say a very simple message: Increased uncertainty requires increased optionality in our monetary policy, and this is what we stressed in our Governing Council last week and what we will apply, implement in the next month.’

‘You know, life is very simple. We happen to have our next Governing Council in March. And this is information I will give today: on March the 9th and the 10th. We will then update our forecasts. And believe me, one month is important, because … we can have developments on the energy front, on the geopolitical front. So our figure will be still better in one month. And then we will decide. But as I said, optionality.’

‘Sorry to repeat this word “optionality”. But it’s not an empty word. Let me precise somewhat. It’s clear that we will have a sequencing in the gradual normalisation of our monetary policy. We are going closer towards our target of 2% and this is good news. There is at present an inflation hump - everybody sees it - due mainly to energy. But the sequencing of the gradual normalisation will be the following: a) tapering, so stopping the net purchases not only on the PEPP, which we decide for March, but on the APP. Second, rate hikes. And third, eventually, end of reinvestment, so downsizing of the balance sheet. The road, the direction is very clear; the pace along this sequencing is completely open and data-dependent. This is what we mean by optionality. And it would be a mistake in such uncertain time to make a premature decisions. So, Christine Lagarde indicated last week the direction of the journey, but we will determine the pace starting in March.’

‘Let me be extremely clear and serious about that. It’s not the usual caution of a central banker. It’s a pragmatism of the situation we are in. If we decide too much in advance with so many uncertainties … it would be a professional mistake.’

‘We think it’s a hump, we think inflation will step down in the coming quarters, let’s say, due to energy prices, due also to the easing of supply chain problems, which is another element.’

08 February 2022

‘I wouldn’t deduce from what has happened in recent days that there is an ECB calendar that corresponds to an underlying calendar of markets. I think there were perhaps reactions that were very high and too high in recent days.’

‘We are exiting a period of exceptionally accommodative monetary policy -- that is why it is a question of reducing very gradually and in an adapted way.’

Policy normalisation would not exceed a ‘neutral orientation’.

‘We are not ... on the verge of a Eurozone crisis, including in Italy.’

‘However, companies are experiencing serious supply difficulties as a result of the economic recovery which, combined with the rise in energy prices, are undoubtedly causing inflation in France to rise to 3.3% in January and 3.4% year-on-year at the end of 2021 (according to the harmonised index at European level). This is much lower than the average for the Eurozone (5.1%), but this "bump" is higher and longer than expected, and raises many questions among our fellow citizens. However, it should remain temporary: within a few months, inflation in France should gradually decrease, and then fall back below 2%. … I guarantee that we, the European Central Bank and the Banque de France, will do what is necessary to ensure that inflation returns to around 2% in the long term in the euro zone and a fortiori in France. We have the mandate, we have the capacity, we have the will: this will contribute in France to consolidate the gains in purchasing power on average, which have been significant in recent years with a per capita gain of around 8% over the period 2015-2021, even if this figure does not cover the diversity of individual situations. The French can have full confidence in the stability of their currency, the euro.’

04 February 2022

‘Yesterday, in the face of increasing uncertainty on inflation, our key word was “more than ever” optionality. We take it seriously: we retain our full optionality on the decisions we will make from March and in the following quarters, informed then by the latest data, forecasts and geopolitical developments. And as we clearly stick to our sequencing – starting with first tapering and second lift off - we will also retain our full optionality about the pace of this sequence, and timing of moving from one stage to the other. Hence, while the direction of the journey is clear, one shouldn’t rush to conclusions about its calendar: it will remain gradual, state dependent, and open in each of its steps.’

‘The ecological transition holds risks, including on inflation as the gradual switch to greener energies may entail higher and more volatile prices, at least in the intermediate phase. Central banks are closely monitoring this debate about a possible “greenflation”. So far, the evidence points to a non-negligible but limited direct contribution of climate policy in the recent increase in inflation. For example, the ongoing rise in CO2 prices in the European ETS market, which we are already taking into account in our inflation projections, has a modest positive impact on inflation. And the implementation of a carbon tax in Germany in 2021 has had a discernible impact in 2021: combined with other measures to tackle climate change, the overall impact on German consumer prices was estimated at 0.4 percentage point in 2021. That said, climate transition is far from being the primary cause of the recent surge in energy prices across the world. Indeed, it has more to do with a combination of global factors: rapid demand recovery from the pandemic-induced recession, supply disruptions, geopolitical tensions. And in the specific case of Europe, the shock on energy prices is amplified by the run-up in wholesale electricity market prices, due to a shortage in natural gas. Afterwards, beyond our projection horizon, the transition to net zero might have a more significant impact on inflation, especially if it were to be disorderly. The net zero transition would then result into a negative supply shock, in particular if the capacity increase in alternative energy sources were too slow. In addition, the reallocation of demand involved by the transition might trigger relative prices changes in some sectors. The level of r* – the natural interest rate – could also be affected in two opposite ways: higher green investments will increase it; but a negative impact on productivity growth would reduce it. On many of these questions, it’s too early to tell. We need urgently more analytical work on the macroeconomic modelling of climate transition; more than ever, monetary policy will remain a judgment exercise, looking through temporary phenomena while averting lasting increases in inflation. Central banks will have to ensure that these shocks on relative prices do not result into a lasting increase in inflation. One thing is certain: the sooner we start the transition, the better to ensure long-term sustainable growth and price stability.’

Nagel (Bundesbank):

09 February 2022

‘Currently, the global economy is doing quite well, it is in an almost post-Corona mood. The recovery from the pandemic-related slump has been unexpectedly fast and strong. Such growth is accompanied by strong demand for energy, which partly explains these price rises. In addition, there is the critical geopolitical situation between Ukraine and Russia. An important question for monetary policy is whether and to what extent energy prices will fall again. ... If energy prices only fluctuate strongly in the short term, monetary policy would do well to hold back. But there are signs that the rise in energy prices could last longer, that it has an impact on the prices of other goods and services, that there is also rising demand behind it. Moreover, the inflation rate is not only driven by energy prices. Half of the current high inflation is due to energy prices. We should also look at the other half. As central bankers, we can do a lot about that. We must not ignore the fact that we have provided the markets with abundant, even overabundant liquidity over the years because the inflation rate was too low for a long time.’

‘It has certainly not failed, it is now facing a new and different test than in the low-inflation environment before the pandemic: if you look at the inflation figures and the macroeconomic environment, we have reached a point that is a textbook template for central bank action. The onus is now on the ECB. We will look at the data, in March the new projections for growth and inflation will come. And on that basis we will decide. If the inflation picture and, above all, the outlook for the future do not brighten considerably by then, we will have to realign monetary policy. … We have precisely defined the order in which we will act if necessary: First comes the exit from net bond purchases, then we raise interest rates. ... I think it is important that we agree in the euro area to first withdraw the measures that we took last in the crisis. The bond purchases are associated with greater risks and side effects. That is why they were taken late. And that is why they should be stopped first.’

‘The Governing Council did an important and good job in the Corona period and before. Now we can start to withdraw as central bankers from the unusual monetary policy of the past years with the very low interest rates and the bond purchases.’

‘I see very clearly the risks we run if we wait too long before normalising monetary policy. I already referred to the social dimension of inflation in my inaugural speech. In my estimation, the economic costs are significantly higher if we act too late than if we act early. This is also shown by past experience. Later, we would have to raise interest rates more vigorously and at a faster pace. The financial markets then react with more volatility. ... If we wait too long and then have to act more massively, the market fluctuations can be more pronounced.’

‘The currently very high energy prices are not primarily explained by climate policy measures. However, if you put the economy into an ambitious transformation process, this can lead to permanently higher prices. In the past, we often assumed that energy prices would go down again after a high because it was only a short-term shortage that could be eliminated. Now it could be different because of the green transformation of the energy supply. We have to be all the more vigilant.’

‘It is too early to make a reliable statement. But if inflation remains at a high level for longer, the probability of second-round effects increases. From today's perspective, the experts at the Bundesbank believe it is likely that inflation in Germany will average well over 4% in 2022.’

‘Since last summer, the inflation rate has risen significantly. There are many reasons for this that have nothing to do with monetary policy: the pandemic, supply bottlenecks, the geopolitical situation. But there are now signs that we have to take countermeasures: Many countries are starting to ease pandemic restrictions. The economy is recovering. Labour markets are looking good. That is an encouraging picture! That is why monetary policy can become less expansionary.’

‘Of course, we can't clear congestion in ports or get containers to where they are needed. But the supply bottlenecks also stem from the fact that demand has risen unexpectedly fast and strongly. And if the bottlenecks and increased inflation persist for a long time, they could also affect longer-term inflation expectations. Temporary price pressures can continue via such second-round effects. Monetary policy must prevent this.’

‘In our forecasts, we are currently assuming that the inflation rate in Germany will not fall noticeably until the second half of 2022, but will continue to be too high. However, I am convinced that monetary policy will succeed in achieving its target of 2% inflation in the medium term.’

‘If the picture does not change by March, I will advocate normalising monetary policy. The first step is to end net bond purchases in the course of 2022. Then interest rates could rise this year.’

Kazāks (Latvijas Banka):

24 February 2022

‘The world economy has recently seen the return of inflation. After years of struggling with below target inflation, the policy challenge has shifted towards finding the right balance between “looking through” the pick-up of inflation that is viewed to be largely transitory, while keeping the underlying price pressures in check. Almost all major central banks have revised their medium-term policy outlook. The ECB has decided to end the active phase of its emergency pandemic asset purchase programme (PEPP) in March, while the purchases in its more “traditional” asset purchase program are boosted slightly raised to smoothen the end of PEPP. With respect to possible changes to our current interest rate policy, no immediate commitments are envisaged for the time being. Which might beg the question – are there risks of the ECB falling behind the curve? To some extent, this assessment will always be in the eye of the beholder. But it helps to have a common framework to evaluate the policy course. And in the case of the ECB, the forward guidance on interest rates (and implicitly on the remaining asset purchases) provides an explicit and clear guidepost. Our forward guidance consists of three conditions that must be met before we decide to act on rates: inflation must be reaching our target well ahead of the end of the projection horizon; inflation must remain at this level durably for the rest of the projection horizon; and we should see sufficiently advanced progress in the observed underlying inflation. And we would not cherry-pick just one or two of these elements; all three must be met for us to act. Inflation has recently exceeded our projections on a regular basis. We constantly update our projections, but even the most recent inflation forecast of December 2021, comes with upside risks. So, after years of undershooting our 2% target, the current inflation projections are close to it. And even though they come with a high degree of uncertainty, the probability of being at or above 2% over medium term has not been this high in a very long time. This does not mean downside risks to inflation have disappeared. High uncertainty equally implies future inflation may be lower than we anticipate. Moreover, if a significant part of the current inflation surge comes from rising energy prices and supply side bottlenecks, this can be seen as the evidence of high inflation for the wrong reasons, as it may dampen economic activity, and therefore also future inflation. So, the possibility of inflation falling below our target should not be discounted altogether. Yes, forecasting inflation is complicated. Therefore, we do not rely entirely on a mechanical link between projections and policy, and we have deliberately included in our forward guidance the condition of advanced progress in underlying inflation, which requires using judgement as a complement to the more technical analysis. The broader picture of the euro area economy shows us strong short-term price pressures, but also generally positive developments in the real sector. Labour market figures continue to be robust, with unemployment rates declining (which is one of the reasons we are not currently debating the stagflation scenario). But for a persistent inflation push we also need a robust wage growth, which is not there yet in the data. The Phillips curves for the euro area have been rather flat over the last years. This, of course, can change in the future, and wage growth may accelerate significantly, but we first must see it to believe it. The long-term inflation expectations in the financial markets have not climbed above 2%. If anything, they still imply long-term inflation slightly below our target. So, if market expectations are for the ECB to raise rates soon, yet the long-term inflation expectations are below 2%, then this is clearly not consistent with the conditions we have laid out in our rate forward guidance. Unless the expectations are that inflation will fall back below 2% because of premature tightening. And this is exactly what we want to avoid! The roadmap for central banks is much clearer when the inflation is high, as opposed to when it is persistently low and the risks of an effective lower bound are looming. This calls for a cautious approach to monetary tightening, and that is the idea behind our rate forward guidance. But it only works well when it is credible. That is why we take the commitments embedded in our rate forward guidance seriously. It is clear on what needs to happen for us to change policy. We are getting closer to all three conditions being met, but we are not there yet. But make no mistake, when all three conditions are met, we will act without delay. We do not want to be behind the curve, nor do we aim to be ahead of the curve. We will be at the curve. So, be ready and be prepared.’

16 February 2022

‘It’s going to be data-dependent. We’ll see, but it’s quite likely that it [a rate hike] happens this year.’

The situation has become ‘more clear-cut … We see inflation significantly above what we saw in the past and that shifts the gravity.’

‘…if rates go up too fast, it will have a bearing on the recovery’. Need a ‘careful and gradual’ approach.

Money-market bets for two 0.25 bp hikes this year are ‘somewhat too harsh.’

‘It’s important not to rock the boat. We need to steer it in a way that’s relatively smooth, that markets understand what we’re doing. And we see what the economy’s doing.’

‘It would be unrealistic to expect that in March we’ll provide a blueprint for exactly what in every month we’ll do going forward. It’s incompatible with the strategy we use. It’s gradual, it’s data dependent and it’s flexible.’

Wage pressure could materialize ‘quite soon … When we see this happening, we shouldn’t hesitate from the monetary-policy point of view to act, to avoid second-round effects.’

07 February 2022

‘July would imply an extremely and unlikely quick pace of tapering. But overall, at the current juncture, naming a specific month would be much premature.’

‘If we see that inflation remains high and the labour market remains strong or strengthens further, if we see that the economy keeps going, the direction is clear: we may act sooner than we assumed in the past.’

‘With the economy recovering, inflation at this level and increased risk of persistency of inflation, new net asset purchases become less necessary.’

Favoured new ‘roadmap’ for tapering rather than repeated decisions that create ‘recurrent cliff effects’.

Lane (ECB):

23 February 2022
https://www.ecb.europa.eu/press/inter/date/2022/html/ecb.in220223~6fb3349f80.en.html

‘In times of great volatility and uncertainty we should not make absolute statements. But the data clearly suggest that we could be moving closer to our medium-term target.’

‘We will conduct a comprehensive assessment of the economic outlook at our March meeting. This includes the recent developments on the geopolitical front. These not only have implications for oil and gas prices, but also for investor confidence, consumer confidence, trade and so on. So in terms of inflation there is not just the mechanical effect from commodity prices, for the medium-term outlook the macroeconomic effects need to be incorporated. As we already flagged at the February meeting, the geopolitical tensions are a very important risk factor right now, for Europe in particular.’

‘It’s important not to anticipate the decision that the ECB’s Governing Council will take in March. A lot can happen before then and, as mentioned, there is much uncertainty in the world. But our strategy is crystal clear: we want inflation to stabilise around 2% in the medium term. There are three possible ways of getting there. First, if the medium-term inflation outlook falls well below our target, the ECB must pursue accommodative, i.e. loose, monetary policy. Second, if medium-term inflation settles above our target, we would need to tighten monetary policy. Third, if inflation settles around our target in the medium term, then a normalisation of monetary policy, as we call it, would suffice.’

‘Inflation rates are high at the moment, hitting 5.1% in January. We expect them to decline in the course of this year, but at what pace and by how much is uncertain. The decisive factor for monetary policy is how inflation develops in the medium term. If inflation rates are moving towards our target in the medium term, which is now looking more likely – instead of being well below 2% as before the pandemic – we will adjust monetary policy, because we would then, for example, no longer need to make asset purchases to stabilise inflation at our target over the medium term. It was different in December, when surveys still showed the expectation that we would need to maintain asset purchases until the middle of next year, but the timeline may be shorter than what people expected then.’

‘Our monetary policy is driven solely by our mandate. If inflation moves close to our target, we will phase out quantitative easing. It’s true that we created a lot of flexibility during the pandemic with our pandemic emergency purchase programme (PEPP). We are also convinced that we need to ensure the transmission of monetary policy works so that our interest rate policy is not undone by fragmentation of the European bond market and the resulting strong divergence in the financing conditions across member countries. In December we said that we will be flexible in our policy when needed. And we also pointed to a particular application of the flexibility: even when the net asset purchases under the PEPP come to an end, we can reinvest the portfolio flexibly. That can help with any fragmentation risk that might arise. But the situation is in any case completely different to that in the financial crisis 13 years ago. The world today is rightly not expecting to see interest rates to return to the levels we saw 15 years ago. Should interest rates move up from a very low level to a slightly higher one, the consequences would not be comparable to what we saw then.’

‘We make a comprehensive assessment, especially at the quarterly meetings, such as in March. The overall economic situation is that a strong recovery of the European economy is expected. Interest rates have gone up from very low levels but remain low compared to historical averages. Of course, the financing conditions play a role for the recovery. And we will always be vigilant, we care about fragmentation risks.’

‘Following our February meeting we said that, compared with the December meeting, we saw more upside risks. Many of these related mainly to the short-term outlook: energy prices continued to increase and the bottlenecks in supply chains could last longer than expected. But these are not lasting phenomena, they belong to the temporary components of inflation.’

‘Inflation rates are indeed higher than expected, and these will persist for longer than originally thought. That mainly reflects energy prices and the supply bottlenecks, but the longer the origin of the shock remains, the more this affects a wider set of prices. So we are also revising our assessment of the persistence of inflation in this respect. But our instruments take 9, 12 or 18 months to affect the economy; that’s why we emphasise the medium-term nature of monetary policy. Many of the factors that are now driving inflation rates up will play less of a role in 12 or 18 months. The economy is not in an overheating zone. We think that most of this inflation will fade away.’

‘The impact on inflation will of course depend on how the green transition proceeds and this will be a gradual process. A lot also depends on what the countries do with carbon tax revenues. A recycling of tax revenues can boost the economy. At present, however, energy prices are being driven up mainly by global factors, and less by, say, national carbon taxation in Germany.’

‘The huge spike in oil and gas prices is not being driven by the carbon transition. The oil price has essentially been going through a sort of “pandemic cycle”. In the first year of the pandemic, 2020, energy prices fell unusually low. And in the second half of 2021, they recovered strongly. There have been all sorts of supply issues, but these will eventually be resolved. As a central bank, we don’t have to take a stance on exactly where these prices are going. But we need to be agile and responsive to what happens.’

‘I don’t think we‘ll go back to the 2019 situation in the coming years. But it is not entirely clear what net impact the changes will have. For example, digitalisation received a boost during the pandemic. This should be an anti-inflationary force as it reduces costs. Business travel being replaced by cheaper video calls is one example of digitalisation. On the other hand, companies that struggled with supply chain problems may become more cautious, potentially focusing on their resilience, their reliability, rather than costs. This could push up prices. In addition, the demographic developments are predictably going to continue, as the population becomes older. There is also the question of whether the internationalisation of the European workforce is coming back. A smaller workforce may translate into higher wages, but also less demand in the economy, so the net impact on inflation is unclear.’

‘We do expect wages to pick up. The question is how much. When we target an inflation rate of 2% and expect productivity to grow by 1%, wages in the euro area increasing by an average of 3% would be consistent with our inflation target. We are monitoring the wage situation very closely. There may be an element of catch-up, but this is not the 1970s – central banks have learnt their lessons. If there was a threat of a wage-price spiral, we would act. And the wage bargaining partners know this, too.’

‘That [the ECB has printed so much money that it created inflation, and since it continues to print more money, inflation will continue to grow] is a theory of domestically generated inflation. What we have now, however, is a lot of imported inflation. That theory would also suggest that people have too much money in their bank accounts, leading to a big surge in consumption and investment, which drives prices up. We are not seeing that. It is important to recognise which prices are growing. The most remarkable increases relate to the prices of gas and electricity. Food and other products that need energy as an input are becoming more expensive. But, unlike in the United States, in Europe we are not seeing a general demand boom, just certain catch-up effects related to the pandemic. What we are seeing at the moment is mostly imported inflation, through the prices of oil and gas. The pandemic led to very high demand for liquidity and the ECB had two options: either meet that demand and allow a big expansion in liquidity in the system or have a large increase in capital market interest rates, which would have added a financial problem on top of the pandemic problem.’

‘Both in the United States and in Europe global factors such as the increasing price of oil have a major impact on inflation. However, in the United States domestic factors such as high demand resulting from fiscal measures play a greater role. The stimulus package introduced by President Joe Biden was much bigger than the fiscal stimulus in Europe, with a bigger impact also on the labour market. The inflation rates are correspondingly higher there. This is why we cannot compare the situation of the Federal Reserve to that of the ECB at the moment.’

‘We were crystal clear in our monetary policy strategy, which we published in July. We have a sequencing: our net assets purchases will first be scaled down, then ended. Then, the key policy rates will only increase above their current levels if the conditions consistent with our medium-term inflation target are met. So before we talk about potential rate decisions, we need to end net asset purchases. And we need to prepare the market for the eventual end of these purchases.’

‘Like everyone, we notice that the energy bill has gone up, petrol has become more expensive, the prices for many groceries have increased. But we are of course aware that people with lower incomes are much more affected by the higher prices, and that they also feel the impact of the energy shock very differently.’

17 February 2022

‘A comprehensive analysis of the implications of high energy prices for near-term and medium-term inflation dynamics should take into account four factors: first, the direct impact through the energy component of the HICP; second, the indirect impact, since energy is an important input for many other components of the HICP, such as food, transportation, goods and many consumer services; third, the potential for second-round effects on wages, with due differentiation between a one-off or catch-up wage adjustment and a revision in inflation expectations that would have persistent effects on wage growth; and, fourth, the macroeconomic impact, with high energy prices operating through negative income and wealth effects, while also affecting energy-sensitive production and investment plans. At a global level, the macroeconomic impact of an energy shock differs between energy-producing and energy-using regions. Since the euro area is a significant net importer of energy, a surge in energy prices constitutes a significant adverse terms of trade shock. Higher import prices for energy reduces the disposable incomes of households and the cash flows of energy-intensive firms. The impact of this terms of trade shock on euro area macroeconomic dynamics will warrant close monitoring in the coming quarters.’

‘Moving from near-term to medium-term inflation dynamics, there is a clear potential linkage: if currently-high inflation causes a rethink about the likely level of medium-term inflation, a persistent shift in inflation expectations can play a significant role in determining inflation dynamics. There are several mechanisms at work here.’

‘First, at any given time, the recent history of inflation is an important input in shaping the beliefs of households, firms and investors. Before the pandemic, there were widespread concerns that a long period of below-target inflation in the euro area had led to a downside de-anchoring of inflation expectations. In particular, there was a widely-held conjecture that myriad structural forces (combined with the effective lower bound for monetary policy) would keep inflationary pressures low for an extended period, with persistent monetary accommodation only gradually returning inflation to the 2% target. The currently-high inflation rate calls this into question this conjecture through a stark demonstration that inflation is not destined to be always super low.’

‘Of course, precisely how much medium-term inflation expectations might be affected by the current burst of inflation will depend on the intensity and duration of this spell of above-target inflation, the nature of its underlying drivers (in particular, the balance between external supply shocks versus domestic demand shocks) and the extent to which the central bank is trusted to deliver the 2% target over the medium term.’

‘It is especially important that the central bank is seen as symmetric in its commitment to the 2% target – being fully prepared to react proportionately if there is a threat that inflation will settle above 2% in the medium term, while also making sure not to over-react to the extent that there is a risk that high near-term inflation might induce an excessive monetary tightening that pushes inflation persistently below the 2% target over the medium term.’

‘Moreover, it should also be recognised that medium-term inflation expectations have been increasing from a low base towards the 2% inflation target over the last year, even before the energy shock. In the specific context of the euro area, there are several factors indicating that the excessively-low inflation environment that prevailed from 2014 to2019 (a period over which inflation averaged just 0.9%) might not re-emerge even after the pandemic cycle is over.

‘First, the scale of the fiscal and monetary response to the pandemic demonstrated the strength of the commitment to delivering macro-financial stability, rather than seeing a return of the pre-pandemic dynamics that acted as a powerful anti-inflationary force after the global financial crisis and the euro area sovereign debt crisis (the twin crises between 2008 and 2013). Importantly, this included substantial policy action at both EU and national level; with the former including the SURE programme, extra funding for the European Investment Bank and, most significantly, the NGEU initiative. In particular, the medium-term nature of the NGEU programme has provided an important anchor for medium-term economic prospects, especially for the main beneficiaries.’

‘At the national level, we have witnessed the deployment of large-scale government interventions to buffer the impact of the pandemic shock on household and corporate incomes – through temporary employment protection schemes and tax cuts, among other initiatives – and to facilitate the normal financing of economic activity – especially through large-scale public loan guarantees. All this stands in contrast to the macroeconomic configuration that characterised the period after the twin crises which involved very muted aggregate demand, with many governments, households, firms and banks focused on sustained deleveraging after a period of excessive imbalances.’

‘Second, the re-anchoring of medium-term inflation expectations towards 2% has also been supported by the clarity of the ECB’s new monetary policy strategy, which was finalised in July 2021 and backed up by its revised interest rate forward guidance. The revised strategy makes it clear that the monetary policy of the ECB is dedicated to delivering the 2% target over the medium term, with a symmetric aversion to below-target and above-target deviations. The simplicity and transparency of the 2% target increases accountability and improves clarity compared to the previous target of “below, but close to, 2%.”’

‘Third, in relation to structural forces, some revisions to beliefs about the operation of the world economy might also be contributing to a shift in inflation expectations. In particular, the level of excess capacity in global manufacturing might be structurally diminishing to the extent that China has embarked on a transition from an export-led to a domestically-focused economy. In related fashion, rising wages and incomes in emerging economies mean that demand-side factors might be more powerful than supply-side factors in relation to the impact of globalisation in the coming years. In parallel, the increasing visibility of aging dynamics in some Western economies – a trend that is also becoming visible in some emerging areas (especially China) – may result in a less dynamic labour supply at the global level. The net impact of demographic change on inflation dynamics is not straightforward: while a lower labour supply may potentially have a direct impact on labour costs, it could also have adverse implications for the potential growth rate of the world economy. Furthermore, the net impact on labour supply in individual regions will also depend on international migration policies that can amplify or mitigate regional imbalances in labour supply. Moreover, in relation to structural forces, the pandemic may also have accelerated the digitalisation of the world economy, which could operate as an anti-inflationary force by increasing national and international competition, including in previously-sheltered services sectors.’

‘The carbon transition constitutes an important structural force that will be a primary contributor to macroeconomic dynamics in this decade and in the decades to come. The net impact of the carbon transition on inflation dynamics will depend on the exact transition path that emerges and the time horizon considered. In particular, the mechanical impact of the carbon transition on energy prices (which, in turn, will depend on the evolving mix between fossil fuels and renewables in energy production) must be assessed jointly with the implications of a sustained phase of transition-focused corporate, household and public investment. In particular, the impact on inflation dynamics must take take into account the shift in the composition of economic activity between investment and consumption and the wealth effects of the transition on the value of carbon-intensive assets, including housing. Moving towards a longer horizon, massive investment in renewable energy technologies should deliver sizeable efficiency gains in the production and use of energy over time, reducing overall expenditure on energy. Clearly, an orderly transition will have a more benign macroeconomic impact than a deferred process that requires sharper policy adjustment at a later stage.’

‘Charts 1-7 show the evolution of inflation expectations across a range of indicators. Taken together, these indicators signal that the current high inflation rate is not expected to persist. At the same time, at a lower frequency, these indicators also support increasing confidence that the pre-pandemic below-target inflation pattern will not re-emerge as a medium-term equilibrium, with inflation expected to settle around the 2% target.’

‘The re-anchoring of inflation expectations has also been reinforced by improving labour market prospects. Since labour costs constitute the dominant share of domestic costs, it is difficult to sustain inflation at the target 2% level if the labour market is too weak. …the labour market has turned out to be stronger than was expected during the pandemic and … the latest staff projections postulate a significant further decline of the unemployment rate over 2022-2024, to a level of 6.6% toward the end of this horizon. We would have to look back more than forty years to see such a low level of unemployment in the euro area. Of course, while these charts focus on the unemployment rate, it is always essential to take into account a wider set of indicators of labour market slack, especially in view of the role of pandemic-related labour market policies that might distort for longer the relation between the measured unemployment rate and the overall degree of labour market tightness.’

‘The projected tightening of the labour market in part reflects the success of macroeconomic policies during the pandemic, with fiscal policy focused on protecting household incomes, mitigating corporate vulnerabilities and maintaining the link between firms and workers through a focus on wage subsidy schemes and short-time working schemes rather than solely focusing on improving unemployment support programmes. It also is predicated on favourable aggregate demand conditions, including supportive financing conditions and fiscal policies. However, the projected tightening of the labour market also reflects the ageing of the euro area population and the possibility that the scale of the labour supply contribution from foreign workers may be weaker compared to the pre-pandemic trend. While such labour supply trends might tighten the labour market, these also have adverse implications for the trend path for potential output.’

‘In summary, monetary policy must take into account both the near-term and medium-term forces shaping inflation dynamics. In line with its new monetary policy strategy, it should be clear that the ECB will set its monetary policy to deliver its symmetric 2% target over the medium term, tolerating neither over-reactions nor under-reactions to emerging inflation risks. In particular, if the medium-term inflation dynamic is anticipated to stabilise around the 2% target, this will permit a gradual normalisation of monetary policy. Whereas if inflation threatens to persist significantly above the 2% target over the medium term, a tightening of monetary policy will be required. And finally, if inflation is anticipated to fall significantly below the 2% target over the medium term, setting an accommodative monetary policy will be necessary.'

‘When we conduct all the analysis we conduct for every meeting, which incorporates all the data we see in front of us, then when we write the monetary policy statement, when we make policy decisions, we have to give our kind of straightforward assessment of what we see. And for me the key communication coming out of that meeting is, compared to our December expectations, so compared to what our view of the world at the December meeting, that there were upside risks to the inflation outlook, particularly in the near term. And that’s just a simple reflection of the fact that, you know, we saw these further increases in energy prices, we saw the December and the January inflation numbers, and also, you know, the fact that the survey of professional forecasters, the corporate telephone survey, the unemployment numbers were basically confirming, if you like, that … these medium-term fundamentals were improving. And then another very significant issue which we highlighted in the monetary policy statement is in mid-December, Omicron was a real unknown unknown. We didn’t know, it was definitely a risk factor, whereas we emphasised in the February statement that, you know, the pandemic’s, this wave of the pandemic seemed to be having a smaller impact, and in fact, you know, fundamentally we did think Europe would see a good recovery. So, you know, in terms of what the market has, you know, has to think about is, you know, there’s a lot going on in the world. Now, what I would emphasise is that for us, you know, trying to also communicate it today, is we have a very stable strategy, is unanimously agreed last summer, we have a very stable reaction function, and we, I think, are just reading the data as we see it. But there is no change in our strategy, there’s no change in our reaction function. It’s essentially the data are coming in, and you know, we felt we had to communicate the fact that there is, it’d be obtuse, honestly, it’d be obtuse, even though it’s not a projection meeting, to not comment on the fact that there was a move in the data compared to our December assessment.’

‘So, again, when, when we think about, first of all, let me emphasise, is, already in December, we’ve already moved. We’ve embarked, we’ve decided to end the net purchase phase of the PEPP, you know, this month or next month at the end of March. We’ve decided in terms of the overall pace of asset purchases that our vision for 2022 will be a lot less purchasing than done in ’21. So there’s already movement in our kind of monetary assessment. And of course that was backed up by the fact that the December forecast was already a significant improvement in terms of the medium-term inflation outlook as it compared to September. But the, as you now, all of the projections we have are based on essentially prevailing financial conditions. And so, you know, on that basis, when, what I’ve been trying to emphasise is what we’re seeing is, is that there’s a, you know, as I showed you with the Survey of Monetary Analysts for example, there’s a significant fraction out there who still think inflation may settle well below 2%, there’s a significant fraction who think inflation will settle more or less at 2%. And so when you think about, you know, what is the monetary policy path, going from a vision where inflation will, will settle, you know, below 2% but maybe not too far below 2%, versus at the target, it does have monetary policy implications, but it’s not gigantic compared to a situation where you assess that inflation’s going to settle well above 2% and therefore you need to have monetary policy actions that are actually trying to slow down the economy, to raise financing costs to slow down the economy. I mean, that’s, I don’t think it is essentially what we see in front of us, because the current inflation rate is mostly an imported inflation shock, and it’s not the case that it's a kind of domestic demand boom overheating the European economy. So, in terms of urgency, I think gradualism makes sense in this scenario where we don’t have a de-anchoring to the upside situation. But what’s also true is in terms of the pathway for the economy. I mean, if inflation’s expected to set around 2% and if you have this period of above 2% inflation for a while. The interest rate paths, the path for asset purchases will have to take that into account. It’s a different path compared to a path where you think you have an open-ended, indefinite, below-2% situation, which is what we did have. So, there are implications of, if it turns out that inflation is projected to set around 2%, it’s a different monetary policy. But equally, it’s also not a monetary policy that requires a kind of significant tightening cycle.’

‘Here [on a gradual normalisation of monetary policy] I’m going to be data dependent. What, and, you know, honestly, I mean, a lot of time, both internally in the Eurosystem and external, it’s, it’s a, you know, I do have the observation is that we need to think about probability distributions. I’m not going to claim I know the precise answer about what the future is going to bring. I know that the Eurosystem staff wouldn’t claim that. But I also know any independent external expert is not going to claim that. So, you know, the, the, there will always be a judgment call about the balance of risks, but what’s also true, I mean, and I think it’s pretty robust, is that there is a difference between a scenario where inflation’s projected to settle basically around 2% versus significantly below 2%. But it’s not, you know, an earth-shaking, gigantic difference. But of course, if you were, you know, if so, inflation was so sticky below 2% for so long pre-pandemic, even the fact that this is essentially, if you like, delivering what we want, we do, we have a lot of deep research, a lot of reflects about what do we want, and, you know, I think the evidence we gathered and looked at is overwhelming. We want a 2% medium-term inflation net trend, and of course for those of you who’ve seen the 18 discussion papers by the Eurosystem staff, which was the kind of intellectual ingredients into the strategy, you can read the very strong case for wanting that 2% medium-term inflation trend. So, the transition from, from, let me recall again in terms of the actual data, from 2014 to 2019 pre-pandemic, inflation was basically around 1, 0.9. Moving from around 1 to around 2 in terms of the kind of average inflation rate is significant in itself. And what I’ve been saying is we’ve already been adjusting our policy. By the way, going back to December 2020, which is basically the point where, where the yield curve has reached its lowest value going into the December 2020 meeting, since then there has been a significant move up in, for example, the long end of the yield curve. But basically, that’s been, at the same time we’ve seen the improvement in inflation expectations, we’ve seen the strong recovery, we’ve seen the reduction in pandemic uncertainty. So, there’s already been a, you know, a move in financial conditions, which, and that’s basically, our task is to make sure financing conditions are, are basically calibrated to deliver the 2% target. And where exactly the level of those financing conditions should be will differ according to whether we’re more or less at 2% versus significantly below.’

10 February 2022

‘From a monetary policy perspective, the role of bottlenecks in near-term and medium-term inflation dynamics needs to be carefully assessed. In addition, it should be acknowledged that bottlenecks are not the only factor influencing the overall inflation environment, with a comprehensive monetary policy assessment taking into account a wide range of factors. Having stated that caveat -- and with a narrow focus on the implications of bottlenecks for monetary policy -- it should be recognised that the prevalence of downward nominal rigidities in wages and prices means that surprise relative price movements should mainly be accommodated by tolerating a temporary increase in the inflation rate, rather than by seeking to maintain a constant inflation rate that could only be achieved by a substantial reduction in overall demand and activity levels. Since bottlenecks will eventually be resolved, price pressures should abate and inflation return to its trend without a need for a significant adjustment in monetary policy. The logic underpinning a hold-steady approach to monetary policy is reinforced if the bottlenecks are primarily external in nature, caused by global disruptions in supply or a surge in global demand. Since monetary policy steers domestic demand, a tightening of monetary policy in reaction to an external supply shock would mean that the economy would be simultaneously confronted with two adverse shocks - a deterioration in the international terms of trade (generated by the increase in import prices) and a reduction in domestic demand. Of course, the diagnosis is quite different if domestic demand is assessed to be a primary driver of global bottlenecks or if there are bottlenecks in the domestic labour market. In addition, it is always necessary to monitor second-round effects, since increases in the consumer price level may propagate through second-round effects on other sectors and on wages. However, even such second-round effects should eventually fade, given the temporary characteristic of the initial price surge, unless long-term inflation expectations are permanently altered by the temporary phase of higher inflation. Accordingly, central banks closely monitor the evolution of indicators of longer-term inflation expectations.’

‘[T]he ECB’s latest corporate telephone survey … does indicate that bottleneck pressures are expected to ease, this will take some time – the modal answer in the survey was that bottlenecks would persist for at least another six months. While around a quarter of respondents were more optimistic (predicting that bottlenecks would ease within six months), another quarter of respondents feared that bottlenecks would persist for about a year.’

‘First, compared to the gas price profile that was incorporated in the staff macroeconomic projections in December 2021, the spot price of gas has declined considerably in recent weeks. Second, at the same time, there has been a significant revision in the futures curve, especially for the current year. Although a significant decline in gas prices is still expected, the timing has been shifted outwards, with the scale of declines during 2022 priced to be much more muted compared to the December 2021 projections exercise. Of course, it should be emphasised that futures prices also incorporate risk premia, so these do not necessarily capture a “true” expectation of future prices, and geopolitical tensions (together with weather-related uncertainty) mean that risk considerations are especially pertinent at the moment.’

‘Although earnings growth in the euro area remains muted so far (as tracked by negotiated wages), there has been a significant increase in average hourly earnings in the United States. … the euro area labour market has made considerable progress in recent months, with the labour force participation rate back to pre-pandemic levels, unemployment declining to 7.0% (faster than expected in the December 2021 staff projections) and the PMI employment indicators signalling employment growth across all sectors. At the same time, the euro area labour market is not experiencing the same degree of labour market tightness as in the United States. Chart 12 shows the ratio of vacancies to unemployment. While this is ticking up in the euro area and is higher than before the pandemic, the level of this ratio is far higher and its slope has been far steeper in the United States. Other indicators also suggest that the labour market has not fully recovered. Hours worked in the euro area are still below the pre-pandemic level and various furlough and wage subsidy schemes remain in place, so the overall state of the labour market continues to be affected by pandemic-related factors. In addition, there is still the important open question of whether the degree of entry by foreign workers (which is especially important in the services sector) will return to pre-pandemic levels once the pandemic is behind us. Still, the improvement in the labour market indicates that wage dynamics should strengthen over the course of 2022-2024. A marked pickup was already incorporated in the December staff projections, while the latest corporate telephone survey also suggests that wages are expected to grow more quickly during 2022... Although this survey focuses on large firms, and therefore does not represent the full spectrum of the labour market, it does provide a directional guide to wage pressures across a significant number of sectors and countries.’

‘Since the prices of tradable goods and energy are heavily influenced by global factors, supply-demand mismatches that originate in external factors can exert a powerful impact on the overall inflation rate. However, bottleneck-related price pressures should fade over time as pandemic-induced frictions disappear and supply and demand adjust in response to relative price movements. In relation to the labour market, a bottleneck scenario can emerge if there is an unexpected and large-scale increase in aggregate labour demand or a substantial shortfall in aggregate labour supply. Although there might be some signs of labour market bottlenecks in certain sectors in some euro area countries, the overall profile of the euro area suggests a smooth recovery in overall labour supply (even if the scale of the future return of foreign workers remains an open question) and provides hopeful signs of a gradual-but-sustained increase in labour demand. Such a gradual tightening of the labour market constitutes a key mechanism for inflation to stabilise at our 2% target over the medium term, whereas there are no indications of aggregate overheating in the euro area labour market.’

Lagarde (ECB):

25 February 2022

‘I just want to tell you that the ECB is closely monitoring the evolving situation. It will conduct a comprehensive assessment of the economic outlook, which will include all the latest developments and which will form the basis of our policy meeting, which will be a monetary policy Governing Council meeting, on the 10th and 11th of March. The ECB and all national central banks in the Eurosystem will implement decisively and rigorously all the sanctions decided by the EU and the European governments. To give you an example, that will apply to supervision, that will apply with cutting off liquidity access for the targeted banks with a view to essentially freeze asset and starve access to finance. Additionally, the ECB stands ready to take whatever action is necessary within its responsibilities to ensure price stability and financial stability in the euro area. I would like to mention one inscription that any visitor to the ECB will read, because it is on the walls of the visitor centre. And this is a quote by Jean Monnet, who says, “It is better to fight around the negotiation table than on the battlefield.” Never more than today has this been true. I would like to add on the economic and financial impact that some of you might be interested in that we discussed the implication of the military aggression against Ukraine. It is at this point in time premature to assess exactly the economic impact of the current conflict, because the situation is evolving by the hour. What we know is that the two main channels through which the euro area economy will be affected will be through energy prices and through the confidence or uncertainty channel. Not so much through trade, which is limited between Russia and the euro area. On energy, gas and oil prices soared on Russia’s invasion of Ukraine, given the weight of Russia as an energy supplier, roughly 22.2% of the euro area energy imports. At this point in time, gas prices stand about six times, six times as high as one year ago, and oil prices 54% higher than one year ago. Uncertainty is already reflected in financial markets, where sentiment did deteriorate, but with no disorderly disruption. We are currently updating our projection on growth and inflation, which will be published on the 10th of March at our next Governing Council meeting. Any number that are floating around are, as I said, premature, simply because it is evolving constantly as we speak. And they will be refined and fine-tuned for March the 10th. On inflation we will evaluate the impact of rising energy prices, which are likely in the short term to increase inflation numbers. Persistent uncertainty, though, will probably be a drag on consumption and investment and will impede growth. And given the current uncertainty that I have mentioned, it is more than ever critically important to be guided by the two principles of optionality and flexibility. Those are the four, sorry, two of the four principles that will guide us. As I said, we will operate within our mandate, price stability, financial stability, we are data dependent, we will move gradually. But in any event, we will be guided by speed in case of an emergency – we have done it at the time of Covid. We will be guided by the need to maintain confidence. Liquidity will be available. We will make sure that that is the case. Payment systems will work properly. And three, cash will be available. And the other two principles I have just mentioned: optionality in order to adjust to the changing circumstances, and flexibility in order to have full capacity to respond to this times of crisis. Thank you.’

‘The European Central Bank has a mandate that is very clear: price stability, financial stability. Within this framework, we have a strategy that is also clear: an inflation objective that is a symmetrical 2% in the medium term. So in March, June, September, December, each time we will examine the projections provided us by staff, take into account the totality of geopolitical developments also and then adjust our monetary policy so as to conform to our mandate…’

‘I’m sorry to disappoint you, but the response to your question [as to whether normalisation would be delayed such as to mean no rate hike would be less likely in 2022] would be entirely premature and inappropriate, because as I just said, we have a 2% symmetric medium-term objective, we are data-dependent, and we are going to look at data very carefully. We will include in that the geopolitical development, which clearly will have a bearing, but we are driven by our mandate, which is price stability and financial stability, and we will make those decisions comes the next monetary policy meeting and then subsequently in June, September and December. That will be the case, I can assure you, on the basis of data and the good judgment of the Governing Council.’

14 February 2022

‘The current pandemic wave and associated restrictions are likely to continue to have a negative impact on growth at the start of this year. Two other factors, namely supply bottlenecks and high energy costs, are also expected to dampen economic activity in the near term. However, the economic impact of the current pandemic wave appears to be less damaging to activity than previous ones. Moreover, the aforementioned bottlenecks will still persist for some time, but there are signs that they may be starting to ease. This will allow the economy to pick up strongly again later this year.’

‘Inflation has risen sharply in recent months and it further surprised on the upside in January, with the rate increasing to 5.1% from 5.0% in December. Inflation is likely to remain high in the near term. Energy prices – as you also highlight in your Report – 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.’

‘Financing conditions for the economy have remained favourable. While market interest rates have increased since December, bank funding costs have so far remained contained. Bank lending rates to firms and households continue to stand at historically low levels.’

‘Turning to the risk assessment, we continue to see the risks to the economic outlook as broadly balanced over the medium term. Uncertainties related to the pandemic have abated somewhat. At the same time, geopolitical tensions have increased and 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 also 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.’

‘In a few weeks, the March ECB staff projections will provide an updated assessment, taking the most recent data into account. This will help the Governing Council better appraise the implications of the surprisingly high December and January inflation figures for the medium-term outlook. In particular, we will carefully examine how higher energy prices will transmit through the economy and affect the outlook overall. Two channels could be at play, pulling inflation dynamics in different directions. On the one hand, rising energy costs can drive up prices directly, by increasing the cost of production, as well as indirectly, by having second-round effects on wages. On the other hand, they can have a negative impact on the incomes of households and the earnings of companies, thereby reducing economic activity and dampening the inflation outlook. In the past, the euro area has been particularly vulnerable to the second channel, as surges in energy prices weakened the spending power of households, and reduced inflation over the medium term.’

‘Obviously, in our assessment of the inflation outlook, we have to bear in mind that demand conditions in the euro area do not show the same signs of overheating that can be observed in other major economies. This increases the likelihood that the current price pressures will subside before becoming entrenched, enabling us to deliver on our 2% target over the medium term. Indeed, while moving up over recent months, indicators of longer-term inflation expectations are consistent with this expectation. Survey-based measures point to inflation returning to 2% by 2023 and remaining close to this level thereafter; and market-based indicators stabilise around levels somewhat below 2%. The solid anchoring of long-term inflation expectations in the euro area – which you also acknowledge in your Report – is a reassuring development, coming after a long period when they were subdued.’

‘To sum up, the euro area economy has continued to recover, although growth is expected to remain subdued in the first quarter. While the outlook for inflation is uncertain, it is likely to remain elevated for longer than previously expected, but to decline in the course of this year.’

‘In the Governing Council meeting earlier this month, we confirmed the decisions we took in 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 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. Our monetary policy is always data-dependent, and this is all the more important in the situation that we are facing at the moment. We will remain attentive to the incoming data and carefully assess the implications for the medium-term inflation outlook. Those implications are key parameters in our forward guidance. Our forward guidance has several dimensions. There is a defined sequencing between the end of our net asset purchases and the lift-off date. A rate hike will not occur before our net asset purchases finish. Moreover, there are three conditions that will have to be met before the Governing Council feels sufficiently confident that a tilt in our policy rate is appropriate. All the three conditions are meant as safeguards against a premature increase in interest rates. Finally, any adjustment to our policy will be gradual.’

The conditions of forward guidance are ‘helping us identify whether we are at target for the medium term, as we have identified in our strategy. The other element of forward guidance, which deals with the next point that I want to make, is the sequence, and that is the forward guidance that we’ve identified in terms of when do we look at interest rates relative to asset purchases? Well, we complete net asset purchases and only then we look at interest rate hikes. So, we have these elements that actually guide us in order to make decisions. Final point, which is very important, is that the decisions we make are data-dependent. It cannot be just on the fly, it cannot be a political decision. It has to be rooted in data and determined by data. And it will be so in that sequential and gradual way’.

10 February 2022

‘I see that prices are going up and I am by no means indifferent to it. There are members of my family whose business is hampered by the rise in energy prices. That concerns me very much.‘

‘Our task is to maintain price stability. If that is in danger, we will take action. But we have to ask ourselves when is the right time to do so. We have to consider that the full impact of any decision we make is generally not felt until nine to 18 months later.’

‘We first need to understand the source of the rise in prices. Just over 50% of it can be attributed to the surge in energy prices. Oil, gas and electricity have become more expensive. And as we import a lot of energy, these prices are, to some extent, beyond the sphere of influence of our economy. The second main factor driving up prices is supply bottlenecks: shortages of microchips, container jams, disrupted supply chains. Let me ask you: what can the ECB do about that? Can we resolve supply bottlenecks? Can we transport containers, lower oil prices or pacify geostrategic conflicts? No, we can’t do any of that.’

Raising interest rates ‘would not solve any of the current problems. On the contrary: if we acted too hastily now, the recovery of our economies could be considerably weaker and jobs would be jeopardised. That wouldn’t help anybody.’

‘[W]e have already begun to take measures. In March we will discontinue the pandemic emergency purchase programme. The ECB will reduce the overall volume of its net asset purchases. Ending net asset purchases is a precondition for increasing interest rates at a later point in time.’

‘We currently see inflation figures increasing and we are taking that into account in our projections. Inflation may turn out to be higher than we projected in December. We will analyse that in March and then take it from there.’

‘Just under two years ago there was so much oil that tankers were lined up in the ports. And buyers were actually given money if they purchased oil. This collapse in demand was unprecedented – as were, shortly afterwards, the recovery in demand and the geopolitical upheavals, which have driven up prices. In truth, neither of these movements could have been rationally anticipated.’

‘Please don’t get me wrong: high energy prices are not a temporary phenomenon; they will be with us for some time to come. But the price level is already very high. The oil price has gone up from less than €20 in April 2020 to €90 per barrel and it is highly unlikely that it will continue climbing at that pace. So even if only for that reason, inflation will slow down.’

‘Inflation will stay relatively high in the coming months. However, I am confident that it will fall back in the course of the year.’

‘We need to carefully analyse how the high energy prices are affecting other prices. Expensive energy pushes up the price of fertiliser, expensive fertilisers push up the price of food, and so on. We will scrutinise that closely in March, and in every subsequent meeting in the coming months. We will act if necessary. But all of our moves will need to be gradual.’

‘We need to carefully analyse how the high energy prices are affecting other prices. Expensive energy pushes up the price of fertiliser, expensive fertilisers push up the price of food, and so on. We will scrutinise that closely in March, and in every subsequent meeting in the coming months. We will act if necessary. But all of our moves will need to be gradual.’

‘The situation in the United States or the United Kingdom cannot be compared to the euro area. The US economy is overheated, whereas our economy is far from being that. That’s why we can – and must – proceed more cautiously. We don’t want to choke off the recovery.’

‘We gave crutches to the economy so that it could continue on its path. We will soon remove the crutches, because firms can once again operate unaided.’

‘We already had negative interest rates when the coronavirus crisis hit. Raising interest rates would have driven the economy straight into the wall. We would have ended up with a financial crisis on top of the pandemic and the economic crisis. But we managed to avoid that. Now we can adjust – calmly, step by step – our monetary policy instruments. And when the economic data allow it, we will do it.’

‘The current impact of decarbonisation on prices is minimal – be it from emissions trading or carbon taxes. We must complete the green transition of the economy to prevent the Earth from turning into a frying pan.’

‘I think that the greenflation debate is exaggerated.’

‘First of all, I think it’s understandable and legitimate for trade union leaders to demand higher wages to maintain workers’ purchasing power in these circumstances. Wage developments are generally linked to productivity increases and medium-term inflation expectations, which are currently close to our inflation target of 2%. Only if the wage settlements were to significantly and persistently exceed these measures could this accelerate inflation. But we are not seeing that at the moment at all. In most euro area countries, including Germany, wage demands are very moderate.’

07 February 2022

‘The current pandemic wave and associated restrictions are likely to continue to have a negative impact on growth at the start of this year. Two other factors which we discussed at the previous hearing − namely supply bottlenecks and high energy costs − are also expected to dampen economic activity in the near term. However, the economic impact of the current pandemic wave appears to be less damaging to activity than previous ones. Moreover, the aforementioned bottlenecks will still persist for some time, but there are signs that they may be starting to ease. This will allow the economy to pick up strongly again later this year.’

‘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.’

‘Financing conditions for the economy have remained favourable. While market interest rates have increased since December, bank funding costs have so far remained contained. Bank lending rates to firms and households continue to stand at historically low levels.’

‘Turning to the risk assessment, we continue to see the risks to the economic outlook as broadly balanced over the medium term. Uncertainties related to the pandemic have abated somewhat. At the same time, geopolitical tensions have increased and 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 also 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.’

‘In a few weeks, the March ECB staff projections will provide an updated assessment, taking the most recent data into account. This will help the Governing Council better appraise the implications of the surprisingly high December and January inflation figures for the medium-term outlook. In particular, we will carefully examine how higher energy prices will transmit through the economy and affect the outlook overall. Two channels could be at play, pulling inflation dynamics in different directions. On the one hand, rising energy costs can drive up prices directly, by increasing the cost of production, as well as indirectly, by having second-round effects on wages. On the other hand, they can have a negative impact on the incomes of households and the earnings of companies, thereby reducing economic activity and dampening the inflation outlook. In the past, the euro area has been particularly vulnerable to the second channel, as surges in energy prices weakened the spending power of households, and reduced inflation over the medium term. Obviously, in our assessment of the inflation outlook, we have to bear in mind that demand conditions in the euro area do not show the same signs of overheating that can be observed in other major economies. This increases the likelihood that the current price pressures will subside before becoming entrenched, enabling us to deliver on our 2% target over the medium term. Indeed, while moving up over recent months, indicators of longer-term inflation expectations are consistent with this expectation. Survey-based measures point to inflation returning to 2% by 2023 and remaining close to this level thereafter; and market-based indicators stabilise around levels somewhat below 2%. The solid anchoring of long-term inflation expectations in the euro area is a reassuring development, coming after a long period when they were subdued.’

‘To sum up, the euro area economy has continued to recover, although growth is expected to remain subdued in the first quarter. While the outlook for inflation is uncertain, it is likely to remain elevated for longer than previously expected, but to decline in the course of this year.’

‘In our meeting last week, we confirmed the decisions we took in 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 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. Our monetary policy is always data-dependent, and this is all the more important in the situation that we are facing at the moment. We will remain attentive to the incoming data and carefully assess the implications for the medium-term inflation outlook. Those implications are key parameters in our forward guidance. Our forward guidance has several dimensions. There is a defined sequencing between the end of our net asset purchases and the lift-off date. A rate hike will not occur before our net asset purchases finish. Moreover, there are three conditions that will have to be met before the Governing Council feels sufficiently confident that a tilt in our policy rate is appropriate. All the three conditions are meant as safeguards against a premature increase in interest rates. Finally, any adjustment to our policy will be gradual.’

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 2% 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 2% since our last monetary policy meeting. The latest survey-based measures stand at around 2%. 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):

24 February 2022

‘In the euro area, inflation has proven more persistent and more broad-based than expected, labour market slack is being reabsorbed at a faster pace than anticipated and pipeline pressures continue to build up. At the same time, prospects are rising that the fast spread of the Omicron variant may herald a turning point in the coronavirus (COVID-19) pandemic. In this environment, monetary policy needs to ensure that the forces pushing up prices today will not jeopardise price stability over the medium term. Households and firms count on the ECB to protect their purchasing power without putting at risk the current strong recovery from the crisis. Our policy framework enables us to deliver on these expectations. Our forward guidance has explicitly defined the conditions that need to be met for policy rates to be raised. And the clear sequence with which we intend to remove monetary stimulus, if and when necessary, reduces the uncertainty about how our actions will affect financing conditions and the broader economy.’

‘A year ago, there was a widely shared expectation that inflation would rise sharply in response to the reopening of our economies but would subside swiftly as the extraordinary factors related to the pandemic would fade. There was a strong conviction that the combination of statistical base effects, slowing energy price inflation and the removal of one-off tax effects would mark a turning point in the euro area’s inflation trajectory towards the end of last year. These expectations have been disappointed. … Today, inflation is not only higher than expected, but price pressures are also visibly broadening. Measures of underlying inflation are following an unprecedented upward trend. The prices of around two-thirds of the goods and services included in the HICP are currently increasing at an annual rate above 2%. Less than a year ago, this share was close to 20%. Current measured inflation would be even higher if the costs of owner-occupied housing were included. Residential real estate prices continued to increase at an alarming pace. In the third quarter of 2021, prices for houses and flats in the euro area increased by 9% year-on-year, an unprecedented rate of increase. If owner-occupied housing were included in the HICP, headline inflation in the third quarter of 2021 would have been 0.3 percentage points higher. For core inflation, the difference would have been twice as much – that is, core inflation would have been 2% rather than 1.4%, which is the largest difference observed since the start of the sample in 2012. Looking forward, the broad-based nature of recent upward surprises, extending well beyond the energy component, implies that significant uncertainty remains as to when the inflation peak will eventually be reached. What is becoming increasingly clear is that inflation is unlikely to fall back below our 2% target this year. It may increase even further over the near term before declining gradually over the course of 2022 as energy price inflation should slow. But the decline is not going to be nearly as fast as we previously anticipated. In addition, it is now becoming increasingly likely that, in the medium term, inflation will approach our 2% target from above, rather than from below. The start of the year has seen three broad developments that corroborate this view. First, there are growing signs that the fast spread of the Omicron variant may bring forward the transition towards an endemic equilibrium. Although hospitalisations are still increasing in some countries alongside elevated case counts, admissions to intensive care units and fatality rates are now only a fraction of what they were in previous waves. There is a real chance that the Omicron variant could herald an inflection point after which the global community will be able to live with COVID-19 in spite of possible recurrent episodes of high case numbers. As governments worldwide are easing contact restrictions, the remaining slack in the economy will likely be reabsorbed at a faster pace than previously anticipated, in particular in contact-intensive services where the pandemic continues to weigh heavily on business and sentiment. The most recent survey data corroborate this view for the euro area. In February, sentiment in the services sector improved sharply, back to levels seen before the discovery of the Omicron variant. A faster and more frontloaded recovery, in turn, risks increasing pressure on wages at a time when the labour market in the euro area is already showing first signs of strain. … Although the pandemic is still raging through the economy, slack in the labour market has continued to decline at a notably faster pace than projected. A year ago, our central forecast was that the euro area unemployment rate would decline, on average, to 8.1% in 2022. In December 2021, the unemployment rate stood already at 7%. We are currently witnessing the strongest labour market in the history of the single currency. The unemployment rate is at a record low and below estimates of the non-accelerating inflation rate of unemployment (NAIRU), while the participation rate is at a record high. Broader labour market slack, too, for which data are lagging, was already reabsorbed, by and large, by the end of the summer of last year, as strong demand is bringing more and more people – also those at the fringes of the labour market – back into work. While total hours worked still remained below pre-pandemic levels in the third quarter of last year, there are good reasons to believe that the widespread easing of contact restrictions will help accelerate progress on that front too. Survey evidence confirms the picture of a tightening labour market. A rapidly rising share of firms across all economic sectors report shortages of labour as a factor limiting production. This is now the case for about a quarter to a third of all firms, a level never before observed in the euro area. Vacancy rates across the euro area are significantly higher than before the pandemic, which is consistent with firms reporting continued strong employment demand ahead. These developments will add to pressure on wages as our economies continue to reopen. Although negotiated wage growth remains moderate, our latest corporate telephone survey among larger firms showed that wage pressures are expected to build up fast. Euro area firms anticipate considerably higher wage increases in the near term. For 2022, their average expected wage increase is 3.5%. The survey also showed that higher input costs, such as wages, are being passed through to consumer prices at a faster pace and to a larger extent than in the past, as strong pent-up demand creates a favourable environment for protecting or boosting profit margins. A faster pass-through, in turn, implies that for medium-term price pressures it is less relevant how fast wages expand today than how fast they will grow this year and next. Third, pipeline pressures, which affect consumer price inflation with a lag, continue to build up. Import price inflation for intermediate and final consumer goods has increased further and remains at extraordinarily high levels. At the later stages of the pricing chain, domestic producer price inflation reached a new all-time high in November. The inflation rate of services producer prices, which are an important element in the cost structure of both manufacturing and services firms, stands at 4.3%, which is almost nine times as high as its historical average. All services sectors report stronger price pressures than before the pandemic. These pipeline pressures will fade only gradually and will likely remain a source of upward pressure for consumer prices over the foreseeable future, with most firms expecting unusual cost pressures to persist for at least another six months. In addition, in large parts of the euro area the recent surge in wholesale electricity and gas prices will only be passed through to consumer prices with a lag. There is also a lot of uncertainty whether energy inflation will decline to the extent suggested by the futures curves underlying our December projections. Brent oil spot prices are now at their highest levels since 2014 and current futures curves are well above the levels seen at the end of last year. Gas futures prices, too, are markedly higher than in December of last year. While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even have to keep rising if we are to meet the goals of the Paris climate agreement. In the EU, price developments under the Emissions Trading System (ETS) signal such an impending structural shift. ETS prices have recently reached a new record high of around €90 per tonne of carbon, almost three times as high as at the beginning of 2021, and they are expected to remain at elevated levels for the foreseeable future. It is a reminder of the challenges we are facing in anticipating potential structural shifts in the underlying inflation process that could extend well beyond the energy sector.’

‘All in all, there have been few instances in the recent past where the information set available to policymakers has changed so profoundly and in such a short period of time as has been the case since the beginning of the year. How today’s attack on Ukraine changes the euro area outlook is highly uncertain at this stage. We are monitoring the situation closely and will carefully evaluate the consequences for our policies. Based on the macroeconomic situation predating the war, however, inflationary pressures will likely prove stronger and more persistent over both the near and the medium term. Policy optionality is therefore needed more than ever to protect price stability. Our decisions in December of last year to end net asset purchases under the pandemic emergency purchase programme (PEPP) in March and to recalibrate the path of future purchases under the asset purchase programme (APP) have been a first important step in this direction. At our next meeting in March, we will reassess whether the current path of asset purchases remains consistent with the updated inflation outlook, and we will thoroughly evaluate the progress made towards meeting the conditions of our rate forward guidance. While both the calibration and the time of adjustment of our policy instruments are data-dependent, the sequence with which we intend to adjust our policy stance is not. Our sequencing is subject to three guideposts. The first is our rate forward guidance, which provides the anchor for the normalisation process. … The second guidepost is that we will stop net asset purchases under the APP “shortly before” we increase our main policy rates. “Shortly before” is a term that is deliberately vague. It does not indicate a pre-defined distance between the end of our net asset purchases and policy rate lift-off. It does, however, imply that we will end net asset purchases under the APP once we judge that it is sufficiently likely that the rate forward guidance criteria are going to be fulfilled over the foreseeable future, while rates are going to be raised only when these conditions are actually met. Third, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising our key policy rates. Again, the notion of an “extended period” is kept open to leave sufficient optionality in order to be able to respond to changes in the inflation outlook. In principle, this sequence is not very different from the one adapted by many other central banks, including the Bank of England and the Federal Reserve. It defines a clear succession of steps that leaves sufficient flexibility to adjust the length of time needed before activating the next step of the sequence. That said, there are three considerations that are more specific to the euro area. The first relates to the inflation outlook. A central bank that faces a significant risk of inflation being markedly above target over the medium term would need to initiate a rapid sequence of policy rate hikes to above their estimated neutral levels. According to survey and market-based proxies, this would require bringing policy rates well into positive territory. However, these are not the conditions that we are facing today. Rather, the economy is evolving in ways that suggest that, after a long period of very subdued price pressures, inflation is increasingly likely to stabilise in close proximity to our 2% target over the medium term. The current inflation outlook therefore calls for a gradual normalisation of our policy stance, reflecting the significant progress made towards meeting our inflation target in the future. During such a process of gradual normalisation, the focus should be first on unwinding step-by-step the exceptional measures we took to fight low inflation, starting with net asset purchases. The degree to which policy will need to be adjusted over time depends on how the inflation outlook continues to evolve. The focus on ending net asset purchases first reflects, at least in part, the fact that their side effects tend to increase over time. The experience of the past few years demonstrates, for example, that balance sheet policies have a significantly larger impact on house prices than changes in short-term policy rates, thereby contributing to the measurable rise in residential real estate prices. Similarly, years of balance sheet expansion have caused the bond free float in some economies to decline to very low levels. As such, an end to net asset purchases enhances the availability of safe assets that the market requires to function well. Ending net asset purchases when inflation is robustly converging to our target also credibly underlines that our actions are solely guided by our mandate, refuting concerns about fiscal dominance. Finally, in the current environment of large imported inflation, reversing the current exceptional measures has the potential to mitigate inflationary pressures even without the usual long lag in policy transmission. Over the past years, these measures have contributed to large capital outflows from the euro area, thereby putting downward pressure on the euro exchange rate. The exit from these measures can thus support the currency and, for a net importer of energy, provide tangible and immediate support to euro area households and firms by improving the terms of trade. The second aspect relates to the choice of policy instruments at different stages of the normalisation process. This choice crucially depends on the transmission mechanism of monetary policy. The euro area remains a bank-based economy. Although market-based debt financing has gained importance since the global financial crisis, bank credit remains by far the dominant source of external finance for euro area firms. The financing structure, in turn, has important implications for how strongly a given monetary impulse is transmitted to the real economy. Recent ECB staff analysis finds that when the share of bank loans in total external finance is high, like in the euro area, real GDP growth often shows only a weak response to changes in long-term interest rates. In other words, our key policy rates are best suited for influencing output and prices in the euro area during the normalisation process. Most of firms’ credit is either linked directly to short-term rates in financial markets, such as the EURIBOR, or has fixed maturities of short duration. Half of outstanding loans to euro area firms have a maturity of one year or less. Long-term rates are not only less relevant for policy transmission, central banks also have only indirect control over the part that is not related to the expected future path of short-term interest rates, i.e. the term premium. The latter is affected by a host of factors, such as inflation uncertainty, global spillovers or demand by price-insensitive investors. The stock of bonds held by central banks is just one of these factors. Balance sheet adjustments may thus not be well-suited as the main instrument for controlling the overall stance. This is also why our sequence foresees that policy lift-off will predate with some distance a reduction of our balance sheet. This brings me to my third consideration – the question as to whether and how changes in sovereign bond market conditions could challenge our sequencing. Despite significant progress in recent years, the euro area’s institutional architecture remains incomplete. In the absence of a common fiscal capacity, and with public debt at elevated levels owing to the pandemic, parts of the euro area remain vulnerable to sudden shifts in investor sentiment. There are three mitigating factors at present, however. One is that the combination of a long period of historically low rates and the marked increase in the weighted average maturity of public debt has measurably reduced the sensitivity of debt to changes in market interest rates. The average interest rate will remain low for some time even if the marginal interest rate starts rising. Second, with average interest rates remaining low, and inflation receding only gradually, the strong expected recovery over the coming years should lead to a gradual decline in debt-to-GDP ratios. Structural reforms and large-scale investments related to Next Generation EU should foster confidence in the capacity of euro area countries to generate sustained high growth. Third, our decision in December last year to reinvest flexibly under the PEPP provides a strong mechanism to preserve the transmission of monetary policy in the event of severe and self-fulfilling market dislocations that would jeopardise the achievement of our mandate. Net purchases under the PEPP could also be resumed, if necessary, to counter renewed negative shocks related to the pandemic. Hence, we stand ready to counter severe market dislocations that lead to fragmentation, while our monetary policy stance is guided by our primary objective of maintaining price stability.’

‘The inflation outlook has firmed since the start of the year. Inflationary pressures have broadened and have become more persistent. The expected easing of contact restrictions, together with the strong recovery in the labour market and elevated pipeline pressures have increased upside risks to inflation over the medium term. At the same time, the shock of war hanging over Europe has clouded the global outlook. In this environment, we need to carefully reflect on how much monetary policy stimulus is required for inflation to stabilise at our target over the medium term, so as to neither fall  below 2% once the extraordinary factors related to the pandemic fade, nor to allow an extended period of high inflation to become entrenched over time. This uncertainty speaks in favour of a gradual and data-dependent normalisation that respects the sequence that we have communicated, with a view to reducing uncertainty about our actions and intentions.’

15 February 2022

‘Last year, we were expecting that the sharp rise in inflation that we've seen in response to the reopening of the economy would subside relatively quickly because base effects were expected to drop out and bottlenecks were expected to be gradually resolved. What we've learnt over time is that high inflation is now expected to stay there longer. We've had two strong inflation surprises in both December and in January, which makes a reassessment of the inflation outlook necessary. In particular, it now looks increasingly unlikely that inflation is going to drop below 2% by the end of this year, as we had expected earlier. A reassessment of the inflation outlook has also become necessary in the light of three fundamental changes to the macroeconomic outlook. One is that the current Omicron wave is now expected to be more short-lived and less severe than previously thought. The second point is the strong data on the labour market. Labour market slack has been absorbed much more quickly than previously expected. We are seeing a historically low unemployment rate and a historically high participation rate, and surveys are pointing to strong future employment growth. Also, more and more firms are saying that a lack of labour is a factor limiting production. All this could imply that wage pressures are going to be stronger than we originally expected. This would be consistent with our survey among firms where a majority now believe that even though wage growth in the past was relatively moderate, it's going to pick up going forward. And finally, there is quite a bit of pipeline pressure. We've seen continued strong growth in producer prices. Part of that is only going to be passed through with a lag. And it seems that the pass-through can be expected to be stronger than usually. All of this implies that it has become increasingly likely that inflation is going to stabilise around our 2% target over the medium term. This means that we should start thinking about a gradual normalisation of our policy. In this there are two types of risk: There's the risk of acting too early and there's the risk of acting too late. We have to find the right balance between the two. With the most recent data, however, the risk of acting too late has increased and therefore we need a careful reassessment of the inflation outlook.’

‘Rising oil prices have different effects. They tend to have a dampening effect on demand, even though fiscal policy is doing quite a bit, especially to protect the more vulnerable parts of society from the rise in energy prices. And then we have the direct and indirect effects of oil prices on inflation. So we really have to see what comes out of the projections, and I would not want to pre-empt that.’

‘I've already pointed to the strong developments in the labour market. Labour market slack has been absorbed faster than anticipated and, as a result, wages may rise more quickly going forward. So there's a demand component in what we have seen and that's precisely what we have to look at. We also have to ensure that current high inflation does not become entrenched in expectations because that could then give rise to a wage-price spiral. We are not seeing anything of that yet. But we have to analyse this in a forward-looking manner and make sure that a wage-price spiral does not arise. Because once it's there, it's relatively costly to fight. So I think we cannot simply look through everything, especially if inflation now becomes more broad-based and more persistent than we originally thought.’

‘Geopolitical developments are part of our assessment. We are monitoring the situation closely. We would consider not only the impact on energy prices but also the broader repercussions on global and domestic growth and financing conditions. Given the likely negative effects of an escalation of the crisis on growth and confidence, including through potential sanctions, it is in my view unlikely that we would accelerate policy normalisation in such circumstances.’

‘Already before the February meeting, lift-off was expected around the summer of the year. That has to be seen in the light of the changes to the inflation outlook and the strong labour market. One should not take the market pricing of lift-off dates literally because it also contains risk premia, reflecting the high uncertainty that we are currently facing. So the actual expected lift-off date that we can take from the data is likely to be somewhat later. But as I said, and as President Lagarde also stressed in the press conference, we are acting in a data-dependent manner. We have a very clear forward guidance, which has defined conditions for lift-off, and I think markets are very well aware of that. Now we have to assess the incoming data and see whether these data fulfil the conditions. Let me also remind you that we have confirmed the sequencing of our different monetary policy measures. The forward guidance refers to interest rates and we said that net asset purchases are going to end before we are going to raise our key policy rates. So when we are discussing and reassessing the pace of our asset purchases, we have to be forward-looking and ask ourselves when we expect the conditions of our forward guidance to be fulfilled.’

‘We've seen a general repricing in bond markets, which is not surprising given the change in our communication and the fact that the repricing started from very low interest rate levels. A particular challenge of the euro area is that a repricing of the risk-free rate may be accompanied by a change in sovereign spreads, which may then affect the transmission of our monetary policy to different parts of the euro area. We are aware that, given the euro area’s incomplete institutional architecture, parts of the single currency area remain vulnerable to a sudden shift in investor sentiment. Spreads generally reflect differences in fundamentals. But they can become destabilising when there is a lot of uncertainty or when there are self-fulfilling expectations. We therefore carefully monitor the developments of yields and spreads in the euro area, and we stand ready to counter severe market dislocations that lead to fragmentation. In the pandemic, flexibility in our asset purchases has played an important role. We have seen that that was a powerful instrument to counter the impaired transmission of our monetary policy. In our December decision, we confirmed the importance of flexibility and we said that in the event of renewed market fragmentation related to the pandemic, reinvestments under the pandemic emergency purchase programme (PEPP) can be adjusted flexibly and we consider this very important.’

‘Spreads have increased, but from very low levels and they remain well below the levels that we saw in the years before the pandemic. Governments will continue to benefit from the low interest rates that we've now had over a long period of time and also from the marked increase in the maturity of public debt. Therefore, even if current bond yields adjust upwards, average interest rates on the countries’ debt will stay low for an extended period of time. What also matters is that the euro area is expected to grow strongly in the coming years. Looking forward, it's absolutely key that governments invest and carry out structural policies that can lift potential growth. NextGenerationEU certainly plays a very important supporting role here. In a growing economy, rising yields are not a major concern.’

‘All our monetary policy measures are guided by the inflation outlook. In March, we are going to look at the data that have come in as well as the new projections and then the Governing Council is going to evaluate the progress we have made in meeting the conditions of our rate forward guidance. And when we judge that the probability of meeting the conditions is sufficiently high, we will consider adjustments to the pace of our asset purchases, reflecting our sequencing. This implies that we will end our net asset purchases before the conditions of our forward guidance are fulfilled.’

‘I very much agree with our conclusions from the monetary policy strategy review that asset purchases are a standard tool in certain circumstances, in particular when monetary policy is constrained by the effective lower bound. Asset purchases are then an essential instrument to ensure price stability. However, we have to be mindful that asset purchases do have side effects and that these side effects are likely to increase the longer asset purchases remain in place. We're always very carefully assessing the proportionality of our measures. We look at the balance of benefits and costs and I would say that we are getting to a point where in light of the inflation outlook, the benefits of further net asset purchases may not justify the additional costs. Then there is an argument for ending net asset purchases. This decision is linked to the inflation outlook. That is important. So you cannot look at the side-effects in isolation.’

‘In December, we already announced that we expect to end reinvestment under PEPP at the end of 2024. So far, we have not made any specific statement about the duration of the reinvestment under the asset purchase programme. In the current situation, we first have to focus our decisions on net asset purchases and the question of lift-off. The discussion regarding the size of our balance sheet after policy lift-off will be held in the future.’

‘We have already announced that we expect the special interest rate period [of TLTROs] to end in June of this year. The special rate was indeed an extraordinary measure that was linked to the pandemic and it looks as if it is no longer needed. We are monitoring bank funding conditions, and we also have to carefully look at whether the maturing of our TLTROs will not hamper the smooth transmission of our monetary policy. I think the TLTROs have been a quite successful tool, they have helped reduce bank lending rates to very favourable levels, and they have contributed to preserving bank lending over the pandemic. But also for this tool, we now have to transition into the time after the pandemic. At this point in time, we don't have to take any additional decisions because the current round of TLTROs is still running until the middle of next year. The main decision that we have to take now is the question of the special interest rate period and there our current announcement is that this is very likely to end.’

‘In our monetary policy strategy review, we came to the conclusion that we need to take the costs of owner-occupied housing into account. Currently, the data is not sufficient, so there is a long process that has now been initiated in order to get a measure that is going to include owner-occupied housing at the proper frequency and also at the proper quality. But we have some preliminary data that we can look at and, in fact, the recent increase in housing prices has been unprecedented. If this were included, it would have a substantial effect on measured inflation, in particular on core inflation, where the weight of owner-occupied housing is larger. For example, in the third quarter of last year, core inflation would have been 0.6 percentage points higher, which is substantial. We cannot ignore this. It has to be part of our general considerations. One outcome of the strategy review was that for the time being our main inflation measure remains the harmonised index of consumer prices. When it comes to asking whether the conditions of our forward guidance are fulfilled, the President has always made clear that this is in the end not mechanically linked to the projections, but is a judgement by the Governing Council. And here, housing prices should enter in.’

‘Given that inflation is very high in the energy component and is also high for food, low income households who typically spend more on these types of goods are going to be affected more strongly. It is concerning that current high inflation is particularly painful for those households in the lower income category. But there is very little we can do about current high inflation. Even if we hiked rates now, this would not bring down today's energy prices. This is why we look at medium-term inflation. And there, we have to find the right balance between acting too early, meaning that we could choke the recovery, or acting too late, which could lead to high inflation becoming entrenched, which would also have a substantial cost. And we know that a recession, which can happen in both cases – whether you act too early or too late –, would again be likely to hit those the hardest who have the lowest income to begin with, because these are typically the people who are most affected by an increase in unemployment.’

‘OMT remains an instrument in our toolkit. The motivation behind OMT that the Governing Council had at the time is still valid: the need to counter fragmentation on the one hand and to have conditionality on the other hand in order to minimise risks related to moral hazard and to protect monetary dominance. Yet, one may ask the question whether the eligibility criteria of OMT are the right ones in all circumstances. We know that there has been reluctance to resort to an ESM programme due to the stigma effect. At the same time, we are seeing that with NextGenerationEU, one can have conditionality without strong stigma effects. I think this is a discussion that we may want to have at some point.’

‘One has to be a bit careful in comparing the two situations [of 2011 and now]. Before the pandemic, the euro area was in a quite different situation, and the experience from that time was reflected in our monetary policy strategy review. This is also when we developed our forward guidance, which now protects us from acting too early. But at the same time, once inflation expectations are de-anchored, it can be very costly to re-anchor them. That is also shown by historical experience. This is precisely the reason why it is better to respond in a timely but gradual fashion, rather than being forced to act abruptly at some point in time, which could also have adverse effects on financial stability. If you have a very abrupt policy change, investors are not able to adjust their portfolios in a gradual fashion. I really think it's important that we find the proper balance here.’

‘There was an agreement that financial stability is a prerequisite for price stability. And while macroprudential policies are the first line of defence, they are not yet perfectly effective. This is why we decided to also consider financial stability considerations in our monetary policy decisions. Such additional considerations, like financial stability or inequality, enter into a monetary policy decision when it comes to assessing the side effects of our measures − that is in our proportionality analysis, where we are trying to see whether the benefits of our measures are higher than the costs and whether one tool may be preferable to another one. And financial stability certainly plays a role there.’

09 February 2022

‘Raising rates would not lower energy prices. But if high current inflation threatens to lead to a de-anchoring of inflation expectations, we may still need to respond, as our mandate is to preserve price stability.’

‘The implications of the green transition for inflation are very important for monetary policy.’

‘Asset purchases under the PEPP are guided by the ECB’s capital key. In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time.’

‘Our economies will benefit from a faster transition to renewable energy sources. This is mainly the responsibility of governments. But we are committed to doing our part, which will be reflected in our monetary policy operations.’

‘Monetary policy has to keep a watchful eye on all factors, including energy, that affect the medium-term inflation outlook. An extended period of high energy price inflation may lead to expectations of higher inflation in the future.’

‘Inflation will remain high for longer than anticipated. There is a risk that inflation continues to rise in the near term but it is likely to gradually decline towards the end of this year. There remains high uncertainty around the inflation outlook.’

‘Projections are always surrounded by uncertainty. But due to the pandemic and structural changes, the uncertainty around the inflation outlook is unusually high. You can trust us that we will take this uncertainty into account in our decision-making.’

‘In the 1970s rising oil prices triggered a harmful price-wage spiral, as inflation expectations drifted away. Today longer-term inflation expectations are well-anchored. We will ensure that high inflation does not become entrenched.’

‘House prices have risen strongly in the euro area, and monetary policy was one contributing factor. Macroprudential policy is the first line of defence but monetary policy needs to take financial stability and inequality considerations into account.’

‘Our primary objective is price stability. We are ready to adjust all our tools to make sure that inflation stabilises at our 2% objective over the medium term. But any adjustment to our policy will be gradual.’

‘Financing conditions must remain in line with inflation stabilising at our target over the medium term. We also need to ensure that our policy is transmitted to all parts of the euro area. Therefore, yields are an important input into our analysis.’

‘The monetary policy statement contained important changes regarding the upside risks to inflation and the need for optionality. The process of normalisation will be data-dependent and gradual, avoiding unnecessary disruptions.’

‘The euro area architecture is more resilient than it was at the time of the sovereign debt crisis, not least due to Next Generation EU which supports convergence across countries. The ECB has proven its willingness to act, if needed and as appropriate.’

‘According to the announced sequencing, we will end net asset purchases before we raise interest rates. Continued bond purchases would offset part of the impact of increasing policy rates. Moreover, asset purchases come with increasing costs.’

‘We need to minimise the risks of both – acting too late and acting too early. Besides supply shocks, we have to assess the strong developments in the labour market and their implications for medium-term inflation.’

‘We take people’s concerns about rising prices very seriously. You and all EU citizens can trust us that we will use all our instruments to stabilise inflation at our 2% target in the medium term.’

‘Negative rates reflect the low inflation environment before and at the beginning of the pandemic. Our policy is data-dependent. We continuously evaluate the monetary stimulus required for inflation to stabilise at our 2% target in the medium term.’

‘Staff forecasts are going to be updated in March. What matters for inflation is the growth in wages over and above productivity growth. We carefully monitor wage developments as they are crucial for the inflation outlook.’

‘Sovereign spreads are a feature as long as they are reflecting economic fundamentals. They are a bug when they become subject to destabilising self-fulfilling expectations, impairing monetary policy transmission.’

‘The pandemic has shown that, under stressed conditions, flexibility in the conduct of asset purchases can help to counter fragmentation. Therefore, flexibility will remain an element of our monetary policy during the PEPP reinvestment phase.’

‘Due to lags in policy transmission “transitory” shocks typically do not require policy action. They matter for monetary policy when there is a risk that they become entrenched in expectations, requiring policy action to protect price stability.’

‘If there is a risk that inflation expectations become unanchored, we need to take action even if the shock is exogenous. Currently, longer-term inflation expectations remain well-anchored.’

‘One reason for rising oil prices was the stronger-than-expected recovery across many economies, with demand outpacing supply. The large fiscal stimulus in the US was one factor driving the global recovery.’

‘The economy is recovering. The progress made towards our 2% inflation target over the medium term permits a step-by-step reduction in our asset purchases. We will reassess the implications of the incoming data for the inflation outlook in March.’

‘Due to the pandemic and structural changes in the economy, uncertainty around the inflation outlook is unusually high. If we judge that inflation will remain above our target over the medium term, the ECB will adjust its monetary policy, as appropriate.’

‘For a long time euro area inflation was below our target but it is now moving towards 2% in the medium term. Current inflation is painfully high – mostly due to high energy prices. We will ensure that it will not persist over the medium term.’

‘TLTROs remain an attractive source of funding for banks, supporting lending to firms and households. We will continue to monitor bank funding conditions and ensure that the maturing of operations does not hamper the transmission of our monetary policy.’

‘Inflation has risen mainly due to energy prices which we cannot affect directly. But we are seeing that inflationary pressures are broadening and becoming more persistent. Policy optionality is therefore more important than ever.’

‘We know that high inflation causes significant hardship for people who bear the rising costs of food, housing and transportation. We will make sure that inflation stabilises at our 2% target over the medium term.’

Visco (Banca d’Italia):

12 February 2022

‘In the short term, risks are mainly on the downside; besides being influenced by the course of the pandemic, these risks stem above all from the ongoing geopolitical tensions and the impact they could have on the cost of commodities, especially energy products, and on trade in intermediate inputs along global value chains. According to our latest estimates, Italy’s GDP growth will near 4% this year on average, and will then slow in the next two years.’

‘Since the second half of 2021, a significant, and for the most part unexpected rise in inflation has been observed in several countries. On the supply and cost side, this has been due above all to the steep increase in fossil fuel energy prices, supply chain bottlenecks and the rise in international transport costs. In the United States, a role was played by the strong growth in demand and the rise in wages, in part connected with the exit of many previously employed persons from the labour force. Pressures on the final prices of goods and services will likely be stronger than initially estimated, but should abate in 2023.’

‘The Eurosystem staff projections published last December indicated that inflation would be above 3% on average in 2022, reflecting the sharp rise in energy prices. It was, therefore, expected to decrease over the course of the year, eventually returning to just below the ECB’s objective of 2%. This level is in line with the expectations reported in January by the participants in the Survey of Professional Forecasters and with the indications implied by the prices of index-linked financial assets, which – while factoring in the latest unexpected rise in prices – continue to signal inflation expectations of around 2% from 2023 onwards. However, price dynamics in recent months have differed from the December forecast, and tensions on the energy front have not let up yet. Though it is likely that the projected slowdown will be confirmed in the coming months, in the short term, the risks of a de-anchoring of expectations and of entering into a wage-price loop, of which there is nevertheless currently no evidence, must be monitored carefully. The rise in energy commodity prices is currently leading to a negative change in the terms of trade and, therefore, to a reduction in purchasing power in the euro area. In 2021 as a whole, the loss associated with the deterioration in the terms of trade was limited to around 1%, though it rose over the course of the year, surpassing 2% in the fourth quarter. This is essentially a tax, probably temporary for the most part, whose distortionary effects may be offset, where possible, by drawing on the public purse. The rise in costs, however, must not turn into a prolonged inflationary spiral.’

‘Last week, the Governing Council of the ECB therefore confirmed its December decision to discontinue net asset purchases under the pandemic emergency purchase programme (PEPP) at the end of the current quarter. … At the moment, I do not believe that the overall picture underlying this stance has changed significantly, though it must be recognized that, in the short term, there has been an increase in the risk of consumer prices growing faster than expected and production activity growing more slowly. At the Council’s March meeting, these developments and their possible consequences will have to be analysed and discussed in depth. In any case, the monetary policy stance remains expansionary, though the gradual normalisation will continue at a pace consistent with the economic recovery and changes in the outlook for prices. At the same time, as indicated by the findings of the ECB’s monetary policy strategy review presented last July, it is crucial that the decisions be incremental and carefully thought through, also to avoid creating any uncertainty that could destabilize the financial markets and the economic recovery. Flexibility will remain a further key element of monetary policy: alongside a constant monitoring of inflation, the Governing Council stands ready to counter risks stemming from an unwarranted fragmentation of financial conditions across euro-area economies. In any case, the main response to the rise in energy prices – a clear, unexpected supply-side shock – should not come from monetary policy, especially in the absence of a wage-price loop and given inflation expectations that remain firmly anchored to the central bank’s objective. While both monetary and fiscal policy may counter the inflationary effects of energy costs, only the latter is able to act directly on these costs, offsetting – at least to a certain extent – the loss in disposable income and limiting their impact on the economy.’

‘Looking beyond the cyclical horizon, the necessary transition to a sustainable economy may bring about significant effects on economic activity but also on the relative prices of energy produced from various sources, with a possible impact on inflation rates. The eventual reduction of net carbon emissions to zero requires an increase in the ratio of fossil fuel energy costs to renewable energy costs, but it is still unclear how this might be achieved, including, for example, in terms of what impact a gradual increase in taxation will have on the former and what impact technological progress and greater investment will have on the latter. When taking into account the broader effects of the measures adopted to facilitate the transition, it cannot be ruled out that the repercussions for economic activity might be deflationary, at least for some time to come.’

‘Over the next decade, the gap between the average debt burden and GDP growth [in Italy] will gradually have a less positive effect on the debt ratio, due to the inevitable normalisation of the growth rate of the economy and of short- and long-term interest rates. In addition, the ageing of the population will exert upward pressure on current primary expenditure. To counterbalance these trends, it will be necessary, on the one hand, to increase growth potential and, on the other, to improve the primary balance gradually and in structural terms. Both of these approaches could help to steadily reduce the yield spread between Italian government securities and those of the other major euro-area countries. The greater the rate of growth, the lower the adjustment of the public accounts needed to facilitate the gradual reduction of the debt-to-GDP ratio.’

‘The unexpected increase in inflation recorded in the euro area in the last few months is largely the result of a supply-side shock. If no wage-price spirals are triggered and if expectations remain firmly anchored to the ECB’s inflation objective, as is happening at the moment, the effect of the energy price rises will mostly be reabsorbed in 2023. As the recovery consolidates, a gradual normalisation of monetary policy therefore remains the most appropriate strategy. The expected slowing down of net asset purchases by the ECB over the course of this year and their eventual suspension are not such as to warrant a significant worsening in financing conditions on the bond market in Italy. The burden of public debt has fallen markedly and it will probably be about 10 percentage points lower compared with forecasts that put it close to 160% of GDP at the end of 2021. The downward trend must continue over the coming years. A small rise in market rates will have no significant effects on the cost of the debt, whose average duration is just under eight years. If fiscal policy is able to ensure a gradual rebalancing of the accounts and the NRRP is promptly, fully and effectively implemented, any increase in interest rates will be offset by the economy’s return to paths towards higher and long-lasting growth.’

Knot (Dutch National Bank):

25 February 2022

‘The economic fall-out of the pandemic seems to be subsiding, and the extraordinary fiscal and monetary support measures that kept economies afloat are being gradually unwound. But, as the economic recovery is proceeding at an uneven pace across regions, this unwinding process is increasingly likely to be asynchronous. This creates the potential for cross-border spillovers. Moreover, since the onset of the pandemic, both public and private sector debt have increased, while asset valuations have grown amid a continued search for yield. This has made the global financial system more vulnerable to a disorderly tightening of financial conditions. A concern that has been accentuated lately by the return of high inflation.’

10 February 2022

‘Look also what is happening in many housing markets across the globe today. I don’t want to be a doomsayer here, but I mean, housing prices have gone up quite dramatically. That has all been predicated on a interest rate outlook which is subject to change, let me put it like that. So, I think we should be careful here.’

06 February 2022

‘I personally think that our first interest rate increase will take place around the fourth quarter. But this is an estimate that is constantly subject to change, and if new information comes to light, then of course I will adjust my estimate accordingly. … normally we take interest rate steps of 25 basis points ... and I have no reason to suppose that we will take any other step than that. … That will then be the start of what we call a tightening cycle of a number of steps, and each time we will look at what effect this step has had on the inflation outlook, and on the basis of the outlook, we will then look at whether more steps are needed. In any case, I expect the first two steps to be taken fairly quickly, because they are the steps that will get us out of negative interest rates, so they will follow each other reasonably quickly. Then it is still the case that if we do not get a wage-price spiral, and if inflation expectations indeed remain well anchored around our 2% target, then there is not so much reason for us to raise interest rates quickly and sharply. Again, we are not in the situation of the United States, where inflation is of domestic origin, where the wage-price spiral is also already taking place.’

‘I expect the first [rate] step this year, and then I would expect a second step sometime in the spring of '23, say.’

‘ …but we have several instruments, and before you can, say, put your foot on the brake pedal, you first have to take your foot off the accelerator, and that brake pedal, I call the policy interest rate hike. We currently have our foot on the accelerator, that is our bond purchase programme, which we must end as soon as possible because that is just fuel on the fire.’

The ECB ‘always looks at the spread between the countries in the Eurozone, and that the differences do not become too great. It's not that far yet.’

‘I now believe, based on this analysis, that at least for most of this year, inflation in the euro area will remain above 4%. … higher inflation during the actually by far largest part of this year of course, also has a spill-over effect into next year, so we now think that, all in all, increased inflation will last at least two years in total, measured from last summer, if not longer. … That is definitely not good news.’

Holzmann (Austrian National Bank):

24 February 2022

‘It’s clear that we’re moving toward normalizing monetary policy. It’s possible however that the speed may now be somewhat delayed.’

‘Uncertainty undoubtedly increased due to developments in Ukraine. We will analyze carefully how strongly the economy will be affected.’

24 February 2022

‘The key reason for low real interest rates is not central bank policy, but structural factors which have driven down equilibrium real interest rates over recent decades to or even below zero. Most probably, population aging, an overhang of savings over investment and declining productivity are responsible (Brand et al., 2018; Borio et al. 2017; Summers and Rachel 2019). In stabilizing output and inflation, monetary policy moves policy rates around this structurally determined natural rate of interest. Given the low level of this so-called r*, a “normalization” of monetary policy would not raise interest rates back to the high levels seen a few decades ago. At the same time, monetary policy rates should not persistently deviate from r*, as this can create asset price bubbles, accentuate wealth inequality, and damage productivity growth by facilitating the survival of unproductive, otherwise non-viable firms.’

‘A key challenge of our time is climate change. The necessary transition to a carbon-neutral economy might help to reverse the trend decline in r* since it is the most fundamental transformation program since industrialization in the 19th century. If handled successfully, climate transition will bring forth new, innovative and fast-growing businesses – in line with the notion of “creative destruction” coined by Joseph Schumpeter.’

‘Climate protection can trigger a gigantic economic investment and growth program. It has the potential to increase the demand for capital and to structurally increase r* over many decades. Climate protection avoids productivity losses from overheating; cheap renewable energy will in the long run provide a lasting boost to productivity, growth, and welfare.’

‘Corona has held the world in its tight grip for the past two years. In terms of growth and employment, the pandemic is almost over. The flip side: Inflation is back. While the ECB projects that the rise in inflation will be temporary, there is a risk that it may not decline as quickly and by as much as projected. So, when should we scale back the generous monetary stimulus? When should we not only scale down but stop net asset purchases? When should we start raising policy rates? When should we gradually scale back existing central banks’ asset holdings? The answer is: “It depends”. Given prevailing uncertainties, monetary policy must keep its options open and “drive on sight”. Many central banks, including the ECB, have reassured the public that inflation will soon fall back to or even slightly below target soon. But let us be humble given the repeated failure to anticipate the extent and persistence of the current surge in inflation. While many of the factors driving this surge are beyond central banks’ control, they must also assure the public and markets that they will not allow inflation to get out of hand. Fighting inflation too late would be very costly.’

‘The secular trend towards low real interest rates is driven by fundamental factors. Reversing this trend requires big policy changes. These include (i) reforms to keep older workers in the labor force, making sure they stay healthy, skilled and engaged; (ii) a deep energy transition that offers productivity gains by drastically reducing clean energy prices and driving system transformation; and (iii) capital flows from the global north to the global south to fund infrastructure and green production. In the short run, it will be for central banks to judge on time and correctly whether the current sharp rise in inflation is indeed temporary or more lasting. In the latter case, central banks must not shy away from acting fast and decisively to fulfil their primary mandate of preserving price stability.’

23 February 2022

‘The inflation rate is indeed high. Moreover, the latest data do not indicate that this has changed in recent weeks. The temporary doubling of bond purchases under the APP is intended to prevent cliff effects because our other purchase programme, the so-called pandemic emergency purchase programme called PEPP, expires at the end of March.’

‘I do not want to prejudge the decision [on March 10]. However, like many of my colleagues, I assume that the situation will have to be reassessed in March. The discussion will certainly include a faster phasing out of all bond purchases and the question of interest rate hikes before the end of the year. My French colleague Villeroy de Galhau has already mentioned an end to bond purchases in the third quarter.’

‘In fact, the ECB has always signalled in the interest rate outlook that a rate hike should only take place shortly after the end of the bond purchases. But it would also be possible to set a first interest rate step in the summer before the end of the purchases and a second at the end of the year. I would favour this variant.’

‘Yes, the exit from the negative interest rate era that started in the middle of the last decade would, in my opinion, be an important signal to the population and market participants. I would like two interest rate steps by the end of this year or early next year. Some of my colleagues would perhaps be even more progressive here, while others would be more cautious.’

‘From my point of view, we should communicate more strongly in which direction the journey of key interest rates should go. The natural interest rate, which cannot be measured directly but only estimated, is currently probably around minus 0.5%. If you take this value and add the ECB's inflation target of 2%, you arrive at a nominal value for the equilibrium interest rate of 1.5%. For me, this 1.5% would be, very roughly speaking, the benchmark towards which the key interest rates must move. Only when this value is reached would our interest rate policy no longer be expansionary, but neutral. We should communicate this clearly to the market participants.’

‘That [when 1.5% could be reached] depends on the persistence of inflation. However, I think that a key interest rate of roughly 1.5% in 2024 could be realistic, although that may well shift a little forward or backward.’

‘Of course, there is always the question of how interest rate increases affect economic participants, and this also applies to the consequences for the state. But it is quite clear that the level of government debt and its reduction is the task of the finance ministers. The ECB cannot take this into account. Especially in member states with high debts, it is important that there is stronger productivity growth. There are countries where productivity has practically not increased in the past 30 years. To change this, the so-called EU reconstruction fund, which is aimed at investments, is right and absolutely necessary. However, it also tends to increase inflation, that must not be forgotten.’

‘Yield differentials have existed for a long time. However, if the differences are too large, monetary policy transmission cannot take place to the extent we would like in the ECB. Moreover, there is the danger that the markets overshoot in crisis situations. We manage the market for government bonds, but we do not stop the market signals. This benefits an economic and monetary union like the euro area, which is not complete. … The market is allowed to operate, but interest rates are prevented from being distorted by misinterpreted or overinterpreted information.’

‘Within the framework of its APP, the ECB has committed itself to buying no more than one third of the outstanding bonds of a state. Only beyond that could it become increasingly problematic from a legal point of view. Ultimately, however, this is a political decision about which one can have different opinions.’

‘The energy transition cannot be had for free. The relative prices of energy sources must change, otherwise we will not make any progress. The question, however, is how quickly the changes should take place and what compensation payments there must be. This is where the communication skills of politicians are needed.’

‘Crude oil and gas have become expensive, but that alone is not the problem. However, the more price shocks there are, the greater the danger of second- and third-round effects. The ECB therefore cannot sit back, but must act. It must take its foot off the gas, especially since fiscal policy is still very expansionary at the moment.’

‘There has been some swing [in favour of the hawks in the Governing Council]. The Council sees the need for something to be done about inflation. The only question is how quickly and to what extent we should act. Which is the greater danger: that we act too soon and stall the economy or that we hesitate and trigger an inflationary dynamic? For me, the biggest danger is that inflation expectations get out of control, because it would cost a lot of money to catch them again. Many things could then be called into question, including the energy transition.’

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):

24 February 2022

‘Over the coming years, the policy action must combine short-run stabilisation with a robust long-run institutional setup. In the euro area, despite the improvement in the crisis response apparatus since the financial crisis, fragilities persist. Coupled with the scars from the pandemic and its uneven effects across sectors and economies, the institutional fragilities may hamper economic growth and limit financial integration. Monetary policy should safeguard the transmission mechanism, while pursuing the primary objective of price stability. It should make use of the flexibility enshrined in the purchase programmes, guaranteeing a gradual pace for the future normalisation. This is not to say that monetary policy should abstract from the recent surge in inflation, but there are strong reasons for keeping a steady hand. First, it is hard to argue that its drivers are “monetary”, imprinting inflation expectations and contributing to disanchoring. Second, despite excess demand in some markets, we are witnessing a natural process of relative price adjustments, reflecting relative scarcities, and adjustments towards a decarbonized economy. Still, well-identified and arguably temporary supply bottlenecks are part of the story. Third, although a strong recovery in demand would eventually call for a policy response to restrain demand and refrain the surge in inflation, there would be welfare costs and, foremost, unsurmountable coordination aspects beyond the reach of monetary, and I dare say, fiscal policies. Such response could delay the adjustments in supply and hence to inflation. Embarking in a generalized restrictive loop, when we face exogenous shocks, will not help the economy overcome these challenges. Overall, the review of the ECB’s monetary policy strategy has just confirmed its medium-term orientation, as “the appropriate monetary policy response to a deviation of inflation from the target is context-specific and depends on the origin, magnitude and persistence of the deviation” Fiscal policies should address possible asymmetries in the recovery. However, it is important to start a gradual transition towards a neutral stance. Whereas the current environment of low interest rates may favour the effectiveness of expansionary fiscal policy, it remains important to strike the right balance between stabilisation and sustainability, ensuring a sound interaction with monetary policy. The fiscal strategy should be prepared for a transition towards the normalisation of monetary policy. In this context, it is reassuring that initiatives taken under the NGEU instrument offer ample opportunities for a sustained recovery process.’

10 February 2022

‘I do not think that unconcerned is the adjective that should be used to interpret what I mentioned, but we need to look at the whole problem and understand that the best way for the country to continue to prepare for this change of cycle in monetary policy is the reduction of indebtedness, which is in fact happening, and which is projected for the coming years as necessary and achievable and desirable from the point of view of the State's budgetary and financial policy. Therefore, if we manage to achieve these goals, the word unconcerned may gain some life because in fact we are transferring it not from the result itself but to the actions that must be adopted. In other words, if we do what we have to do, we can face this situation with some reinforced confidence, certainly more than what we experienced five, six years ago.’

‘There is one thing that is not good: inflation above 2% is never temporary enough. We always get very anxious when these indicators exceed our targets, but we were already prepared for that. The change we made with the ECB's revised strategy envisaged that, temporarily, inflation could be above 2%.’

‘If it becomes part of the anchoring of inflation, what these effects mean in the context of monetary policy in terms of risk is very simple: it is a spiral, in fact, that reinforces every time wages are decided and those wages pass into prices. I think we have room in our economy to negotiate wages and not have those second-round effects. They are not yet visible. Just a few weeks ago, the CGD, which is one of the largest companies in Portugal, had its pay scales revised well below the values that are being talked about in Europe. In Italy there is also no evidence that this is happening. In some countries, and Spain and Belgium are two of the most cited examples, there is a mechanism that central banks don't like, which is wage indexation. We don't have any of that and we can do wage negotiations based on what the companies' interpretations are without that risk. The US is a completely different situation and the UK imposed a Brexit on itself which had a very negative impact on the labour market and removed hundreds of thousands of workers from the country. And this creates wage and price pressures that we don't have in the EU. We don't need to import problems that others have that, for us, simply don't apply.’

09 February 2022

‘In an environment of geopolitical tensions, pressure on energy and growth in demand and constrained expansion of supply we have higher inflation. Still, core inflation - which excludes energy and food - is 2.3%, and fell in January. Inflation expectations want to be anchored. One of the most used indicators to measure them, the 5-year swaps, are at 1.8%. We can say that for the first time in many years inflation is anchored. Second-round effects on wages have not yet been felt, at least for the time being, even though the limited labour supply constitutes an upward risk for inflation. After the temporary effects and the resumption of labour mobility in Europe, we anticipate a drop in inflation, which should converge in 2024 to values compatible with the monetary policy objective.’

‘We are entering a new monetary policy cycle. The period of generally low interest rates, some even negative, should be followed by a normalisation, a desirable process. Monetary policy, a macro policy, aims at controlling prices. But it will not be able to deal with geopolitical pressures, nor with decarbonisation. These are processes with temporary effects, but whose impact is not negligible. At this stage, monetary policy should keep all flexibility and all options open. It would be a mistake, comparable to those of the recent past, to give monetary policy the role of chasing after Mr Putin. The credibility of a monetary policy that responds to supply shocks and political tensions does not survive the first clash.’

‘On the contrary, in Europe, coordination with fiscal policy should maintain the spirit of 2020, while increasing its effectiveness. Analysts are often worried at turning points in policy. But it is worth remembering: in 2017 we were financing ourselves at 5% and Germany at 1% (with a 10-year maturity). Today the financing costs are much lower. The interest differential with Germany is about 80 basis points, it was over 400 basis points. The budget balance was still lurking at the limit of excessive, the requirement today is clearly within our reach. The ECB's purchase programmes have already had a break in the net purchase phase, at the end of 2018. At that time, 10-year rates were at 1.70%, which is well above what we have today. In other words, in that too, we are now in a better starting position. Interest expenditure is down 1100 million euros between 2019 and 2021. No one should have been convinced that interest rates would stay at 2020/21 values (were they?). But we have to keep the focus on our responsibilities and bring the debt quickly to near 120% in 2022 and improve on the 2019 figures the following year. And it is possible.’

Rehn (Bank of Finland):

12 February 2022

‘If we reacted strongly to inflation in the short term, we would probably cause economic growth to stop. It’s better to look beyond short-term inflation and look at what inflation is in 2023, 2024.’

Inflation in the coming years could be ‘close to the 2% target.’

‘We will have time to react in the March meeting and in later meetings if it looks like the situation is markedly different than it now appears.’

10 February 2022

‘The strong but necessary response of monetary and fiscal policies to the pandemic has supported economic recovery. At the same time, the question is whether the measures have been oversized. Is the economy so hot now that it could lead to a long-term acceleration in inflation? On the positive side, the economic recovery in the euro area is continuing and employment is improving. At the same time, high prices for gasoline and food are felt in the wallets of many and cause concern for people. Euro area consumer prices have risen exceptionally fast, by 5.1% in January. There are three main factors behind the acceleration in inflation. Energy inflation explains more than half of euro area inflation. The escalation of the geopolitical situation is likely to keep energy prices high for a long time. Inflation has been accelerated by the normalisation of private service prices as economies open in autumn 2021. The rapid recovery from the recession has exacerbated production bottlenecks and component availability problems and raised product prices. These drivers of inflation alone will not lead to a permanent, long-term acceleration, unless they cause large multiplier effects, i.e. a price-and-wage-spiral. Unlike in the United States, wage inflation has so far been relatively modest in the euro area. The development of wages is now being monitored particularly closely.’

‘The new monetary policy strategy of the European Central Bank was decided by the Council last summer: in the medium term, we are aiming for a symmetric inflation rate of 2%. At present, the medium-term outlook for inflation in the euro area is not far from that. Monetary policy decisions will not respond to short-term deviations of inflation from the 2% symmetric target unless they are expected to have a more lasting impact on inflation. However, if inflation threatens to accelerate excessively and in the long run, the ECB's monetary policy will work to prevent it by reducing purchasing and financing operations and raising key interest rates. This is how an independent central bank works, with the primary objective of price stability. In December, the Governing Council launched a gradual normalisation of monetary policy. Net purchases under the Pandemic Purchasing Program (PEPP) will end at the end of March. At last week's meeting, we assessed that there are risks of a faster-than-expected acceleration in inflation. In a situation of uncertainty - I am also referring to the prevailing geopolitical tension and its potential effects on energy and growth - it is better to say, as the street says, that is, to proceed with the normalisation of monetary policy, in particular gradually and step by step. Monetary policy is conducted consistently and flexibly, while maintaining room for maneuver. The Governing Council will use all its instruments to ensure that inflation stabilizes at the 2% target over the medium term.’

04 February 2022

‘The economic recovery in the Eurozone continues and inflation has accelerated. Barring a backlash in the pandemic or geopolitical situation, it would be logical for the ECB to raise interest rates next year at the latest. We will ensure that the rise in prices remains moderate in the medium term.’

The ‘gradual normalisation’ of monetary policy was decided in December.

"On the positive side, the economic recovery in the euro area is continuing and employment is improving despite the Omicron variant. The bad news is that inflation will remain high for longer than expected, with rising energy prices and geopolitical tensions being the main drivers.'

‘I fully understand that higher energy prices weaken the purchasing power of households. If energy prices continue to rise for a long time, it is likely to increase inflationary pressures. Monetary policy has little effect on energy prices.’

‘So far, wage inflation in the euro area has been modest. At the March meeting, we will have a better understanding of inflationary pressures and, in particular, wage developments. Monetary policy decisions are always made on the basis of the most recent information available. I have suggested in the Council that data on wage developments be obtained more quickly from different countries.’

‘In March, we may also see more closely how Russia’s power policy has affected energy prices. However, I do not think that the tensions in Ukraine and Europe will ease quickly, but rather we should prepare for Russia's long war of nerves.’

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):

23 February 2022

‘I believe that the direct exposure of the European financial system to the Ukraine and Russia is relatively limited. It’s something that we’ve been signalling in the past. I believe that the indirect effects are in a way much more important. That is, how it can affect the price of energy, for example. The price of energy, petroleum as well as gas, which has been one of the factors that are behind the increase in inflation, and obviously, the sentiment in general of the markets. But from the point of view of direct exposure of European banks, of the financial system, the positions are relatively limited. That is, we have to look a lot more at what would be the indirect atmospheric effects that, logically, a conflict of this type, of this political nature, has a rather noticeable impact, and rapidly, looking at energy prices, that is, the price of a barrel of oil has approached 100 dollars, and also the price of gas…’

‘With respect to inflation, I would like to highlight various issues. First, in ’21, practically all analysts underestimated the evolution of inflation … and I think this has had various effects. First, the consideration that inflation is no longer as transient as we had considered practically six, 12 months ago. Second, that the risks to inflation are to the upside, and third, that we have to pay a lot of attention to everything having to do with second-round effects. That is, if we’re going to have inflation that’s going to be higher for longer, then the fundamental risk is that we find that inflation expectations, which are still relatively moderate in a region slightly below 2%, are adjusted upwards and that, obviously, economic agents adjust their incomes, their nominal income demands, to a situation of inflation that is … higher … over a longer time horizon. This is the principal risk we have. We’ve seen for example how the European Commission recently revised clearly upwards its inflation projections, and in two weeks we will too, that is, we will come out with our new inflation projections, which are going to fundamentally determine the direction of monetary policy, of the actions of the Governing Council of the European Central Bank. And these actions, logically, we’ve said are always dependent on incoming data, on the updates that we do of our projections.’

‘The market continually places its bets on when monetary policy moves will occur. Sometimes they are right, sometimes they are wrong. I am not going to get into that. … I would raise a fundamental issue. That is, we have to receive the inflation projections, the new inflation projections … which will extend until the year ’24. We’ve had inflationary surprises … and this is reflected in the projections made by the European Commission or the International Monetary Fund. Our actions will depend on incoming data, we’ve always said so. And we took decisions in the month of December, one of them was to end the emergency asset purchase programme tied to the pandemic, which will end now at the end of the month of March, and then to continue with the normal bond purchase programme. We will see the data, we will see the projections, and in accordance with these we will adjust, as the case may be, we will adjust the asset purchase programme and, of course, then we will see when a rise in interest rates can actually take place. But I would say to the markets that sometimes they are right and other times they are wrong. Therefore, I would be cautious, and in addition, they themselves keep modifying their bets with respect to this kind of consideration, also according to the data, and if there’s anyone who has to depend on the data, it’s logically the central bank.’

10 February 2022

‘Exceptional fiscal and monetary stimulus has been essential in supporting the ongoing recovery of the euro area economy. While real GDP returned to its pre-pandemic level in the final quarter of 2021, growth moderated during that period and economic activity is likely to remain subdued in the early part of this year. However, we expect growth to rebound strongly over the course of 2022. Over the next three years, we anticipate that euro area growth will remain above its long-term average.’

‘As has been widely discussed, there has been significant volatility in the path of inflation since the start of the pandemic. Measures to contain the spread of the coronavirus (COVID-19) initially depressed inflation by curtailing economic activity. However, inflation has risen sharply in recent months and it has further surprised to the upside in January, reaching 5.1%. 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. That is the central case, but there are upside risks to that outlook. Inflation could turn out to be higher if price pressures feed through into higher-than-anticipated wage rises, or if the economy returns to full capacity more quickly than foreseen.’

‘Our monetary policy measures have enabled us to successfully navigate the pandemic emergency. In view of the progress on economic recovery and towards our medium-term inflation target, at our February meeting the Governing Council confirmed the decisions taken at our 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. At the same time, in view of the current high level of uncertainty, we need more than ever to maintain flexibility and optionality in the conduct of monetary policy. We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at our 2% target over the medium term.’

‘Regarding the future path of our policy rates, our forward guidance on the conditions under which they will be raised is clear. To reiterate, we would need to see inflation reaching 2% well ahead of the end of the projection horizon and durably for the rest of the projection horizon. We would also need to judge that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. Some other central banks have either already raised rates or indicated that they will soon do so. In making comparisons, it’s worth remembering that the euro area is at a different stage of the economic cycle, just as it was when the pandemic started. So it’s natural that central banks around the globe won’t necessarily start raising rates at the same time. We are guided by our forward guidance conditions and will act if, and when, they have been met.’

Wunsch (National Bank of Belgium):

16 February 2022

‘The current inflationary pressures should gradually ebb away in the coming months, although there is still considerable uncertainty about that, as some of the factors driving up prices actually reflect a need for global value chain adjustments via investment which will take time to materialise. The risk of production costs fuelling inflation also requires extreme vigilance, especially in view of the dynamic labour market and, in Belgium, automatic wage indexation and the rapid reappearance of labour shortages. Central banks need to balance the risk of spiralling prices against the danger of premature monetary tightening which could strangle the recovery.’

‘In the euro area, the September 2021 reform of the monetary policy framework gives the Eurosystem the flexibility it needs to navigate in these uncertain waters. It will have to be both patient and vigilant in the face of an inflationary episode featuring uncertain dynamics while standing ready to change course if there are definite signs of significant deviation from the new symmetrical target of 2% inflation in the medium term. The expectation that inflation will normalise in the medium term in the region of its target should make it possible to proceed with a gradual tightening while maintaining an accommodative monetary policy without side effects, particularly for financial stability. That is the essence of the December decision by the ECB Governing Council. To sum up, the watchwords for the coming months will be patience, agility and close attention to the relevant indicators.’

‘The strong recovery, proliferating supply constraints and rising prices imply that the massive support for domestic spending will soon come to an end, in Belgium and everywhere else. A gradual, smooth exit from the crisis policies is vital for the timely regeneration of the leeway essential for attenuating future shocks. However, the continuing public health uncertainties make it difficult to decide the right pace of normalisation. On the one hand, we must not impede the recovery, but on the other hand, it is important to limit the risk of an erratic response by the financial markets to the fragility of public finances or the speed of monetary tightening.’

‘The current uncertainties presage considerable risks for the short- and medium-term outlook. While the baseline scenario remains favourable, the sharp slowdown in the final quarter of 2021 and the exponential spread of the new Omicron variant illustrate the threats to growth. Control over the dynamics of the epidemic with vaccines and treatments is still far from perfect and hard to foresee. The monetary policy choices could also be more difficult than expected if it takes a while for supply constraints to clear and for energy and commodity prices to return to normal. The same applies to the cumulative delays in resolving longstanding structural problems, including the sustainability of public finances.’

‘Central banks worldwide are finding it difficult to foresee how long this inflation surge will last. Some are already brandishing the spectre of “stagflation”, that persistent combination of high unemployment and inflation which followed the 1979  oil shock and the dramatic tightening of American monetary policy. A repetition of that scenario is highly improbable as economic agents remain confident that, in the medium term, inflation rates will normalise around their official targets (2% per annum for the euro area). That confidence is based on the firm belief that central banks are supposed to pursue their objectives unhindered. In 1979, that credibility was in jeopardy, since the monetary authorities were viewed as dependent on considerations unconnected with their main mandate.’

‘Broadly speaking, the expert debate on inflation comes down to two different positions. Some experts believe that the inflationary surge could persist if monetary policy fails to respond fast enough. In their view, the demand pressures are such that many firms are no longer afraid to up their prices, in contrast to their previous approach of maintaining their competitiveness, market shares and profit margins by keeping costs down. In addition, fiscal policies reflecting the desire of many governments to step up investment in infrastructure will continue to fuel demand. These synchronised budgetary pressures could exacerbate the existing strain on some supply chains and be reflected in prices. Finally, a global context of tight labour markets is conducive to wage rises, increasing the likelihood of further price hikes. Others take the view that the current inflationary pressures are fundamentally temporary, because mismatches between supply and demand never last. In particular, the surge in energy and commodity prices will dissipate once supplies on those markets pick up as expected. And the logistical bottlenecks which have driven transport costs sky high are also unlikely to persist. For those who take this view, if the accommodative monetary policies are ended too soon, that would crush a recovery which is still vulnerable to the epidemiological risk. Such contrasting analyses reflect a reality which is hard to read and a highly uncertain outlook. On the one hand, even if the bottlenecks and other logistical disruptions were to cause a permanent rise in the level of some prices, the effect on inflation (which measures the growth rate of average prices) would still be transitory. The same logic applies to commodity prices, even if they were to stabilise at a higher level than before the crisis. On the other hand, some inflationary pressures could prove more persistent. First, permanent changes in the structure of expenditure could prolong the constraints on supplies of intermediate inputs or commodities. Be it a question of new private consumption behaviour, accelerated digitalisation or a global increase in green investments, some supply constraints will only be resolved by substantial adjustments to value chains, and that takes time. Second, the pandemic has shown up the fragility of globalised production methods. More fundamental changes designed to enhance their resilience (such as shortening of value chains by the relocation of production) therefore cannot be ruled out, especially if the pandemic persists. That said, any such relocation need not damage production efficiency if accompanied by increased automation. Third, the ongoing reallocations on the labour market are sometimes still difficult to interpret. In any case, the global context is more favourable to wage increases than before the pandemic, and the risk of spiralling cost inflation cannot be ignored.’

‘While inflation is expected to fall this year, the reforms of the monetary policy framework adopted in the United States and in the euro area in 2021 have given central banks greater flexibility to deal with this specific, highly uncertain environment. More than ever before, monetary policy cannot be reduced to an automatic link between an inflation forecast and what is considered to be the optimum monetary policy stance. The exercise being conducted by credible central banks worldwide concerns risk management. Patience in the face of inflationary blips remains essential so long as a premature tightening of financial conditions would be at the cost of a stalled economic recovery. However, the credibility of patient central banks requires them to signal their willingness to act if inflation expectations clearly deviate from their official target. Striking the right balance between patience and swift response involves continuous, rigorous and transparent analysis of all the relevant data. This three-pronged approach involving patience, swift response and analysis explains the decisions taken in December 2021 by the Federal Reserve and the European Central Bank (ECB), for instance. In varying degrees, reflecting different economic situations and outlooks, the world‘s two leading monetary authorities signalled their willingness to make monetary policy less accommodative. By cutting back their asset purchases on the secondary markets, the monetary authorities are reducing their influence on longer-term interest rates, including the level of risk premiums. Elsewhere in the world, a number of central banks (in Latin America, Canada, the United Kingdom, Russia, the Czech Republic and Poland) have also initiated a cycle of monetary tightening. Unless the health risks return in force, those decisions mark the end of an exceptional period of support for demand. The quantitative tightening (tapering) is notably speedier in the United States than in the euro area. … Faced with a more fragmented and generally less tight labour market, with budget deficits more under control in some Member States, the ECB predicts that inflation will converge on a level just under 2% (but within the margin of error) in 2023 and 2024. In principle, it can therefore be more patient than its American counterpart and maintain an accommodative monetary stance for longer. Leaving aside the debate on inflation, more neutral macroeconomic policies are necessary to restore room for manoeuvre in order to cope with future crises. The legacy of massive fiscal support for the economy takes the form of historically high public debt ratios (averaging over 120% of GDP in the world‘s advanced countries), constricting future room for manoeuvre. In the central scenario of robust economic growth in 2022, and without prejudice to any targeted crisis measures remaining essential, the window of opportunity for initiating fiscal consolidation is now open. First, an early start offers considerable freedom to choose the rate at which structural deficits are eliminated. The scenario of austerity dictated by the pressure of risk premiums is unlikely so long as monetary policy remains highly accommodative. But it is much less improbable if monetary policy is obliged to change course. Second, the persistence of real interest rates well below the growth rate makes it possible to stagger the consolidation measures while maximising the reduction in the debt ratio. These conditions favour the chances of success, and hence the credibility, of the debt reduction strategy. Third, the phasing out of fiscal support for demand facilitates a gradual normalisation of monetary policy. At the same time, the credibility of moderate but sustained fiscal efforts reduces the risk of accidents on the sovereign bond markets and, in the euro area, the associated risk of fragmented financing conditions in the Monetary Union. Fiscal consolidation will entail a gradual shift in the financing of priority expenditure away from borrowings (or EU transfers) in favour of resources freed up by the rescheduling of less urgent programmes and reforms designed to contain the structural pressures on certain current expenditure, notably that related to population ageing.’

‘This very cautious exit from the crisis policies minimises the risk of a hasty tightening which could strangle growth. However, it is vital not to ignore the opposite risk of unjustified maintenance of extremely accommodative financial conditions despite the ECB‘s inflation forecasts already very close to the target. Disregarding that risk could fuel concerns over the possibility of a disruptive reversal of monetary policy once inflation regains or even exceeds its target level.’

‘In the absence of a runaway wage-price spiral, attention focuses on two prospective scenarios. In the first, inflation converges sustainably on the 2% target and monetary policy can be gradually normalised, as envisaged in December. The gradual approach and predictability suit the financial operators, limiting the risk of undesirable side effects on asset prices. In the second scenario, the economy reverts to the pre-crisis situation, namely sluggish growth and inflation obstinately below the official target. In that case, difficult choices might need to be made in the next 18 months. If inflation is too low, it will be necessary to pursue an extremely accommodative monetary policy with no real prospect of normalisation, even though that policy has not succeeded in getting inflation on target despite the sharp rise in 2021-2022. Conversely, financial stability could become so fragile as to endanger the proportionality of monetary policy, because the repercussions of that policy on the balance sheets of individuals and firms, or even the State, would persist (excess debt) while potentially soaring asset prices could imply the risk of sudden reversal (bursting of a potential financial bubble).’

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):

24 February 2022

‘Less than two years into the pandemic, the euro area economy has returned to the pre-crisis level of activity, though the recovery has been incomplete in some sectors and countries. With a rapid and comprehensive response of monetary, fiscal and other policies to a once-in-a-lifetime shock, we prevented the free fall of the economy and helped to preserve financial stability and protect productive potential. As our interest rates were near the effective lower bound, the Eurosystem has resorted to unconventional monetary measures, launching tailor-made instruments to leave no one behind. With the roughly simultaneous reopening of economies and relatively robust household incomes, backed by fiscal and other measures, regional and global demand rebounded strongly. This led to supply-chain bottlenecks and shortages of different goods, ranging from energy and construction materials to computer chips, and brought about soaring prices. The pick-up of inflation in the euro area and elsewhere was not unexpected, considering the low reference base in 2020 and the impact of pandemicdriven one-offs and other presumably short-term factors. In an effort to secure the uncertain recovery, we last year had good reasons to tolerate supply-driven spike of inflation - after a decade of it falling short of the target set. However, Eurozone inflation prints kept surpassing our projections in recent months. Energy inflation and consequently headline inflation exceeded their highest levels since the introduction of the euro. Global supply chain disruptions have proven more sustained, while Europe also grapples with the energy supply crunch, aggravated by geopolitical developments and the EU’s own climate-related policies. With the persistence of these factors, price growth has been gradually spilling over into a wider range of products, bringing core inflation rate on par with its previous 20-year peak. Elevated inflation is set to persist well into 2022, longer than previously expected. The development of the pandemic and thus the duration of disruptions in supply chains are still uncertain. At the same time, various structural policies and geopolitical disputes indicate no immediate relief in energy prices. Longer spell of higher inflation increases the danger of it becoming more entrenched and broad-based. Studies show that euro area economies tend to be at risk of price hikes leading to increased wage pressures. In addition, expectations of future inflation, an important determinant of inflation, are highly state dependent and tend to react strongly to current inflation. Higher inflation, even if caused by external factors, could therefore result in a feed-back loop through higher wages and increased inflation expectations. Our monetary policy focus should therefore be on identifying early signs of increased wage pressures or the deanchoring of inflation expectations above our target. In addition to the surge in consumer prices, some of the unintended consequences of our policies are also weighing heavily on our decisions. In a low-yield environment investors are seeking yields in risker segments of the markets, or are pushing the prices of some investment possibilities, like housing, into levels where abrupt repricing could pose a threat to the macroeconomic environment. Furthermore, our maintaining of favourable financing conditions across all sectors and jurisdictions during the pandemic has contributed to increased debt levels in these sectors, hence inducing refinancing risk. Macroprudential policies with capital- and borrower-based tools are an important line of defence, but they focus primarily on the banking sector and are not all powerful. The longer the highly accommodative policy is maintained, the more pronounced these risks become, and the more painful the normalisation process may have to be. Given these considerations, the time seems right for our monetary policy to move out of crisis mode and start the process of gradual normalisation. With the return of economic activity to the pre-crisis level, looming labour shortages and in part structural pressures on energy prices, our monetary policy needs to start rebuilding its space to be ready to respond to the next business cycle. However, this has to be a gradual and predictable path, in order not to pull the rug from underneath a more complete recovery in the context of an enduring pandemic. The decisions at our previous monetary policy meetings have laid the necessary groundwork to implement such an approach.’

18 February 2022

The ECB should be ‘somewhat quicker at adjusting monetary measures’.

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 February 2022

‘The situation in Ukraine increases uncertainty. In my view it is going to have a short-term inflationary effect – that is prices will increase due to higher energy costs. As you know, Europe depends on natural gas from Russia in the order of 40%. But in the medium to long term, I think that the consequences will be deflationary through adverse trade effects, and of course through the rise in energy prices. So, I would urge caution. I am not sure that we need to add to the existing uncertainty that has been created due to the situation in Ukraine.’

‘Caution means in my view that we should not deviate much from our December decision. We’ll have to review the new evidence and forecasts in March before we make a decision. The situation is much more uncertain now than it was one week ago. In my view our forward guidance, reviewed under the new evidence we have in March, should be our guide: we should retain the sequencing and to carefully consider the conditions that have to be met before we change our monetary policy stance. More generally, I am not sure at all that the deflationary tendencies that we observed for several years before the pandemic have changed dramatically because of the pandemic. We simply have had a series of supply-side shocks plus a geopolitical shock now. Monetary policy is not well suited to tackle these shocks. It can do it but at a very high cost in terms of output and employment. That’s why I would urge caution.’

‘Yes, I think we should take into account [in the forecasts] the situation in Ukraine. It will have first and second round effects. We don’t know which kind of sanctions will exist in the medium term. Uncertainty is on the rise, so definitely our forecasts must take into account this situation that has worsened recently.’

‘Before we see the evidence and the new forecasts, I think it would be premature to say anything [about ending the APP]. Judging the situation from today’s point of view, I would rather favour a continuation of the APP at least until the end of the year, beyond September, rather than bringing the end closer. That’s part of the caution I was talking about.’

‘Yes, exactly[, I would keep the guidance as it is, which de facto means APP until the end of the year]. We should keep our flexibility. That’s the name of the game at this juncture. The colleagues you mentioned spoke before the Ukraine crisis if I remember well.’

‘On the Governing Council we talk about flexibility and optionality, which means we keep our options open. We don’t know what kind of sanctions we’re going to have.’

‘Yes, I wouldn’t be in favour of announcing the end of APP in March.’

‘I do have confidence in our staff both at the ECB level and at the NCBs. Predicting inflation is not an easy exercise. Economics is not an exact science, nor is monetary policy. It’s both an art and a science. Who could have imagined that we would have a pandemic? Who could have imagined supply-side shocks? And now we have a geopolitical supply-side shock. We could not have imagined it. There is uncertainty here that cannot be incorporated in our models. It has nothing to do with the ability of our staff. We have the best models in the world and the best academic advice in the world but inflation forecasting remains an imprecise science which needs judgement. That’s what we’re trying to do in the Governing Council.’

‘Yes, I don’t think that keeping “lower” now serves any purpose. We could remove that word.’

‘I would avoid introducing a hawkish bias, yes. We don’t know the effects we might have, deflationary effects sooner than the medium term. Markets are volatile, the volatility indices have been up in the last two or three days and I would be wary of adding to that volatility.’

‘The credibility of the ECB is extremely important. For the moment the evidence - and by that I mean second-round effects, labour market and inflation expectations - shows that in the medium term expectations are well anchored at 2% or below. This hasn’t changed. If that changes, I would not hesitate to urge changing our monetary policy stance. But I don’t see the need for that now. On the contrary, we need to show calmness and try to review all the evidence very carefully.’

‘I would agree with that [omitting the word “shortly” from forward guidance]. It would increase our flexibility and our options.’

‘I haven’t thought about that and we haven’t discussed it. In front of us we have a tightening of policy that will come through the repayment of TLTRO, because the favourable interest-rate conditions will very likely end in June. We may start to see TLTRO repayments so we will have a de facto tightening of policy and a reduction of the balance sheet.’

‘We haven’t considered the pros and cons of a fast versus a gradual convergence [of the DFR] to zero.’

‘It’s not in our immediate concerns [bringing the DFR back to zero] and we haven’t thought about it in the Governing Council or in the analysis we have done with our staff.’

‘I don’t think this is the right time for such a move. It’s not our immediate concern to change the tiering multiplier.’

‘Is it [OOH] an inflationary element or a one-off effect? I think it’s only a one-off. When we introduce housing costs in a more proper way, it would be a one-off effect and not a continuous impact. It would not increase prices continuously. I don’t think it’s such a serious argument now to alter our approach. There are megatrends at play when it comes to inflation. Before the pandemic, we said there are structural factors that keep inflation very low or even negative. That’s why the natural real interest rate is negative. I’m trying to understand what has changed. I’m not sure that the deflationary bias has changed into an inflationary bias because of the pandemic. Do we observe any different trends in investment or savings? Has the savings glut disappeared? Has digitalization changed productivity growth? What’s the impact of green transition? These are more important questions than housing costs.’

‘Bank of Greece research shows that in the long term, green energy will result in lower energy costs than fossil fuels. But until then, there is a transition and we have made a small mistake in this transition. We have rightly imposed very ambitious targets on green energy but didn’t make sure we have enough storage capacity for this green energy. This is perhaps what creates the high transition cost and explains our dependence on natural gas.’

24 February 2022

‘“Stagflation” was popularised in the 1970s and early 1980s. It came to be identified with sustained periods of slow, or even negative, economic growth, high levels of unemployment and high inflation. Although central to the U.S. economy, this experience was mirrored in all other industrial economies. The main causes of the stagflation episode were two successive waves of oil-price increases by OPEC. Those oil price shocks made life difficult for central banks because they were strictly supply-side phenomena. For almost 10 years, policy makers faced a dilemma. Tighten monetary policy to bring down inflation that would raise the unemployment rate further, or ease monetary policy to reduce the unemployment rate that would bring inflation even higher. Many central banks chose the latter. Today’s situation is very different. Oil prices have risen in the past year, but at a rate far below anything experienced in the 1970s. In fact, they are near or even below their levels of a decade ago. Moreover, today’s economy is more service-based and less manufacturingbased than in the 1970s. Services require less energy than manufactured goods. Therefore, it would take a much larger oil-price change to have the impact on the economy observed during the 1970s. Euro area inflation reached very high levels early this year, but is expected to come down as pandemic-related supply disruptions and product and labour shortages unwind. The combination of supply and demand shocks is expected to dissipate. Contrary to the 1970s stagflation, unemployment is at historically-low levels. Economic activity is expected to pick up again later this year and moderate at close to historical levels in 2023 and 2024. Furthermore, during the 1970s most central banks had not established credibility, with few exceptions, like the Bundesbank. In the U.S. the main weapon to fight inflation was wage and price controls. In the mid-80s inflation had fallen to low levels but long-term interest rates remained high, because the Fed had still not earned credibility. Today, despite the recent surge in euroarea inflation, the yield on the 10-year euro area benchmark bond stands near zero, indicating that the markets believe that this rise is transitory. The 5y5y forward inflation linked swap rate is anchored close to the 2% target. Underpinning this situation is that markets expect that the ECB will deliver on its commitment to achieve 2% inflation in the medium term. For the same reason, no second-round effects have been generated by rising prices; wages’ growth remains rather contained. Unlike the 1970s, wage indexation schemes are largely nonexistent today, as wage earners trust that the ECB will deliver price stability. Today, inflation has risen but long-term interest rates have remained low because central banks, in our case the ECB, have earned credibility. The ECB needs to assess whether the rise in inflation will be short-lived or persistent. Unlike the 1970s, there are good reasons to believe it will be short-lived. That is why medium-term indicators show that inflation will fall back to near – or below – the 2% level. It is essential that the ECB maintains its credibility, which brings me to the issue of the way forward for monetary policy. Monetary policy faces high uncertainty, reflecting, in part, the erratic path of Covid-19, geopolitical tensions and the unknown impact of green transition policies on future inflation. Policy makers need to see through this cloud of uncertainty. Our objective is price stability, and our compass comprises the information, such as price expectations, that shows if that objective is achieved. Presently, our compass tells us that a steady course is warranted. An abrupt tightening could lead to recession, damage credibility, especially in the aftermath of the too-low inflation outcomes in the previous decade, and trigger financial stability risks and fragmentation. Therefore, the ECB’s monetary policy stance should stay the course, as long as the available information points that inflation will remain below our target over the medium term. A gradual and cautious unwinding of the monetary policy stimulus over the coming period could continue to be pursued, based on the further improvement in the economic environment and the inflation outlook. However, the risk that current high inflation rates may become entrenched in long-term inflation expectations should not be overlooked. We have to remain vigilant and prevent that risk from materialising. If signs of a sustained presence of inflationary pressures emerge, we should act in accordance with our mandate. Monetary policy implementation should learn from the past. It needs to see through price developments that are expected to be short-lived and focus on price stability in the medium term. It will thus maintain its credibility, continuing to support the smooth functioning of the economy in the euro area.’

21 February 2022

‘Interest rates have risen due to the crisis in Ukraine and the possible tightening of European monetary policy. But this is not very important for Greece.’

13 February 2022

‘The tightening of monetary conditions that is already underway could slow economic growth and, more importantly, put upward pressure on borrowing costs for both the public and the private sectors and affect the sustainability of public and private debt. The explicit reference to Greece in the ECB’s December 2021 announcements is a strong message of confidence in the Greek economy and helps to mitigate some of these risks. Effectively, the ECB’s decisions provide support to Greek bonds, until they obtain an investment grade rating, via three channels: (1) their continued eligibility for purchase during the PEPP reinvestment period, which was extended until the end of 2024; (2) the flexibility of PEPP reinvestments, including the purchase of debt securities in excess of the redemption amounts; and (3) a possible resumption of net purchases under the PEPP, if deemed necessary. Moreover, the fact that Greek bonds will continue to be purchased during the PEPP reinvestment period until the end of 2024 suggests that they would also remain eligible as collateral for the Eurosystem refinancing operations over the same period. The recent rise in Greek government bond yields is a generalised phenomenon and is largely due to the common shock of changing global financial conditions. However, given the lower credit rating of Greek bonds, their yields are more sensitive to international market volatility compared with other sovereign bonds. Therefore, part of the increase in the spreads of Greek government bonds (vis-à-vis comparable German bonds) is attributable to the fundamentals of the Greek economy. According to debt sustainability analyses carried out by the Eurosystem, Greek public debt, despite its high level, is resilient to various adverse macroeconomic and fiscal scenarios. In particular, Greece’s debt-to-GDP ratio is stabilising and is projected to reach its pre-crisis levels earlier than the ratios of other highly indebted countries, marking the largest drop by 2030, both in the baseline and in the various alternative scenarios.’

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):

24 February 2022

‘Nobody needs to explain why high inflation is undesirable. It robs people on fixed incomes. It starts the dog chases tail wage-price spiral between unions and employers. And yet, nobody would like inflation to return to negative territory, where interest rates can get stuck at very low levels for long periods. Hence the accepted 2% inflation rate target, which gives adequate elbow room to monetary policy makers to keep the ship steady and allow economic growth to flourish. Hence too the symmetry principle which the ECB has embraced for the future. That said we are presently faced with relatively high rates of inflation which were last experienced more than a decade ago. Indeed, the rates in the European Union countries and elsewhere, notably in the US and Canada, are exceptionally high. The knee-jerk reaction response from media to raise interest rates is understandable. But proper evaluation needs to enquire about the source of this inflation, and how it has been in hibernation for so long and after proven itself unresponsive to the barrage of monetary instruments over the last decade, appears all of a sudden. Of course, it has to do with the pandemic. No doubt the pandemic has upset persons, institutions, and whole economies. Many people stayed at home for various reasons. Like a war period both supply and consumption were seriously interrupted. Like war it has interrupted the modes of work, encouraged persons especially the elderly to withdraw from the labour force, affected heavily people’s wellbeing and self-worth, while making others to rethink their life-plans and undertake a reset as well. The aftermath of the pandemic found the economy with previously pent-up demand pouring out and finding supply short. Industry found much of their staff missing due to sickness-imposed quarantine, absences to look after children whose schools were closed, or even inadequate vaccination. The logistic problems affecting cargo shipping, combined with the tight oil production and ensuing energy prices affected the prices of a wide range of goods, including food and housing cost. Each price surge is explainable, has a beginning, and an end. In short, the price burst is not expected to be permanent. Inflation is transitory. Many questions arise. What do we mean by transitory? What about the reactions of firms, unions and consumers in the face of such price increases? Will they react? Inflationary expectations are of material interest to the medium-term anchoring of the inflation rate. In all this we cannot ignore the fiscal side. In this pandemic, government support took a central role and may be described as the elephant in the room. Definitely more so in the US where no less than a 3 trillion US dollar stimulus package was laid out. On this side of the Atlantic the pandemic-related public expenditure was likewise justifiably generous, though not as much as in the US. But judging by the increasing deficits and debts which averaged over 13 percentage points for the euro area it was indeed significant and without precedent. This public assistance was intended to ensure some element of continuity which was missing during the 2008 financial crises and its aftermath. Wage supplements and business support schemes were meant to provide liquidity to revenue-starved firms and ensure the labour force would remain on the firms’ payroll. This was supplemented at the EU level by various schemes with the largest being the RRF. Definitely, one cannot overlook this as a potential source of inflationary pressure. In comparing the global financial crisis to the pandemic crises another difference stands out. The aftermath of the former crisis was marked by stringent EU wide fiscal rules and relentless consolidation where EU governments saw a marked reduction of their deficits and their debts. In the current situation the fiscal rules had to be suspended and a new fiscal framework is still being discussed. Its future is not yet clear. It is expected that deficits will come down but definitely slower than before. What is relevant for inflationary expectations is whether consumers, firms and unions believe that governments are really committed to bring down the crisis related deficits and debts. If that is the case then indeed inflationary expectations would be eased accordingly. If on the other hand the taxpayers believe this will not happen, inflationary expectations may not become anchored at the required rate for price stability. They will argue that since governments do not do their part to see the debt burden falling to pre-pandemic levels through growth and fiscal rectitude then inflation will be left to reduce the debt burden through its known taxing method. The principle of using one instrument for one objective here applies. That part of inflation which is caused by fiscal largesse must be mainly addressed by fiscal means. For now it is imperative for MS to reach an agreement on a renewed fiscal pact for the sake of containing inflationary expectations.’

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 February 2022

The labour market is ‘in a much more positive state of health’.

‘It’s entirely possible that in March we can make decisions as to what happens to the asset purchase program. I don’t personally feel that I could tell you what’s going to happen to interest rates, and when. I’d prefer to have a bit more options open to me as we go.’

The decision on whether asset purchases will end in 2Q or 3Q will ‘very much’ depend on the new projections.

‘People who think we’re going to be putting up rates soon are operating on a completely different calendar to the one that we’re operating on and that we have announced.’

‘We need to retain optionality as to what we do and when -- especially in this world. There’s a lot of uncertainty still out there, notwithstanding the trajectory that we’re moving in.’

‘I suspect the picture on wages is not going to be much clearer until later in the year. I can certainly see that by the time we get to June and the September forecast, and the trajectory carries on as it is, that the path toward normalization will become clearer and clearer.’

‘We’ve shown that we can create new tools’.

13 February 2022

‘As you say, inflation is high and it’s been increasing since last year for a variety of reasons as we know, higher energy prices. What we’re seeing coming out, the recovery out of the restrictions, a recovery in the price of goods and services that fell sharply during the pandemic. The rebound in demand and the supply side bottlenecks which are then packed in behind. There's been a lot of narrative about that. And but I mean we still see; we sort of expect inflation to decline in the course of the year. But it is going, it’s likely to remain higher for longer than we'd previously expected. And I suppose my first answer to your question is, why are we concerned? We’re actually concerned because it’s affecting people’s lives and I think that is… and I think the President mentioned that in her press conference last week. I mean we are not blind to the impact it’s having on households and businesses around the euro area. So, quite naturally we’re concerned. I mean perhaps one of the things that has changed between the meeting in December and where we are now is that we’re beginning to see price changes becoming more broad-based to beyond just energy prices. Core inflation has gone up reflecting the slow pass through of the indirect energy price increases as well as the supply bottlenecks. And we've got to keep very close attention to developments at core inflation to help us form a view on what inflation dynamics over the medium-term, what's happening to them. And that’s, I mean I think sometimes in a lot of noise in stuff about what's happening right now, people forget that I mean that part of our focus or I think part of our focus, is what's happening to inflation over the medium-term. And I think, and I've said this before...we live in pretty uncertain times. You could say well that’s something that you know, you guys always say we live in uncertain times, but as I flagged before, we haven't had a pandemic like this one. We haven't had economies close down in the way that they have, that they’ve all closed down. And now that we've never had the economies coming out of this pandemic. So, it is particularly uncertain and I think my watch words have been vigilance, flexibility and optionality in the conduct of monetary policy. And for me, they're the things that are most important. We need to continue to be forward-looking as a Governing Council over the coming months in our analysis, in our assessment. While recognising the extent of uncertainties that exist right now. We've got to be, and this is a phrase you'll have heard from others, data driven. Which I'm absolutely committed, I'm a believer in. But I'm more than just the believer in being data driven, I'm also a believer in listening to businesses and non-financial corporates telling us their stories. So, for me, I'll try and gather the richest possible amount of data if I can put it like that. The richest possible amount of information to help me come to a judgement. And you mentioned 2011, and whether we are worried about what you described as the mistakes of 2011. I mean it’s a very interesting question. I mean actually, one of the things I checked was how many of the Governing Council were there in 2011 and I think only one of us was there back in 2011. The most important and perhaps the most difficult part of monetary policy is setting it at precisely the right level at precisely the right time. And what happened in 2011, now as I said I wasn't there, so this is partly me and history. What happened in 2011, that rates were raised on the assumption that increases in energy prices were feeding or were about to feed into more broad-based pressures. But in the end, it turned out that wasn't the case. Headline inflation reduced in response to the energy price reversal. And as we know, remained well below target and it’s one reason that energy price shocks tend to be why you know, consensus is that monetary policy should look through them. So, there are similarities between where we are today and 2011, but there are also differences. And we need to make sure that our assessment is pulling the current high headline numbers into a broader context. So, the sorts of questions I think we need to be asking ourselves is to what extent is the economic recovery and the convergence of inflation to our medium-term objectives, self-sustained. To what extent are those two things dependent on the current degree of monetary and fiscal accommodation. How likely is a sudden reversal in the pressures we’re seeing in the energy markets and how would headline inflation respond to that? So, there's all sorts of things we need to think about.’

‘I mean I think you know, from where we were in December, we've had a few more weeks that have passed, that actually our most recently meeting was slightly later than the usual period we have between our December and our first meeting of the year. So, we had the flash estimate just for one as an example. And I think what we’re seeing is a picture that’s slightly more enduring. Well, it’s posing questions for us. I mean I mentioned some of them just then. It’s posing a few more data points, just posed some of those questions perhaps a bit more forcefully. Obviously, we’re looking at the global picture and trying to understand what's happening there. In our own individual countries, we’ve, certainly in Ireland’s case you know, I think actually Ireland was one of the countries whose flash estimate was lower for January. It was lower than December. But we forecasting inflation, the Central Bank of Ireland, forecasting inflation for this year to be above the 2% target. I mean 4.5% was our last estimate. But we are again forecasting it to fall over the forecast horizon so…’

‘One of the factors is…different Council members will have slightly different views. One of the things that’s particularly interesting is what I'm seeing in the labour market and what I'm seeing in Ireland and what I'm seeing in the euro area. Unemployment is at its lowest level. Like we’re not seeing this feed into wage increases. You know, the sorts of second-round effects the monetary policy makers worry about. But some of our data on that always comes with a lag. But you know, the labour market looks in pretty good shape. And certainly, in Ireland it’s in pretty good shape and in the euro area it’s clearly improving. As I said, the wage growth remained subdued last year and hopefully over the coming months we’re going to have better data to get a better sense of where things are. Personally, I think the development in the labour market would be central to our deliberations. Certainly, to my own thinking and my own views, we’re going to have to track the extent to which the cost-of-living pressures are reflected in wage demands which will obviously put more upward pressure on firms costs and prices. I mean the last set of negotiated wage agreements that I've seen, which are up to sort of Q3 last year, appear to be in line with our 2% inflation aim with an additional uplift of about 1% productivity growth. But let’s see what happens during the course of this year.’

‘Yeah, I mean we’re getting evidence [wage growth picking up] from those sorts of sources [as the ECB’s business survey]. And certainly, when I talk to some of the non-financial corporates that I've spoken to, businesses based in Ireland, not multinationals you know, one of the top subjects that comes up every time is the sort of dearth of talent and the tightness of the labour market raw talent. And there's a bit of discussion about wage pressures, but not to an extent that I would say you know, I've now got strong evidence of things moving. On the other hand, I would not be surprised if that evidence does start to emerge as unemployment is at such low levels. And we are projecting unemployment to fall further from the record low. So, the tightness of the wage growth relationship and how we’re able to demand what we…is going to be pretty important for us.’

‘I mean labour demand can be met from unemployed workers, it can be met from increased labour force participation and even increases in the labour force itself via migration. So, we've got to look at all of these. If you look at Ireland, before the pandemic population projects had over two thirds of growth in the working age population coming from net inward migration. And I think Germany and Spain similarly rely on inward migration to grow the labour force. Now the pandemic disrupted this pattern and we’re seeing labour markets adjust. And suddenly, in Ireland we see labour force participation in the sort of under 25 age group increase sharply, particularly for women. And participation in the euro area has held up strongly, I think it’s returned to levels more or less in line with pre-pandemic…which is incidentally different to what's happening in the US. Are we not going to change policy in March because we haven't got enough new information? I mean my view and you know; our March meeting is not that far away. We all have some more information, at the very least we’re going to have a staffs forecast to look at. But what I expect, I mean my sense right now is that the path to normalisation has become a little clearer. Not clear, but clearer. I certainly think there's a bit of a difference between the calendar we’re working to and the one that some market participants may have in mind. The position we’ll be in in March I think would just you know, help with the clarity. I keep emphasising, I don't expect things to be clear, just clearer from where they were. But I think we are, we can see the you know, compared to where we were say last October, the path to normalisation is a bit clearer. I think an important point that I keep emphasising when I chat to people about this is that we are running, and have for a while, a very accommodative monetary policy. And the debate that we’re really having is how much more accommodation is needed, should be maintained, how much, you know. And a lot of the talk in media and markets and whatever is you know, about us tightening. I see it less as tightening and more as reducing accommodation. And what's the path to reducing that accommodation. And what's the pace at which we’re going to go along that path. I mean the reality is that because of the uncertainty, we want to move in a very informed way because, accepting that inflation at the levels we have now are impacting on households and businesses in ways they don't want and no one wants. We also don't want to kill off the recovery. So, we've got to find the sort of calibration. But we do have the tools at which to exercise optionality, exercise flexibility and to maintain our vigilance to make sure that in the medium-term, inflation does get to our 2% target.’

‘As I said a few minutes ago, I mean I do think that some market participants are operating on a slightly different calendar to the one we’re operating on. As you know, I mean certainly from the beginning of the pandemic, ensuring favourable financing conditions has been pretty central to restoring inflation momentum. And guiding the formation of inflation expectations. Although there's been a sort of, as you say a movement in…and real yields following our meeting. Real yields do still remain at exceptionally low levels and if you just… well, if you only looked at that metric you'd say that financing conditions remain favourable. But for me, the most important thing actually is less the spreads for sovereigns and corporates, but actually the functioning of the market. And clearly market pricing has always been and will remain highly reactive to data. Before I answer your question specifically on when should the ECB or how should the ECB react, I just want to emphasise that point I was making that the functioning of the market it something itself that should be focussed on. We, and at the moment view is that the spreads had a limited impact on market functioning. Bank lending rates, firms and households incidentally, I mean they're also at historically low levels. So, overall, taking market-based, bank-based funding costs, I think financing conditions overall remain favourable. I mean the issue for me, sorry for the ECB but also for me, when should we you know, intervene if you could put it like… I can't remember what word you used exactly. I mean essentially, when the transition of, the transmission of monetary policy is put at risk, I mean that’s really at the end of the day the most important thing for us. You know, that’s when we need to react. I mean the single monetary policy in the euro area is you know, fundamental to ensuring the proper functioning of the transmission mechanism. We've got all the tools at our disposal to deal with that. And obviously, spreads are important indicators and would be monitored sort of carefully. And as I say, I don't think it’s just the spread level, it’s how the market is functioning that’s important. We announced the decision to end the purchases of the PEPP last December and we said that if there was a threat to price stability mandate through fragmentation, we can use PEPP reinvestments in a flexible way across time, asset classes, and jurisdictions at any time. So, if we saw a threat to the transmission of monetary policy we would react in the appropriate way.’

‘Well, we could [restart PEPP]. I'm not sure that at the moment on the menu of things that we would be doing, that’s something that sort of pretty high on the list. But you're right. I mean we've got the flexibility and the option. … in a world where we’re seeing this sort of slightly clearer path to normalisation, reintroducing PEPP as a sort of top of the list of things that we would jump to. But it’s an option absolutely, and, at the end of the day the transmission of monetary policy is what we’re about and we will use the tools that we have to make sure that it works.’

‘We could, we could raise rates before we end asset purchases but I don't think… frankly, I don't think anyone’s seriously in that space. Certainly, my sense of the last discussion that we had is that the sequencing that we've already flagged is the sequencing that we’re all pretty committed to. So, we’re going to be focussed on asset purchases before we’re focussed on interest rates in that order. Which is what I, to be honest, which is why I said what I said a few minutes back which is that the calendar that some market participants are sort of operating to is different to ours because…if you take our… I hope people do take our commitment to sequencing seriously. If you take that, then the notion as some of the markets have indicated you know, there'll be a rate hike in July, just seems to run pretty counter to everything we've been saying.’

‘Well, the other word that I would flag now, which I know the President used, is the word gradual. So, if you think, if you say to yourself well you know, the ECB is signalling and has signalled most recently. But it'll move in a gradual way. If you then add to that that it has already indicated a sequence in which it will move. The idea that there'll be a hike in June looks very unrealistic to me. Now you know, events, events dear boy, events may you now, may turn out differently. But sitting here today talking to you on the 9th February, it’s very unrealistic.’

‘I think it’s important to signal to the market [the end of net asset purchases in advance]. Well, to signal to everybody frankly as to what we’re doing, what we’re seeing and therefore what we’re doing. I think gradual change is much, much better than abrupt change. If you have a crisis then obviously things are different and I was reflecting before we spoke at the discussions we were having on March 12th 2020 and what then happened on March 18th 2020. But we’re not in that world. So, in a nutshell, I think it is important to signal both what you're thinking, what you're seeing and what you're planning to do. I mean at the end of the day you're going to be driven by the evidence and data. And will we announce, could we announce in March that we’ll end asset purchases in June? I mean that’s an option. I think that’s probably, I mean I would you know, I'm talking personally now, I'm not talking about my colleagues. Personally, I'd like that sort of view to be supported by the evidence. But if your question was how confident am I that asset purchases will end this year; I'd say I'm reasonably confident asset purchases will end this year. And the question is, what's the pace at which my foot sits on the accelerator if I could put it like that. And you know, am I talking about June, am I talking about you know, Q3? But that’s for more consideration and careful, kind of deliberation over the coming weeks.’

‘And I think that critique [that buying assets for the next three to six months while convinced that inflation is going to be at or above target over the medium-term is just adding fuel to the fire] is a reasonable one. And I think from my perspective, how much of a surprise would that be to the markets? And if it was a surprise to them, how well could we explain it to them, that sort of judgement that we’re making. So, I mean I understand the reason for the critique. I mean I think, to be honest I think the sort of crucial issue for us when you look at our forward guidance, is going to come to the judgement on whether what we’re seeing is durable. It’s that word, durable, which you know, which right now is… pretty significant question because the models are going to come out with their numbers right. And I personally am not somebody who is… I mean the models belong to staff, they do the forecasts, I'm in many ways more interested in the inputs into the models as the outputs. That will inform us, but the question I think which will require judgement as opposed to modelling, is the one around durability. And we've got a… you know, if we can persuade ourselves one way or another, we need to be able to explain that. And help everyone understand what we’re seeing and why we’re doing what we’re doing.’

‘I mean it’s Ukraine] obviously a very, a big geopolitical issue and carries significant risk for, not only for energy prices to be honest. For the European economy, potentially the global economy. We can't, I can't, I can't make you know, decisions based on what I think will happen in the Ukraine. I need to make decisions on what I have reasonable confidence in, based on the data that I see and on the evidence that I gather from talking to businesses. But the way the Ukraine could play out, there's all sorts of variable are possible there. And it would be better for everybody I suppose if we didn’t have that variable in front of us as we're making our judgement. But it’s just one of these risks…we said at the Governing Council that risks to inflation are all on the upside. And that’s a particular factor that sort of helps to make that even worse if I can put it like that.’

‘One, the world that we come from and the medium-term, the world that we’re moving to in the medium term, which we haven't really talked about. The world that we came from was one where we had a relatively slow-moving European economy, inflation you know, below target and so on. We’re now in this sort of pandemic/post-pandemic world which is more uncertain than usual. And in the medium-term, we we’re moving into a world where there's potential structural change emerging, some of which we know about and have a sense of what it might be like and some of which we’re not that… we sort of know about, we’re not clear what it'll mean. And that’s a mixture of the transition to net zero, the whole demography issue, the impact of the sort of increased digitalisation is going to have on the way our economies work et cetera. I mean some of those structural changes require careful analysis and consideration. So, in that context, moving from where we are, sorry from where we've been, I am probably… in your binary world, I'm probably more worried about making decisions too quickly that take us back to that sort of closed down economies if I can put it in a very, slightly pejorative way than I am about taking action a bit you know, which see inflation… Now we said in our strategy review that we could live with transitory you know, increases in inflation that’s above, average rate is above target. And I suppose on balance, again I emphasise answering your binary question, I'm more wary about reacting to what I'm seeing now which by and large are sort of an exceptional set of either supply side pressures or the emergence from the pandemic and cleaning off demand at an aggregate level than I am about making sure we don't have an overshoot. At the moment, I think if we have an overshoot, the commitment to the Governing Council who are price stability target I think is very, very strong. And if we’re going to have an overshoot it'll… I mean we’re not aiming for overshoots but if we’re going to have one, it'll be… I would envisage that it is a temporary and transitional one. But that’s, I mean I'm talking today in terms of what I know and we haven't talked about this, but I know some are comparing our action taking or not with what the FED is doing. I think we are in different circumstances to what the FED is, where the FED is. So, in a months’ time I may have a different view. But right now, what the evidence is telling me and I emphasise today, is to exercise in your binary world, chair about reacting too soon. On the other hand, as I also said, I think the path to normalisation has got a little clearer. I anticipate it will get clearer over the coming months. That ultimately will determine our decision-making, or mine anyway.’

10 February 2022

‘The economic outlook is positive. Economies are proving resilient to the pandemic, as each successive wave of the virus appears to be having a reduced economic impact. Inflation, however, is currently high, with the latest flash estimate for January of 5.1% released last week. It has been increasing since last year due to a variety of factors (which I have discussed previously), including higher energy prices, a recovery in prices for some goods and services that fell sharply during the pandemic, and a rebound in demand which is meeting global supply bottlenecks in both inputs and transportation. Energy prices remain the main driver. More than half of the recent increases in headline inflation come from energy price rises which have both a direct and indirect effect on the cost of goods and services. The direct effects on home heating or electricity and personal transport fuels – driven in particular by changes in international energy markets – tend to pass through quickly to consumers. Indirect effects occur via the impact on business costs and tend to be passed on more slowly and only partially to consumers.’

‘In deciding how to respond to inflation developments, monetary policy makers need to consider two things. First, what is the source of the inflation? And, second, what is the potential for more persistent inflation above our 2% target in the medium term? Identifying the source and understanding the current dynamics in inflation is critical in deciding the appropriate policy response. Strong increases in energy prices mean that the leading driver of current inflation has been from the supply side but monetary policy’s primary effect is through the demand side of the economy. As I said in November, constraining demand to bring it back into line with what might be a temporary supply interruption could depress incentives for supply to return and therefore be counterproductive. But we have also seen evidence of more broad-based price changes, beyond just energy prices. "Core" inflation in the euro area (that is, excluding food and energy) was 2.3% in January, up from 1.6% six months previously. Some of this reflects the slow pass-through of the indirect energy price increases I mentioned above, as well as other global supply bottlenecks. While our current expectation is for both headline and core inflation to fall over the current projection horizon (to end-2024), we pay close attention to developments in core inflation to help us form a view on inflation dynamics over the medium term. I also see developments in the labour market as central to our deliberations, in two respects. First, we need to track the extent to which cost of living pressures are reflected in wage demands, and in turn put more upward pressure on firms; costs and prices. And, second, the record low euro area unemployment of 7% in December (and projected to fall even further as job openings rise), this could also put upward pressure on wages and ultimately prices, as reflected in our December projection. Although wage growth in the United States has been robust in recent months (and inflation drivers there are not the same as those in Europe), we have yet to see strong evidence of this in the euro area (notwithstanding that our wage data comes with a long lag). Overall, I think it is fair to say that the risks to inflation- from many sources- are to the upside in the near term.

‘With the cost of living rising, and people having to spend an increasingly large share of their income on energy in particular, it can leave less money to spend on other goods and services. As President Lagarde outlined last week, there is unanimous concern among members of the Governing Council at the impact of high inflation on citizens across the continent, particularly those who "are most vulnerable, most exposed and who face the day-to-day hardship of having to put up with higher prices".’

‘Monetary policy is a lever that impacts aggregate demand. It is not an effective tool to deal with supply side drivers, or to address the distributional effects of inflation. If current trends in overall inflation persist, the case for monetary policy action becomes stronger. But we need to be conscious of the effects of tightening policy: constraining demand now to bring it back into line with supply would impact on inflation with a lag but there would be a more immediate trade-off in terms of growth and employment.’

‘The inflation outlook, as always, will be of key concern for the members of the Governing Council in the coming months. We need to be forward-looking in our analysis and assessment, while recognising and monitoring the extent of current uncertainties. These uncertainties are accumulating, including some unforeseen events towards the end of last year. Some will have a shorter-term impact on inflation, whereas others could prove to be more long-lasting. It will be important to remain data-driven in our assessment of the evolving inflation outlook and ready to take policy actions to ensure that inflation stabilises at our 2% target over the medium term.’

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):

16 February 2022

‘I think that [whether it is now appropriate to start thinking about winding back the APP] will depend of course on the next ECB staff projections, which we will have in March. When we look at the most recent projections, which are the December projections, the medium-term outlook of inflation was still below 2%, hence the decisions we took back in December. But we need to see what the dynamics are in the March forecasts, which includes as per the forward guidance not only the medium-term outlook for inflation, but also … the wage dynamics, which have to be compared with productivity growth.’

‘We discussed this element [of the exclusion of owner-occupied housing in inflation leads to systematic underestimation] at the Governing Council, and we took a decision that it should be included. However, in terms of the timing of that, we need first to make sure that the data is available by all member states and that the quality of the data is acceptable and comparable. So, just to be clear about what happened in March, we’re working on it, all the member states are working on it, Eurostat is working on it, but that will be further down the line.’

‘So, firstly, it’s all said in the forward guidance and in the policy statements. So, any potential move in the rates is going to be sequenced, and the net purchasing has to end before any change in the rates. The December statement indicated that the APP will end up being at €20 billion a month by the end of the third quarter. Now, first we need to see that the forward guidance criteria, the three criteria, are fulfilled. We will see that with the March forecasts, the March ECB forecast. And should we see that that criteria are fulfilled from a forward guidance perspective, then the APP should be calibrated accordingly, so that the net purchases are terminated before any rate move.’

‘It would depend on the March forecasts [whether I support removing the word “shortly”]. And when we say “forecasts”, I need to repeat again, it’s not only the medium-term outlook on inflation, which has to be sustainably at 2%, but we need to see whether inflation expectations have moved. In our last Governing Council monetary policy meeting, inflation expectations were still well anchored. And we need to see whether there is wage growth that is beyond productivity growth. I think these are the variables that we need to examine on the basis of the March forecasts and analysis in order to decide any time in between the ending of the APP and any move on the rates.’

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)

18 February 2022

‘The risks this instrument [the APP] was designed to address have subsided, while on the other hand the negative side effects are becoming more significant. Trading activity weakens in August so that would be a good natural timing for ending the program.’

‘It’s time to start thinking about separating the two [ending asset purchases and hiking interest rates]. Phasing out asset purchases should free our hands and give us room to find the most appropriate timing for returning to rates as the standard monetary-policy tool.’

‘Our road-map toward monetary tightening still has some blank points that represent risks, and we’ll need more data that will decide whether or not a rate increase will be needed already this year. I have no doubts that we’re headed toward monetary tightening, but I’d advocate for a path of gradual steps.’

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.’

Reinesch (Central Bank of Luxembourg)

11 February 2022

‘While the Governing Council in February 2022 confirmed the step-by-step reduction in asset purchases decided on in December 2021 to ensure that the monetary policy stance remains consistent with inflation stabilising at its target over the medium term, it is worthwhile to note that the February 2022 monetary policy statement contains, notably, two changes, namely:

1. The December monetary policy statement pointed to the need to maintain flexibility and optionality in the conduct of monetary policy against the background of the uncertainty prevailing. The February monetary policy statement emphasises that the Governing Council needs more than ever to maintain flexibility and optionality in the conduct of monetary policy. The February 2022 monetary policy statement also recalls that 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. It does not reiterate, however, that potential adjustments could go “in either direction” as mentioned in the December 2021 monetary policy statement.
2. While already in December the inflation outlook had been revised up substantially, the February 2022 monetary policy statement acknowledges that inflation had further surprised to the upside in January. The February 2022 monetary policy statement concludes that Inflation is still likely to decline in the course of 2022, but to remain elevated for longer than previously expected.’

‘Moreover, compared to the December statement, the Governing Council formally recognises in the risk assessment section of the February monetary policy statement that “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, the latest monetary policy statement points out, inflation could turn out to be higher. While the explicit focus of the assessment of upside risks is on the short term, it implicitly also covers the possibility of upside risks to the projected inflation path over and beyond the short term. In the light of the above it would not be entirely groundless to consider that the end of net asset purchases under the current APP could come sooner than might have been expected on the basis of the December assessment and the related monetary policy statement.’