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

14 March 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 March 8 and includes comments from the following (those whose name is in bold have commented since the previous version):


Centeno (Banco de Portugal)


de Cos (Banco de España)


de Guindos (ECB)


Herodotou (Central Bank of Cyprus)


Holzmann (Austrian National Bank)


Kazāks (Latvijas Banka)


Kažimír (National Bank of Slovakia)


Knot (Dutch National Bank)


Lagarde (ECB)


Lane (ECB)


Makhlouf (Central Bank of Ireland)


Müller (Eesti Pank)


Nagel (Bundesbank)


Panetta (ECB)


Rehn (Bank of Finland)


Reinesch (Central Bank of Luxembourg)


Schnabel (ECB)


Scicluna (Central Bank of Malta)


Šimkus (Bank of Lithuania)


Stournaras (Bank of Greece)


Vasle (Banka Slovenije)


Villeroy (Banque de France)


Visco (Banca d’Italia)


Wunsch (National Bank of Belgium)


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.’

Villeroy (Banque de France):

11 March 2022

‘We must first start from the economic situation in which we find ourselves, which has indeed been greatly changed by the war in Ukraine. This war is … also a negative economic shock. We have to say things very directly: much more negative for Russia, which will suffer from the sanctions, but for Europe this means more inflation, through the rise in energy prices, less growth, and many more uncertainties. These uncertainties, we tried yesterday to reduce them, in any case to give a certain number of benchmarks by publishing three scenarios. We haven't talked about it much, but I think it's one of the very important pieces of information from yesterday: we took a moderate scenario, a degraded scenario, and then a severe scenario, with different assumptions because there are a lot of uncertainties. You can see the negative effects I was talking about, but there are still two points of confidence if I may say so, two reducers of uncertainty that we have given. First of all, in all the scenarios, growth remains positive in Europe each year, there is no recession. The second benchmark is that inflation, after a peak in 2022 … -we should be between 5 and 7% inflation-, should return by 2024 to around 2%, which is our objective. We are of course looking at the Eurozone as a whole, but I note in passing that for France inflation, while high, at just over 4% in the European index this year, is significantly lower than the Eurozone average, around 2 points less. France is the major country in the Eurozone which has the least inflation today.’

‘Yesterday we did something probably quite close to what we would have done in the absence of the Ukrainian crisis, even though the Ukrainian shock is adding inflation. It's a measured reaction, and basically, if I took a very simple picture, the only decision we made yesterday ... unanimously, was to take our foot off the inflation accelerator, precisely to avoid having to press the brake suddenly in the future. This accelerator from which we have decided to ease off, subject to conditions, is what is called asset purchases: according to exceptional measures introduced since 2015, we have been buying more and more debt securities because there was not enough inflation. Today there is too much inflation, so continuing to press the accelerator would not make sense. These asset purchases are called QE, but for all that we are going to keep a very large amount of securities that we hold. To be completely precise because we are on BFM Business: we are going, subject to conditions, to stop in the third quarter, to increase this QE, but we are stabilizing the amount. This amount will remain very high, at around 5,000 billion euros, so we will remain present on public and private debt securities. Then there are measures that we have not decided on, I would like to insist on them because… Maybe it [an interest rate hike] will happen later...Or not, exactly.’

‘…to emphasize this point: when we compare to what other central banks around the world are doing, the American, Canadian and British central banks, to name but a few, they are taking much tougher measures compared to the acceleration of inflation. Some in particular have already raised their interest rates, it seems that the US central bank is preparing to do so next week. We, what we said yesterday was that there was no longer any automaticity between the end of these net purchases of assets and a possible increase in interest rates. It's a change that perhaps wasn't noted enough by the markets yesterday. What have we been saying so far? It was because we stopped asset purchases, “immediately before” the interest rate hike. There we will no doubt, subject to conditions, stop asset purchases, but we say that the question of interest rates will arise … “some time after”. What does it mean, some time after? It's completely open, there's no automation, it can be long, and we'll take all the time we need. We will judge at that time, based on inflation data and the economic situation. We also said that if this increase in interest rates started, it would be very gradual. I therefore insist on this second part of the decision: we decide to take our foot off the accelerator, but we break the automatic mechanism, the sequence, which we see in other central banks, with a possible increase interest rate. This means one thing that is very important for those listening to us, and that is that the ECB's monetary policy, compared to that of all the other major central banks, remains very accommodating. When you look at real interest rates, net of inflation because that's what matters, they remain strongly negative, and historically favourable. It's true for real estate credit, it's true for government borrowing, or for business investment.’

‘Some countries risk being affected more than others, and then there may be tensions on the famous spreads, the interest rate differences between countries. We had already said in December, and I want to say it again this morning, that we would do what is necessary in terms of flexibility. This is the term we use: the risk is fragmentation, the answer is flexibility, that is to say being ready if necessary, if there were unjustified interest rate spreads, to act more on the securities of certain countries or on certain asset classes. We said it in December, we confirm it and we will do more if necessary. This flexibility device accompanies the measures that we took yesterday, that is to say the scheduled halt to asset purchases.’

Nagel (Bundesbank):

02 March 2022

‘Over the past year, inflation rates have risen strongly. They have never been this high since the introduction of the euro. The primary goal of monetary policy is clear: stable prices for the for the people in the euro area. At the same time, monetary policy is geared to the medium term. Therefore, a key question is how persistent the current high inflation rate will be. inflation rate will be. The price outlook is very uncertain. Therefore, monetary policy must be on on its guard. And if price stability requires it, the Governing Council must adjust its monetary policy stance. The most important asset central banks have is trust. People rely on us to keep the value of money stable. The new monetary policy strategy gives us the right framework to do so.’

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):

02 March 2022

‘Last week was a massive game-changer in geopolitical terms. And of course, geopolitics has a direct impact on the economy and on policymaking. The outlook has become more uncertain. However, the ECB’s strategy is well suited to address shocks, because we are gradual, flexible, data-dependent. This means that we can assess the impact of the latest developments and then act gradually, guiding the market so as not to rock the boat, so that the adjustment can happen relatively smoothly. We will discuss these issues next week, but the outlook will be dominated by the war in Ukraine, which will have structural implications. The two major short-term implications in my view are that inflation will be higher for longer mainly due to energy and food, and economic activity will suffer because of trade interruptions and confidence effects on top of pre-existing supply constraints. And in my view, the implications for both inflation and growth are non-trivial. So the war adds quite a few negatives to the outlook. But as such, war is likely to lead to more cautious and more careful actions in terms of normalizing monetary policy. We just don’t know how widespread and deep the sanctions and their economic impact will need to be. That depends on Russia’s brutality to wage war.’

On whether a 2022 rate hike is now off the table: ‘We should stick to our modus operandi. We have a defined policy sequencing, according to which we stop QE before raising rates, and we have our elements of flexibility, gradualism and data-dependence. That means that under this increased uncertainty, we should not pre-empt our own actions too far into the future. It’s still too early to say, but the increased uncertainty makes me more cautious. On the other hand, gradual does not mean slow and behind the curve. If necessary, we can be gradual and still step up the pace.’

‘In terms of the pandemic emergency purchase programme, it should end in March. The negative impact of the pandemic has faded. In terms of the asset purchase programme, we will discuss the implications at next week’s meeting. I would not jump to any conclusions. Let us be pragmatic. The situation over the last week has gotten much more complex, so the answer is much less clear-cut than it was prior to the Russian invasion. Before last week, I took the view that QE needed to end in the third quarter of this year. Now there is a war in Ukraine and flash inflation reading for February significantly above the forecast. The appropriate approach is to assess the new situation and go step by step. The longer and more brutal the war, the deeper the sanctions will need to be and thus more changes to the economic outlook and monetary policy.’

Let’s reassess the implications of the current situation and then draw conclusions. Ending them [asset purchases] in Q3 is still possible. But under such high uncertainty, let us first assess the situation.’

‘We’ll evaluate the impact of the newest developments on the forecasts. That will be one of the elements of our discussion next week. Of course, taking decisions based on outdated forecasts is not going to happen, so we will have to see what the view is when everything since then is also taken into account. Since the war is a very new development, the situation is still evolving and there will be a lot of uncertainty, which again calls for a much more cautious approach to policy. But in terms of the PEPP, I can say very clearly that the economy has emerged from the need for emergency support, so there is no need to reconsider its end in March. Other asset purchases will be discussed, in particular the pace and volume, but given the uncertainty, we should not tie our hands or make any promises that are not credible under current circumstances. We have meetings every six weeks. If necessary we can also meet more often. We can make decisions when we need to and can keep markets informed about our thinking as we go.’

‘There have been upside inflation surprises consistently for some time, and supply bottlenecks are not easing as quickly as initially expected. Energy price pressures are there and inflation has gotten broader. There is a risk of inflation becoming entrenched. On the other hand, the good news is that inflation expectations are still around 2%. We do not see de-anchoring. That gives us flexibility and allows us to be gradual. Labour markets are strong and we see wage pressures building in the pipeline. But we haven’t seen this materialise in wage data yet. Overall, it is not only supply factors and there has been a growing demand element in driving inflation dynamics, which cannot be looked through by monetary policy. But here again, we need to think about this in terms of what the outbreak of war means.’

‘In my own view prior to the war, the situation was quite clear with regard to QE ending in the third quarter of this year, although with the flexibility to react more quickly if inflation developments warranted it. Gradual is by no means the same as slow. The economy had an outlook of strong growth, so that emergency support could be removed, and policy space gradually rebuilt with rates quite likely raised later in the year. Now there is a massive new element of uncertainty and it is negative. I would not agree that this automatically puts on hold monetary policy normalisation. All I’m saying is that we need to take reassess things next week and then communicate how we see the new situation. Ultimately, we need to normalise monetary policy, and we cannot forget about this. When exactly and at what pace, we will see during our discussions.’

On how much advance notification will markets be given about an end to net asset purchases and a first rate hike: ‘We can’t put a precise length on the time between the two. Similarly, if you ask what “shortly after” means, one cannot define this exactly. It will always be data-dependent. So it is a flexible wording– a week, a month, six months. It depends on the situation. We would want to guide the market so as not to rock the boat, and the earlier we can give such guidance, the better the market can adjust. But at the same time, one has to recognise that under this high uncertainty, being too specific about timeline and volumes can be counterproductive. Now, we need to ensure that high inflation does not get out of control, and we will do whatever is necessary for this. Current inflation levels are unacceptable. But as noted, inflation expectations are still around 2%. If they were to consistently exceed 2%, then of course I would see the need to become more aggressive.’

In my view, it [the word “shortly”] is redundant, and dropping the word would be neutral. But we should be careful not to be misinterpreted. If leaving it there causes fewer misunderstandings than removing it, then let it stay.’

On whether redundant means that people shouldn’t infer from the word “shortly” anything about how much time will elapse between the two things: ‘Yes. It’s going to be data-dependent.’

We don’t target the exchange rate. Of course, we monitor it because of its implication for inflation. But we wouldn’t intervene to target the exchange rate. Monetary policy decisions will always be taken through the lens of inflation.’

We have seen elements of that [verbal intervention] in the past at certain moments in time, and I do not exclude that. But it has to be viewed through the lens and in the context of inflation developments. It’s not the exchange rate per se.’

On what to expect from next week’s meeting: ‘An analysis of the first impact of recent developments on inflation and growth. A confirmation of the end of PEPP – I expect no change in that respect. And then we should have a discussion about the pace and duration of asset purchases. I would not expect specific decisions on interest rates; it’s too early for that. Unfortunately, we are likely to see higher inflation, and there needs to be discussion of that and the role of monetary policy. The important thing here is that monetary policy is not and cannot be the only the game in town, which brings us back to all the structural issues. Monetary policy should not lose sight of the aim to normalise. And that is what we should do next week. But don’t expect to get all the answers on March 10. The situation is evolving.’

Lane (ECB):

02 March 2022

‘The ECB is closely monitoring the evolving situation. With regard to policy measures, the ECB will implement the sanctions decided by the EU and the European governments. The ECB will also ensure smooth liquidity conditions and the access of citizens to cash. The ECB stands ready to take whatever action is needed to fulfil its responsibilities to ensure price stability and financial stability in the euro area.’

‘In this respect, the schedule for the March staff projections exercise has been revised in order to take into account the implications of the Russian invasion of Ukraine. The revised schedule also means that today’s Eurostat inflation release will be incorporated in the projections that will be considered at next week’s monetary policy meeting.’

‘As to the policy instruments that can be deployed, the set of policy interest rates takes primacy and should be sufficient to deliver the 2% target in scenarios in which the economy is not operating in the shadow of the effective lower bound and in which financial conditions are non-stressed. However, when the economy is close to the lower bound (either as a result of a sequence of adverse shocks or simply due to a sufficiently-low equilibrium real interest rate such that even the steady-state nominal interest rate is close to the lower bound), the strategy review concluded that monetary policy measures should be especially forceful or persistent to avoid negative deviations from the inflation target becoming entrenched. Moreover, adopting forceful or persistent measures may also imply a transitory period in which inflation is moderately above target, since a persistently-accommodative stance that successfully lifts inflation towards the target may involve hump-shaped adjustment dynamics for the inflation path. In particular, maintaining some policy measures on a persistent basis acknowledges that a commitment to maintaining monetary policy accommodation into the future can partially substitute for sharper near-term policy easing measures.’

‘It is important to recognise that underlying inflation is a broad concept and refers to the persistent component of inflation that filters out short-lived movements in the inflation rate and that provides the best guide to medium-term inflation developments. In the current context, two factors make it especially difficult to interpret standard indicators of underlying inflation. First, the scale of the energy shock means that the producers of many goods and services that are included in the core inflation measure face higher energy input costs and are passing these cost increases on to consumer prices. To the extent that the increase in energy prices is a level effect, it follows that the knock-on impact on core prices is also primarily a level effect, rather than necessarily representing a shift in the persistent component of inflation. Second, the bottlenecks generated by the sectoral shifts in demand and supply associated with the pandemic are currently generating temporary inflation pressures, which also do not necessarily constitute a source of persistent inflation pressure. Policymakers must strike the right balance in responding to shifts in projected inflation. In one direction, if forecasts indicate that the inflation target will be reached within the projection horizon, waiting for realised inflation to converge to the target before tightening might be excessively costly, especially if inflation expectations become de-anchored to the upside. Under this scenario, excessive delay in monetary tightening runs the risk of a sharper subsequent hike in interest rates and a greater loss in output. In the other direction, if current inflation is above the target level but the forecasts indicate that inflation will fall below the target level over the projection horizon, tightening policy in response to temporarily-high inflation would be counterproductive. Under this scenario, premature monetary tightening runs the risk of an economic slowdown and a reversal in the medium-term inflation dynamic, de-railing the prospects of ultimate convergence to the inflation target. Of course, assessing these different types of policy errors is especially difficult in the current context of high uncertainty, the unique circumstances of the pandemic and policy settings that have long been driven by the twin challenges of excessively-low medium-term inflation pressures and the constraints associated with the effective lower bound.’

‘An important element in the strategy review was to re-confirm the medium-term orientation of the ECB’s monetary policy. In line with the Treaty mandate and without prejudice to price stability, the medium-term orientation allows for inevitable short-term deviations of inflation from the target, as well as lags and uncertainty in the transmission of monetary policy to the economy and to inflation. It also provides room for monetary policy to take into account considerations such as balanced economic growth, full employment and financial stability. Under many scenarios, these are mutually consistent objectives. In particular, so long as longer-term inflation expectations are anchored at the target level, inflation will be at the target level if economic activity and employment are at their potential levels. However, in the event of an adverse supply shock, the horizon over which inflation returns to the target level could be lengthened in order to avoid pronounced falls in economic activity and employment, which, if persistent, could jeopardise medium-term price stability. This consideration is relevant in developing the appropriate monetary policy response to the current energy shock and pandemic shock. In particular, it should be recognised that the prevalence of downward nominal rigidities in wages and prices means that surprises in 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. At the same time, it is essential to avoid that a spell of temporarily-high inflation pressures – even if arising from a supply shock – becomes entrenched by permanently altering longer-term inflation expectations. Accordingly, central banks must closely monitor the evolution of indicators of longer-term inflation expectations. From a policy perspective, the clearer is the commitment to the medium-term target of 2%, the less likely is the de-anchoring of inflation expectations, since everyone should recognise that the central bank will take decisive action to ensure that deviations from the inflation target do not last too long and do not put at risk the stabilisation of inflation at 2% over the medium term.’

‘To me, if you take a multi-year perspective, what we're seeing is a reversal of the appreciation that happened during the first year of the pandemic. ... The exchange rate is not too far away from pre-pandemic levels.’

Lagarde (ECB):

10 March 2022

‘The Russian invasion of Ukraine is a watershed for Europe. The Governing Council expresses its full support to the people of Ukraine. We will ensure smooth liquidity conditions and implement the sanctions decided by the European Union and European governments. We will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to safeguard financial stability. The Russia-Ukraine war will have a material impact on economic activity and inflation through higher energy and commodity prices, the disruption of international commerce and weaker confidence. The extent of these effects will depend on how the conflict evolves, on the impact of current sanctions and on possible further measures. In recognition of the highly uncertain environment, the Governing Council considered a range of scenarios in today’s meeting. The impact of the Russia-Ukraine war has to be assessed in the context of solid underlying conditions for the euro area economy, helped by ample policy support. The recovery of the economy is boosted by the fading impact of the Omicron coronavirus variant. Supply bottlenecks have been showing some signs of easing and the labour market has been improving further. In the baseline of the new staff projections, which incorporate a first assessment of the implications of the war, GDP growth has been revised downwards for the near term, owing to the war in Ukraine. The projections foresee the economy growing at 3.7% in 2022, 2.8% in 2023 and 1.6% in 2024. Inflation has continued to surprise on the upside because of unexpectedly high energy costs. Price rises have also become more broadly based. The baseline for inflation in the new staff projections has been revised upwards significantly, with annual inflation at 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024. Inflation excluding food and energy is projected to average 2.6% in 2022, 1.8% in 2023 and 1.9% in 2024, also higher than in the December projections. Longer-term inflation expectations across a range of measures have re-anchored at our inflation target. The Governing Council sees it as increasingly likely that inflation will stabilise at its 2% target over the medium term. In alternative scenarios for the economic and financial impact of the war, which will be published together with the staff projections on our website, economic activity could be dampened significantly by a steeper rise in energy and commodity prices and a more severe drag on trade and sentiment. Inflation could be considerably higher in the near term. However, in all scenarios, inflation is still expected to decrease progressively and settle at levels around our 2% inflation target in 2024. Based on our updated assessment and taking into account the uncertain environment, the Governing Council today revised the purchase schedule for its asset purchase programme (APP) for the coming months. Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June. The calibration of net purchases for the third quarter will be data-dependent and reflect our evolving assessment of the outlook. If the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases, the Governing Council will conclude net purchases under the APP in the third quarter. If the medium-term inflation outlook changes and if financing conditions become inconsistent with further progress towards our 2% target, we stand ready to revise our schedule for net asset purchases in terms of size and/or duration. Any adjustments to the key ECB interest rates will take place some time after the end of our net purchases under the APP and will be gradual. The path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilise inflation at 2% over the medium term. Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. We also confirmed our other policy measures, as detailed in the press release published at 13:45 today. I will now outline in more detail how we see the economy and inflation developing, and will then explain our assessment of financial and monetary conditions.’

‘The economy grew by 5.3% in 2021, with GDP returning to its pre-pandemic level at the end of the year. However, growth slowed to 0.3% in the final quarter of 2021 and is expected to remain weak during the first quarter of 2022. The prospects for the economy will depend on the course of the Russia-Ukraine war and on the impact of economic and financial sanctions and other measures. At the same time, other headwinds to growth are now waning. In the baseline of the staff projections, the euro area economy should still grow robustly in 2022 but the pace will be slower than was expected before the outbreak of the war. Measures to contain the spread of the Omicron coronavirus variant have had a milder impact than during previous waves and are now being lifted. The supply disruptions caused by the pandemic also show some signs of easing. The impact of the massive energy price shock on people and businesses may be partly cushioned by drawing on savings accumulated during the pandemic and by compensatory fiscal measures. Over the medium term, according to the baseline of the staff projections, growth will be driven by robust domestic demand, supported by a stronger labour market. With more people in jobs, households should earn higher incomes and spend more. The global recovery and the ongoing fiscal and monetary policy support are also contributing to this growth outlook. Fiscal and monetary support remains critical, especially in this difficult geopolitical situation.’

‘Inflation increased to 5.8% in February, from 5.1% in January. We expect it to rise further in the near term. Energy prices, which surged by 31.7% in February, continue to be the main reason for this high rate of inflation and are also pushing up prices across many other sectors. Food prices have also increased, owing to seasonal factors, elevated transportation costs and the higher price of fertilisers. Energy costs have risen further in recent weeks and there will be further pressure on some food and commodity prices owing to the war in Ukraine. Price rises have become more widespread. Most measures of underlying inflation have risen over recent months to levels above 2%. However, it is uncertain how persistent the rise in these indicators will be, given the role of temporary pandemic-related factors and the indirect effects of higher energy prices. Market-based indicators suggest that energy prices will stay high for longer than previously expected but will moderate over the course of the projection horizon. Price pressures stemming from global supply bottlenecks should also subside.’

‘Labour market conditions have continued to improve, with unemployment falling to 6.8% in January. Even though labour shortages are affecting more and more sectors, wage growth remains muted overall. Over time, the return of the economy to full capacity should support somewhat faster growth in wages. Various measures of longer-term inflation expectations derived from financial markets and from surveys 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.’

‘The risks to the economic outlook have increased substantially with the Russian invasion of Ukraine and are tilted to the downside. While risks relating to the pandemic have declined, the war in Ukraine may have a stronger effect on economic sentiment and could worsen supply-side constraints again. Persistently high energy costs, together with a loss of confidence, could drag down demand more than expected and constrain consumption and investment. The same factors are risks to the outlook for inflation, which are on the upside in the near term. The war in Ukraine is a substantial upside risk, especially to energy prices. If price pressures feed through into higher than anticipated wage rises or if there are adverse persistent supply-side implications, inflation could also turn out to be higher over the medium term. However, if demand were to weaken over the medium term, this could also lower pressures on prices.’

‘The Russian invasion of Ukraine has caused substantial volatility in financial markets. Following the outbreak of the war, risk-free market interest rates have partially reversed the increase observed since our February meeting and equity prices have fallen. The financial sanctions against Russia, including the exclusion of some Russian banks from SWIFT, have so far not caused severe strains in money markets or liquidity shortages in the euro area banking system. Bank balance sheets remain healthy overall, owing to robust capital positions and fewer non-performing loans. Banks are now as profitable as they were before the pandemic. Bank lending rates for firms have increased somewhat, while lending rates for household mortgages remain steady at historically low levels. Lending flows to firms have declined after increasing strongly in the last quarter of 2021. Lending to households is holding up, especially for house purchases.’

‘Summing up, the Russian invasion of Ukraine will negatively affect the euro area economy and has significantly increased uncertainty. If the baseline of the staff projections materialises, the economy should continue to rebound thanks to the declining impact of the pandemic and the prospect of solid domestic demand and strong labour markets. Fiscal measures, including at the European Union level, would also help to shield the economy. Based on our updated assessment of the inflation outlook and taking into account the uncertain environment, we revised our schedule for net asset purchases over the coming months and confirmed all our other policy measures. We are very attentive to the prevailing uncertainties. The calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook. We stand ready to adjust all of our instruments to ensure that inflation stabilises at our 2% target over the medium term.’

‘First of all, in terms of Governing Council: we had very intense discussions about the current economic situation, about the outlook, about the uncertainty. And as with most institutions, communities, families – and probably you all – the war of Russia against Ukraine has tainted and overshadowed a lot of those discussions. There were different views around the table - in all directions. But after those good discussions there was a determination by all Governing Council members to rally the proposal that was put together by the Executive Board and presented by our Chief Economist. It takes a balanced approach. It delivers on the mandate that we have, which as you know is price stability in the face of what we are seeing. Your second question related to accelerating normalisation. That was not the decision that was made today. The decision that was made was to progress step by step, to acknowledge the added uncertainty that we are facing and to therefore have added optionalities so that we can in all circumstances respond in an agile way. You will have noted that our decision in relation to asset purchases under the APP is conditional and clearly states that we have a declining pace of purchase for Q2 and that for Q3, if the outlook for medium-term inflation is confirmed by the data, we will indeed end asset purchases. But if on the other hand the data – which are critically important because we are data dependent in our decisions – do not support this medium-term outlook as we see it now, then we indicate very clearly in the monetary policy statement that I have just read that the Governing Council stands ready to revise, both in terms of timeline and in terms of volume, its purchases. So it is a conditional provision that you see in our decision and we are not in any way accelerating. This was in line with our December meeting, with our February meeting and press conference, and what we are doing is confirming our step-by-step approach, our maximum optionalities in the face of maximum uncertainty, but also delivering on our mandate which is price stability. The medium-term inflation outlook both in the baseline delivered by staff and in the scenarios that you will see tomorrow in detail, which are all of course a worsening of the situation, there is not a positive and a negative. They are both more negative. But in all those baseline and two scenarios the medium-term inflation outlook arrives roughly at target. I think in terms of optionalities, I'll be happy to expand a little bit because this is clearly what has guided us, added uncertainty, added optionalities. So what are we doing? We are clearly identifying the pace, we are procuring a situation where we can decide some time after net asset purchases what decision we should make in relation to rates. In terms of timeline, we're also saying that we will end net asset purchases under those data that I have just described in the course of Q3. Q3 is three months, so we tried to have as much optionality in order to deal with the situation. I have underlined in my response to you “some time after”, which is a substitute to “shortly before”. Obviously “some time after” is an open time horizon which will be data dependent; the occurrence of which will be data dependent. I think that was your third question; “some time”. I think I have explained it with this response. I hope so.’

‘I will have difficulty addressing your second question [about the timing of a rate hike] because I don't know what is my dominant scenario. We have a baseline and we have two scenarios; one is adverse, one is severe, and you will have all the details of those scenarios tomorrow. Suffice to say that watchers are not those who make Governing Council decisions. It is the Governing Council, 25 sensible people around the table, who look at what the mandate is, what the projections deliver, what the medium-term outlook for inflation looks like, what the risks are, what the uncertainty is, and on the basis of all that, who are trying to deliver a predictable course while being very cautious. That's really what we did and doing what you have to do should be the predictable thing. Adding uncertainty to an uncertain situation would not have been the right answer. Now, you're coming back to this “some time after”. We came from a “shortly before”, because it addressed actually one end of the spectrum relative to the others. In other words, the time it takes to purchase assets relative to the time when interest rates could be hiked, and it did say “shortly before”. So there was an assumption that there would not be such a long period of time between when net asset purchases would stop and when there would be a rate hike. It was decided, and we debated that indeed, to replace it with “some time after”. That respects the sequencing that we had, which is net asset purchases and subsequently, the Governing Council looks at all the data to determine whether it is time to hike rates or not. Clearly, “some time after” is all-encompassing. It can be the week after, but it can be months later, and by that I think we want to indicate that the time horizon is not what is going to matter most. It's the data that will support the decision that is made by the Governing Council to assess the medium-term inflation outlook and whether a rate hike is warranted. You will have noted, by the way, that we have removed the bias that we had by eliminating “lower” in relation to our interest rates.’

‘On your other point: let me just make that clear once again. The decisions that we are making today are the logical continuation of our December decisions, of our February communication and we are on this path which is data-determined and which is also delivering on our mandate which is that of price stability. So we are not talking about accelerating, we are not talking about tightening; we are talking about normalising simply because we acknowledge the fact that in the present environment, which is that of high inflation and not low inflation as it was in the past, the support that net asset purchases can give to policy rates is getting close to conclusion, and therefore requires that we decelerate the pace of purchases, consider the fact in Q3 – or at the end of Q2 rather – to decide whether depending on the data that we get, we effectively conclude net asset purchases, the principle of which was agreed today.’

‘On your first question I'm sure that some of you will really enjoy picking up the phone and trying to question who said what, when, and on what topic. Let me just be very clear on that. There were some members who thought that given the uncertainty that we have, we should be uncertain as well and do nothing. There were other members who thought that despite the uncertainty we should move ahead and not have any conditionalities. There are both ends of the spectrum. I think that the proposal that was debated and supported by the Executive Board and presented by Philip Lane, the Chief Economist, was this balanced approach of taking into account the baseline produced by staff, acknowledging the inflation numbers that we are seeing now and the inflation outlook that we have for the medium term, to propose a path that reduces net asset purchases, brings us to concluding the net asset purchases under the conditions that data actually confirm the outlook that we are seeing now and that we are seeing in the scenarios produced by staff. So that's what the package was – and it is a package; it's a package of determination, conditionalities, the removal of the “shortly before” which has not been replaced by “shortly after” but by “some time after”, so as to delink, and maximum agility and flexibility as you will have seen in the description of the various instruments. I think that was published in the press release and I'm here referring clearly to flexibility that we give ourselves under the PEPP reinvestment policy. Speaking of reinvestment, let's not forget that we have five… Maybe I'll have the right exact number that I can give you in terms of reinvestment policy under the APP [and the PEPP]. I thought I had that somewhere. Anyhow, we’ll have more than €5 trillion worth of assets that we will be reinvesting over the course of time. So it's not as if we were ending, tightening monetary policy going forward. We are normalising monetary policy with the caveats that I have just outlined. Now, obviously when we look at the medium-term inflation outlook we also do a risk analysis. While we are clearly of the view that given the drivers behind inflation, energy predominantly for the moment, supply bottlenecks, food price increases and a broader increase of prices in general which is coming from energy predominantly and translates throughout all the items, clearly risks to inflation are to the upside particularly in the short term. But possibly also in the medium term, but not exclusively, because risk to inflation could also be to the downside. So you mentioned some of the investment projects, some of the fiscal spending that will probably take place over the course of the next few years. That will certainly continue to push prices up. If anything, it's a good reason that we should stick to our mandate of price stability and of bringing medium-term inflation outlook to our target of 2%.’

‘On the first one, which relates to the fiscal effort: we clearly point out in the monetary policy statement that fiscal support will continue to be critically important. What form it takes, whether it is a national fiscal effort, with a good focus, with a target on those that are most affected by the current crisis – particularly the energy crisis – or whether it takes a European-wide format is something that obviously the leaders will have to decide. I'm sure that they are, as we speak, or as they meet, addressing those questions. I think we have a long-standing record of arguing for some fiscal facility at the European-wide level in order to respond to shocks. We are clearly facing a major shock, whether it is just the pure war or whether it is the energy prices, but this fiscal facility that we've advocated, we stand by it and do believe that it can be extremely helpful particularly in order to move Europe to a more integrated basis. On when energy prices will stabilise: in our assumption and in the scenarios that have been developed there is the assumption that oil and gas and energy prices in general will throughout the projection exercise stabilise, certainly not in the short term. What we are not seeing – and that takes me a little bit away from energy prices but it's clearly related to how long it takes to stabilise – but what we are not seeing so far and we are very, very much scrutinising the numbers, is wage pressure. When we look at the numbers for the fourth quarter of '21, the [negotiated] wage increases have actually been lower than the average of 2020. So we are trying to get as much intelligence and as much understanding of how and where wage pressures are going to come from because it will have an impact on the underlying inflation that is integrated in our medium-term outlook and in our forward guidance.’

‘On the “some time after”: I know this seems like great elaboration – and in a way, it was. We could have substituted the “shortly before” by “shortly after”, but that would've made it too time dependent in terms of decision-making. We want to be data dependent, so whenever the data confirm that the medium-term inflation outlook is at target, then the decision should be made. We are guided by our strategy review, we are guided by our forward guidance. We are not guided by a time element that would predicate that within X weeks, or within X months, a decision will be made. So the deliberate use of “some time after” opens sufficiently wide an interval of time so that we can review the data, determine the robustness of the data, make sure that some uncertainty has cleared a bit so that we can make a decision. I don't know how I can more explain this “some time after”, but that's what our debate was about. Again if I can just insist on that: we want to have as much optionality as possible. We recognise that there is huge uncertainty and that things can go in all sorts of directions. We want to be able to respond to those circumstances, and to do that we need to have all options on the table. We keep all the options open and we will proceed, and we are proceeding, step by step.’

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.’

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.’

Centeno (Banco de Portugal):

11 March 2022

‘Monetary policy is changing its cycle, gradually and thoughtfully, in line with the economic and financial challenges of the euro area. Economic, because inflation is a concern and growth is still recovering from the pre-pandemic period. Financial, because the stability and financial integration of the euro area are inalienable goals for us. This means that monetary policy should seek a more neutral and less accommodative position. For this to be achieved, budgetary integration in Europe must advance, in line with the decisions taken in December 2019 and then in the pandemic period in April and July 2020. In this context, there are three words to remember: proportionality, which has a legal dimension, crucial in the context of the European Treaties, but which only says that the scale and intensity of our interventions must balance instruments and objectives; optionality, creating space for decisions that must always be guided by the principle of doing whatever is necessary, as President Draghi put it in 2012; and flexibility, the principle behind the huge success of the policy adopted in March 2020. Yesterday's decision, March 10, did not change the medium-term perspective. … Projections, perhaps benign in the baseline scenario, predict a growth of 3.7% for GDP and 5.1% for prices in 2022. However, the growth figures are positively affected by the carry-over effect of 2021. If GDP grows by 0% chain in all quarters of 2022, the annual GDP growth rate will still be 2.1%. In the adverse scenario of the ECB staff, released yesterday, the annual growth is 2.5%, that is, it corresponds essentially to the carry over effect. Quarterly growth will be virtually nil, with a negative impact on the second and third quarters as a whole, recovering at the end of the year. This scenario, whose likelihood will depend on the duration of the conflict, does not allow excluding a period of stagflation. We should all remember that the definition of stagflation in economics textbooks and the historical experience of this phenomenon also implies an impact on the labour market that I do not anticipate happening. But a period of zero growth and high inflation seems inescapable. Changes in interest rates by the ECB depend on the fulfilment of the conditions established in its forward guidance. These conditions are not yet met. Core inflation, which excludes the more volatile components, is still dominated by external factors rather than supported by domestic factors such as wages. Labour markets in the euro area show no signs of second-round effects, in fact the ECB's wage forecasts have been successively revised downwards. Finally, the ECB adjusted one of the dimensions of forward guidance, replacing the expression “shortly after” with “after some time” in defining how we move from the phase of net asset purchases to the phase of rate hikes. We buy time and explicitly say that we should analyse the economic and financial data and outlook as we move from one phase to the next.’

Rehn (Bank of Finland):

11 March 2022

‘The economic effects of the war are very uncertain, as they will depend essentially on both the duration and the extent of the conflict.’

‘Any adjustments to the key ECB interest rates will take place some time after the end of the APP net purchases and will be gradual.’

‘Euro area central banks, including the Bank of Finland, will ensure ample liquidity conditions in the financial markets.’

28 February 2022

‘The direction of normalization is still, in my view, appropriate. The economic recovery is relatively strong and employment is increasing. However, given the new situation, we need to take a moment of reflection as regards the speed and way of a gradual normalization of monetary policy.’

‘In this kind of a situation, it’s usually better to wait with your decisions until your sight clears so that you avoid doing damage. We would risk a slowdown or even a recession in Europe if we acted in a premature manner.’

‘I wouldn’t be very keen on discussing when the first rate hike might take place. Once we have taken our moment of reflection, we will have time to ponder what is the appropriate time for that.’

‘In a monetary union like the Eurozone, it’s important to have both instruments [regular asset purchases and pandemic emergency asset purchases] in your toolbox -- even if you wouldn’t necessarily have to use them all the time.’

Müller (Eesti Pank):

11 March 2022

‘It is still impossible to accurately assess the economic impact of the war initiated by Russia, which, of course, will initially be overshadowed by the human tragedy and security debates caused by Russia's hostilities. At the same time, it is important for the European Central Bank to react to the changed circumstances and take the necessary decisions to slow down the rise in prices again to close to the target of 2%. Prior to the attacks that began on February 24, it was reasonable to assume that the rapid rise in prices would remain temporary and would begin to recede in Estonia and the rest of the euro area by the middle of this year at the latest. The rise in prices accelerated in the second half of last year due to higher energy prices and supply chain problems. However, it is now clear that the previous assumptions are no longer valid - the primary impact of the war will be reflected in even higher prices for gas, oil and other raw materials, and the rapid rise in prices will take longer. The European Central Bank has just finished updating its economic forecast, which is, of course, thankless work in the current context. According to a recent forecast, the euro area economy could be expected to grow by 3.7% this year, before decelerating. At the same time, the precondition is that, despite the accelerating rise in prices, which reduces people's purchasing power and slows down economic growth, the Russia-Ukraine war will not be able to completely slow down the recovery of the economy recovering from the corona crisis. The above-mentioned growth rate for the euro area comes from the forecast, the assumptions for which were locked on 2 March. We now know that Russia's isolation from international trade has gone even further over the past week. Therefore, the European Central Bank also developed and presented two alternative economic outlook scenarios. However, even these scenarios should only be considered as the best, but still limited, knowledge of possible economic developments. The continuation of the rapid rise in prices, at least this year, already seems quite inevitable. Gas prices have risen by 40%, oil prices by 15%, wheat prices by 20% and some metals even more since Russia's 24 February attacks. As a result, price increases in the euro area are likely to remain above 5% on average this year, and a slowdown is not expected until next year. However, given the slightly longer consequences of the Russia-Ukraine war, the need to rapidly increase Russia's independence from Russian gas and oil and additional defense spending could provide additional impetus for investment in Europe. This would offset the setback in private investment associated with the high level of uncertainty caused by the war. As countries spend more on supporting Ukrainian war refugees, this in turn keeps overall economic activity higher through additional government spending. In terms of both price increases and general economic development, the expectations of Estonia and the euro area as a whole are broadly similar. As a direct effect of the war, we will certainly see a rapid rise in prices over a longer period of time and a slight slowdown in economic growth. In the coming weeks, we will publish an assessment by Eesti Pank of what different scenarios could mean to the Estonian economy in more detail. As the slowdown in price rises has been postponed due to the war, the Governing Council of the European Central Bank had to adjust its monetary policy stance in order to curb somewhat the forthcoming rise in prices in the euro area. The phrase 'somewhat slow down' is important here, as there is little scope for central banks to intervene prudently when price increases are caused by geopolitics, soaring energy prices and problems in supply chains. On Thursday, the Governing Council of the European Central Bank decided that, in the context of accelerated price increases, we would slow down the rate of bond purchases and complete additional purchases in the third quarter to the best of our knowledge. Earlier, we planned to continue supporting the economy with bond purchases at least until the end of this year. The decision made on Thursday also creates an opportunity to raise interest rates earlier than previously planned, although it is certainly too early to allow anything concrete in this regard. The next decisions will all depend on the actual economic development in the coming months and quarters. Most importantly, however, in the current context, the Governing Council's clear message is that we do not intend to hesitate too much in shaping monetary policy, and when circumstances change, we will always react and always contribute to maintaining a stable economic environment. For central bankers, this means, above all, that we base our decisions on the pace and future prospects of price increases, as our main goal is to ensure that the purchasing power of the euro is maintained and that prices rise slowly in the long run.’

de Guindos (ECB):

10 March 2022

‘Well, it's quite clear that we have seen since the beginning of the invasion volatility, tensions, stress in financial markets. But I think that perhaps the main point that I would like to stress is that this situation is not comparable to the one that we had two years ago. Liquidity has not disappeared from the markets and despite the situation and tensions that we have seen in certain financial and capital markets, well, liquidity, as I have said before, has not disappeared. We are closely monitoring the different financial markets. We have seen a lot of volatility for instance in equity markets. As well, we are also looking at what's happening with corporate bonds. In terms of corporate bonds, spreads have widened, but as I said before, liquidity has not faded out. Finally, there is a very specific market that we are looking very carefully at and that is the derivative market. Mainly, one part of this derivative market is the commodity derivative market. So far, in the clearing houses we have not seen any sort of a special volatility there. All the margin calls derive from the increase in commodity prices, having honoured, but we are closely monitoring the situation. Finally, in the government bond market as well, we have seen ups and downs in terms of nominal yields, but the spreads have been quite contained. So the conclusion is: Russia is important in terms of energy markets, in terms of commodity prices, but in terms of the exposure of the European financial sector to Russia, it's not very, very relevant. Simultaneously, the size of the Russian economy is quite limited; it's only 2% roughly of the world economy. So the situation, perhaps the main conclusion, is that the strains and the tensions that we have seen are not comparable at all to what happened at the beginning of the pandemic.’

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.’

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).’

Vasle (Banka Slovenije):

11 March 2022

‘Economic growth in the euro area reached a high 5.3% last year, and this year, despite the significant impact of Russian military aggression, we expect favourable economic activity to continue (3.7%). With the continued recovery of the economy and strong price pressures from the international environment, inflation is becoming more widespread and persisting at high levels. At the same time, future movements in the price area will also be strongly marked by the consequences of Russian military aggression. With economic activity expected to remain solid despite Russian military aggression, amid rising inflation and growing uncertainty, members of the Governing Council decided yesterday to adjust monetary policy. The key points are (i) to maintain all options, (ii) to gradually reduce the monthly net purchases of securities under the APP and to close them in the third quarter, if conditions allow, and (iii) to gradually adjust key interest rates some time after the completion of the purchase of securities. In this way, we will ensure that inflation stabilizes at the target of 2% in the medium term. The post-pandemic recovery of economic activity in the euro area before the Russian military aggression continued, and real GDP reached pre-pandemic levels in the last quarter of last year. Due to the worsening epidemiological situation, growth slowed down slightly towards the end of the year, but high-frequency data on the release of epidemic restrictive measures in February already indicated a renewed acceleration in economic activity. As the recovery continues, high inflation continues to persist. With rapid growth in energy prices and congestion in supply chains, it is becoming more and more well-established, reaching 5.8% in February. Russia's military aggression and its consequences will affect both economic activity and price dynamics in the euro area. Falling foreign demand and deteriorating economic sentiment will slow down growth, while higher energy prices will boost inflation. The forecasts discussed by the members of the Governing Council at this meeting show that economic growth in the euro area is expected to be half a percentage point lower this year than in December, at 3.7%. On the other hand, faster growth in the prices of energy and other raw materials, which is also reflected in the growth of prices in other sectors, will accelerate inflation, which is expected to reach 5.1% this year. With the expected decline in energy prices in 2023 and 2024, inflation will gradually calm down and stabilize close to our 2% target. Due to the aggravated geopolitical situation, volatility in the financial markets increased, and liquidity also deteriorated. Funding conditions have tightened, slightly more for the private sector compared to the public sector. Interest rates on borrowing for the private sector have risen significantly, but new levels are still not far from the average levels prevailing in 2018 and 2019. Investors require a yield of around 1% for a 10-year bond of the Republic of Slovenia, while for maturity bonds comparable German around 0.2%. Despite increased volatility and deteriorating liquidity, financial markets in all euro area Member States have provided uninterrupted access to financial resources for euro economic and government entities. Yesterday, the members of the Governing Council of the ECB decided to make smaller purchases of securities under the APP program in the second quarter on a smaller scale than announced in December. Net purchases will amount to €40 billion in April, €30 billion in May and €20 billion in June. If conditions allow, APP net purchases will close in the third quarter. In light of the increased uncertainty, we also adjusted the timetable for changes in interest rates. With this extension of the scope for action, we have ensured that the completion of net purchases will be followed by an adjustment of interest rates over time, but not necessarily in the short term, as envisaged so far. At the same time, the members of the Governing Council remain ready to adjust all our instruments to ensure that inflation stabilizes at 2% in the medium term.’

Stournaras (Bank of Greece):

11 March 2022

‘Yes, that's [that even a total collapse of the Russian economy will not shake the global economic system] exactly what I'm telling you. Not in terms of goods and services, not in terms of financial services. But clearly there will be a significant impact in the energy sector.’

‘There was a big discussion in Frankfurt in the last two days, on Wednesday and Thursday. There is what we call a baseline scenario, the one that was presented, which actually shows that the impact on GDP in the euro area will be 0.5%. Indeed, this assumes that the hostilities will end quickly and we will return to normality. It is not something that can be ruled out, nor am I an expert at this time to tell you that it is the baseline scenario. But there are scenarios, there is what we call a worst-case scenario and a very worst-case scenario. The very worst one, so to speak, predicts a 2 percentage point reduction in the rate of economic growth in the euro area. That is to say, instead of 4.2 it will be 2.2, so it is 2 points in the very bad scenario that the European Central Bank has on the table. … No, [even in the worst-case scenario] we do not see a recession, exactly. There may be trends, what we call a stagflation shock, that is, there may be stagflationary trends. … That is, trends for inflation to rise and for the rate of economic growth to fall, but we don't see a recession, that is, a negative rate of economic growth.’

‘We speak about scenarios and possibilities. If inflation rises sharply, then disposable income will fall and inflation will begin to fall as the rate of economic growth slows. We do not see at the moment that inflation will be perpetuated in both 2023 and 2024. On the contrary, at the European Central Bank we believe that in 2023 it will fall to 2.1% and in 2024 to 1.9%, to be precise.’

‘The European Central Bank will not stop buying bonds, neither for Greece nor for the other countries. What we decided yesterday is to reduce purchases, net purchases ... This does not mean, however, that the Central Bank's balance sheet will start to decline. When the net purchases stop, there will be repurchases, that is, there will be reinvestments.’

‘Yes, it [the umbrella of ECB bond purchases] will remain open until 2024. If we do not acquire [investment grade] by then… what can I say? But we will get it much sooner. So do not worry, let me reassure you the European Central Bank has opened the umbrella for Greek bonds.’

‘We have not yet made any decision on interest rates. … The European Central Bank has a negative interest rate on deposits and still continues to buy bonds on a net basis and interest rates are still negative. So monetary policy is purely expansive and will be for many more months. Clearly, because inflation is showing its teeth, that is, it has gone up and because our priority at the European Central Bank from our mandate to which we have sworn allegiance is inflation, we made a decision yesterday that simply reduces the rate of bond purchase. But nothing else. We did not make a decision to raise interest rates, nor to stop bond purchases. This is important because the European Central Bank in this difficult situation provides liquidity to the banks, it provides liquidity to the governments, so there is no reason to worry about monetary policy. We just took a small step, we took, to put it simply, our foot a little off the gas, but just a little. We're not stepping on the gas that much, we probably won't be stepping on it from June onwards. Because until June we'll be stepping on it.’

08 March 2022

‘Just before Russia's invasion of Ukraine, the rate of economic growth was forecast for 2022 at 5%. … The forecast for the course of the economy is, however, subject to significant uncertainties and risks related to the evolution of the Ukrainian crisis and its impact on the global economy and the money and capital markets, the acceleration of inflation and the reaction of economic policy to an environment of increased uncertainty about the course of the economy. As regards Greek banks, the challenges they face are significant, especially considering that the full impact of the pandemic on banks' assets is expected to manifest itself with some backwardness, i.e. after the complete lifting of the measures to support the economy and alleviate the burden on borrowers. There is therefore a need for continued vigilance and more intensive action on the part of banks, with the aim of further reducing NPLs, strengthening their capital base qualitatively and quantitatively, a direction in which banks have already begun to move, and taking advantage of the increased liquidity available to finance the economy. Russia's invasion of Ukraine creates a serious supply-side disruption, which negatively affects production and particularly increases energy prices, which are likely to rise even more in the future. The continuation of inflationary pressures on import prices could limit private consumption and growth dynamics. For households, inflation is doubly negative because it reduces their real income and the actual returns on their deposits. Inflation in Greece and in the euro area as a whole has strengthened significantly mainly as a result of soaring energy prices. The Ukrainian crisis and its resolution are likely to delay the decline in inflation to levels consistent with the objective of price stability. In the short term, the effects of this crisis are working in the direction of stagflation, but in the medium term they lead to deflation, depending, of course, on the de-escalation of uncertainty. At the moment, we do not know when and how the Ukrainian crisis will be resolved, so we must take a cautious stance as it is still too early to assess its impact. The intensity of the new serious disturbance will depend, among other things, on the response of fiscal and monetary policy at European level, which has not yet been defined.’

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.’

Panetta (ECB):

28 February 2022

‘After many years of too-low inflation in the euro area, fears have turned to the prospect that inflation may remain too high for too long. Across advanced economies, the current inflation spike is proving to be broader and more persistent than initially expected, leading central banks to reassess the risk that it could become entrenched. This is no easy task, especially in the euro area. Economic conditions in the euro area have benefited from the strong response of monetary policy and its positive interactions with fiscal policy during the pandemic. But this is not a typical business cycle, and we are not seeing a typical recovery. The current inflation spike is for the most part not being driven by domestic factors – by an economy that is “running hot”, in other words. Demand remains below its pre-crisis trend. Instead, the economy is experiencing a series of imported supply shocks that are pushing up inflation and depressing demand. The exit from the pandemic is characterised by global mismatches between demand and supply – in energy and goods markets in particular – with uneven effects across sectors. As a result, past economic regularities may be a poor guide for the future. This makes medium-term developments extremely hard to anticipate. There are forces at play that could delay the recovery and contain underlying price pressures, and others that could lead to accelerating inflation. Policy mistakes in either direction could push the economy onto an unfavourable path. Faced with such uncertainty, there is a case for the central bank to accompany the recovery with a light touch, taking moderate and careful steps in adjusting policy, so as not to suffocate the as yet incomplete recovery. If we are to durably escape the low inflation and low growth environment that has defined the past decade, we cannot afford to waste the progress we have made so far. In the spirit of William Brainard, we should take small steps in a dark room. The dramatic conflict in Ukraine is now weighing negatively on both supply and demand conditions, making uncertainty more acute and exacerbating risks to the medium-term inflation outlook on both sides. In this environment, it would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer. And the ECB stands ready to act to avoid any dislocation in financial markets that could stem from the war in Ukraine and to protect the transmission of monetary policy.’

‘The recent inflation data in the euro area do not make for easy reading. Headline inflation reached 5% in January and is expected to stay above 2% for the entire year, while core inflation is at 2.3%. Inflation pressures are becoming widespread. To determine how monetary policy should respond, we need to understand the drivers of this inflation spike. I have previously spoken about “good”, “bad” and “ugly” inflation in this context, and each of these has different implications for policy. In short, good inflation is driven by domestic demand and wages consistent with our target, which monetary policy should seek to nurture until that target is reached. Bad inflation instead reflects negative supply shocks that raise prices and depress economic activity, which monetary policy should look through. Ugly inflation – the worst type of inflation – is driven by a de-anchoring of inflation expectations, which monetary policy should immediately stamp out. Data indicate that bad inflation is still dominating in the euro area today. Unlike in the United States, our economy is not experiencing excess domestic demand. Household nominal income has not recovered its pre-pandemic trend and households are saving more of their income than they did before the pandemic. Consumer spending and investment both remain well below their pre-crisis trends. Inflation is largely imported, reflecting global shocks to supply and demand that are spilling over to our economy through import prices. Around 60% of inflation in January was energy, of which the euro area is a net importer. This is the consequence of the recent extraordinary increases in oil and gas prices. These in turn mainly reflect shocks that compress energy supply, rather than stronger aggregate demand. The rise in the cost of energy has further accelerated after the Russian aggression against Ukraine. Inflation is also being fuelled by the global shift in consumer spending from services to manufactured goods at a time when the pandemic has disrupted production. This has translated into global supply chain bottlenecks, high durable goods prices and strong pipeline pressures. This effect, which also represents a supply shock for the euro area, is now being reabsorbed, but at a different pace in different economies. These global supply-driven increases in prices – above all energy and industrial goods, but also food – explain a good part of the currently high headline inflation. In contrast, services inflation – the most domestic inflation component – has so far largely come from high-contact sectors. These sectors are experiencing frictions created by the pandemic and the reopening of the economy, and some of them (such as transport services) are also sensitive to energy prices.’

‘Imported supply shocks that underpin bad inflation increase the uncertainty surrounding the medium-term inflation outlook in two main ways. First, energy-driven inflation acts as a “tax” on consumption and a brake on production, over time generating effects akin to an adverse demand shock. This adds to the uncertainty around the growth outlook, making it harder to judge when the economy is likely to reach full capacity. Before the invasion of Ukraine, the economy was seeing a bounceback after the slowdown created by the Omicron wave. But we were still some way short of returning to our pre-crisis GDP trend, across a range of possible estimates. In my view, GDP reaching the bottom end of this range would be the bare minimum needed to conclude that resources are fully utilised – and current projections suggest that this will not happen until the middle of 2023. The terms of trade tax from higher energy prices could further delay the return to that growth path. The heavier energy bill has already reduced household purchasing power by around 2% and is negatively affecting consumer confidence. It is also eroding the financial buffers built up during the pandemic, especially for households with low incomes, reducing the degree to which dissaving can support consumption in the future. Second, prolonged imported price shocks make it harder to assess whether inflation is feeding into domestic price pressures. The fact that core inflation is increasing above 2% may initially seem to suggest that domestic inflationary pressures are accumulating. However, rising core inflation is partly due to higher energy prices, which are pushing up costs in almost all sectors. Similarly, industrial goods inflation may remain elevated in the near term due to higher input costs, but beyond that its dynamics are hard to predict. Inventory levels are starting to return to normal, which suggests that demand might have peaked. The memory of supply shortages might prompt firms to build precautionary stocks that initially prolong tensions but ultimately lead to excess inventories once bottlenecks ease. This would amplify the manufacturing cycle and the volatility of goods inflation. The Russian invasion of Ukraine is now intensifying this uncertainty. We face greater financial volatility in the short term. There is a risk of renewed market dislocations as investors anticipate the potential impact of sanctions and possible retaliatory actions. And these dislocations might be felt unevenly, threatening the smooth transmission of our monetary policy across the euro area. But we also face greater macroeconomic uncertainty in the medium term. The higher energy prices triggered by the conflict in Ukraine point to a longer period of above-target inflation, while supply disruptions of raw materials and food could prove more persistent. At the same time, these factors increase the terms of trade tax and depress economic confidence, aggravating downside risks to growth and further delaying the return to full capacity.’

‘This uncertainty means the path to price stability is exposed to pitfalls on both sides. As imported inflation now looks set to last longer, we will need to see wages catch up sufficiently to avoid a further fall in purchasing power. If that does not happen, we might face an adverse scenario of a slower closure of the output gap and renewed disinflationary pressures once bad inflation subsides. However, we could be also confronted with an opposite, equally adverse scenario where high inflation proves to be so persistent that it destabilises inflation expectations. That could feed into wage negotiations and domestic price pressures, entrenching inflation above our target. Whether the economy can avoid these risks and move along a stable path depends crucially on our policy response. In such a finely balanced situation, any errant policy measure could easily push the economy onto the wrong path and put at risk what we have achieved so far. If we respond to a false signal and react to a rise in inflation that might not be lasting, we could suffocate the recovery. But if we are too timid in the face of mounting signs that inflation is becoming a domestic process, we might inadvertently give the impression that we lack determination to secure price stability. In both scenarios, we should not infer the medium-term inflation outlook from present inflation figures. We need to carefully assess the prospects for wage growth, productivity growth and inflation expectations. This requires us to cross-check forward-looking indicators with evidence of what we can observe in the real economy. So far, the labour market is not looking excessively tight, especially in comparison with other jurisdictions, and even a significant increase in wage growth would not put it much above trend productivity growth plus our inflation target. Wage growth has remained moderate to date, perhaps reflecting workers’ concerns about job security, and the shock from the Ukraine conflict could prompt further caution. Different measures of inflation expectations also show no signs of de-anchoring on the upside. Therefore, the danger of high inflation becoming entrenched seems contained at the moment. At the same time, I would like to see more evidence that improvements in labour markets are translating into wage growth consistent with our 2% target to be confident that the low-inflation scenario has fully disappeared. Indeed, a key conclusion of our strategy review was that, when coming out of a long period of low inflation, we should wait to see underlying inflation sufficiently advanced before adjusting policy, of which wages are a central component. And option-implied probabilities of tail events suggest that markets still see risks of eventually falling back into a too-low inflation regime. In the current situation, the task for the ECB is therefore twofold. First, with the crisis in Ukraine raising uncertainty to unprecedented levels, our immediate priority is to protect the functioning of the financial sector and bolster confidence, in order to contain the impact of the shock on the economy and keep in place the conditions for the smooth implementation of monetary policy. Second, we should aim to accompany the recovery with a light touch, taking moderate and careful steps as the fallout from the current crisis becomes clearer.’

‘More than 40 years ago, William Brainard proposed the “conservatism principle”, which calls for cautious action when policymakers are faced with uncertainty. This principle does not apply to all forms of uncertainty. For example, when faced with deflationary shocks that risk rooting interest rates at the lower bound, it pays to act more decisively. The same is true when inflation expectations are at risk of becoming de-anchored. Both these considerations informed the ECB’s resolute response during the first phase of the pandemic. And if measures to avoid market dislocations prove necessary in response to the war in Ukraine, we should intervene with equal determination, using all our instruments. In this respect, we reiterated in our February decisions that “within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability”. But when policymakers are uncertain about the effects of their policy on the economy, it is advisable to take small steps – and this is the case for the path out of the pandemic. Confronted with supply shocks that are both inflationary and contractionary, we should adjust our policy moderately and progressively as we receive feedback on the effects of our actions. We began reducing the pace of net asset purchases last year and we are on track to return to our pre-pandemic policy setting by September this year. Longer-term real yields have already returned to their pre-pandemic levels in the euro area. The inflation outlook is stronger today than it was before the pandemic. Therefore, once the current crisis has abated, ensuring that monetary policy accompanies the recovery with a light touch may be consistent with a further adjustment in our net asset purchases. Beyond that, additional modifications to our stance should be considered carefully, for three main reasons. First, in recent months euro area real yields have already risen more than in the United States, in spite of the different positions in the cycle. It would be imprudent to move further until we have strong confirmation that both actual and expected inflation is durably re-anchoring at 2% in a world of tighter financing conditions. This is especially important given that the equilibrium real interest rate is subject to large uncertainty, making it difficult to judge how far away we are from a neutral policy stance. Second, we need to be certain that removing accommodation too suddenly will not trigger market turmoil, as this could lead to financial markets overreacting and financing conditions tightening abruptly. This would set back the recovery in underlying inflation and the re-anchoring of inflation expectations at our target. We have already seen that, in the current environment, inflation expectations are highly sensitive to abrupt changes in the expected path of policy. Before the escalation of tensions in Ukraine, markets had brought forward their expectations of rate lift-off. This was associated with a reversal in the improvement of market-based inflation expectations. The fact that this decrease in inflation expectations was unique to the euro area might have revealed concerns that the ECB would overreact to current inflation numbers and adjust its monetary policy too much and too quickly. These concerns were also hinted at by the shape of the €STR forward curve, which peaked in 2024 and then inverted somewhat, reflecting investors’ perceptions that the economy would be unable to sustain interest rates at those levels. The end of net asset purchases in the euro area in 2018 was smooth mainly because short-term rates remained anchored by our forward guidance. We have not been in a situation before where markets are simultaneously reappraising the path of asset purchases and the path of rates, which could increase term premia along the yield curve. Moreover, markets are reappraising the tightening intentions of all major central banks at the same time, increasing the risk of undesirable spillovers on euro area financing conditions. Third, a key lesson from the previous crisis is not only that rates should not be raised prematurely, but also that doing so without the right framework in place can lead to renewed financial fragmentation. And this fragmentation could force monetary policy into a trade-off: we would face a choice between triggering an excessive tightening of financing conditions in some parts of the euro area, which would result in domestic demand that is too low, or adjusting the stance by less than would be optimal. Today, fragmentation could result from the legacy effects of the pandemic, so we need a different mechanism for addressing it than during the financial crisis. We have a framework that has served us well over the last two years, when the flexibility of our pandemic emergency purchase programme and the European Commission’s Next Generation EU instrument proved sufficient to stem fragmentation. This gives us a good indication of the direction we should now take. And we know from experience that the more credible a backstop is, the less likely it is to be used.’

‘Let me conclude. Whenever we are uncertain about the consequences of our actions, it makes sense to act prudently. Faced with high uncertainty surrounding the medium-term inflation outlook with pitfalls on both sides, we should adjust policy carefully and recalibrate it as we see the effects of our decisions, so as to avoid suffocating the recovery and cement progress towards price stability. That was already the case before the invasion of Ukraine, but this terrible event has made the need for prudence even greater. The world has become darker, and our steps should be smaller still. At the ECB we stand by the people of Ukraine, who are now seeing what they hold dearest threatened by an unjustifiable act of aggression that violates the most fundamental principles of international law. That a country can be subjected to a full military invasion should steel our determination to defend those principles wherever we are, however we can. The ECB’s role is clear: we will take any measures necessary, using all our instruments to shore up confidence and stabilise financial markets. This is the duty of a central bank in times of emergency. And we will swiftly implement the sanctions decided on by the European Union. The scenes we have witnessed this past week will scar our memories forever. But I hope that, one day, we will look back on this moment and be proud that we did our duty, showed resolve and unity, and sought to uphold the universal values of peace, freedom and prosperity.’

‘Do I see risks more on the downside than on the upside? The message that I have tried to give is that risks are now on both sides. The uncertainty on inflation is very high and we see forces that could push inflation down or up. We could well end in a situation where inflation is higher than 2% for a very long period and this spills over to wages and inflation expectations. But first of all, we have a previous history of monetary policy decisions, and if you look at the perception by markets, by investors of the monetary policy of the ECB, which led us to do our monetary policy strategy review, it’s a history that denotes very clearly a perception that we … might feel comfortable with inflation rates below 2%. Not only that, but also if … we find out that inflation is drifting above 2%, we can hike. But the asymmetry is implied by the presence of the lower bound. And we can … stimulate the economy, if we found out ex post that what we considered an inflationary shock which could lead to a persistently high inflation was in fact a one-off effect of a supply shock of oil, as it happened in the past. Then, I think that the risk would be at that point very high. This of course should also take into account the credibility of the ECB. Why are wages not increasing? Why are expectations after a year and a half of above-target inflation? Well, because people know, investors know, markets understand that the ECB will not, will not tolerate inflation above 2%, will not tolerate a divergence from our price stability target, which is 2%. So there is no doubt about that. And this is giving us the luxury of taking time to assess carefully the nature of the shock, its potential implications, without running excessive risks that an untimely tightening of financial conditions could derail the recovery and bring us back to the previous world in which inflation was stubbornly below 2%, with all the consequences that we have observed in the last 10 years. In the speech, I mentioned a recent work by Ricardo Reis in which he looks at the nature of tail risks surrounding the inflation outlook in the euro area and in the US, and he finds that even now, after a prolonged period of above-target inflation, markets in the euro area are concerned about the euro area getting back into a too-low inflation, actually a deflationary environment. They do not have doubts that the ECB could let inflation stabilise above 2%. There is no indication in the evidence that Ricardo presents. And the opposite happens in the US. In the US, the risk of deflation is virtually zero. I’m talking about tail risks here. The risk of deflation is virtually non-existent, while the risk of inflation has a high probability. So we have to cope with a situation which if we err on the upside we can correct it. And we are not seeing signs that this is the case. If we err on the downside, then we have a problem, because stimulating the economy would be problematic, in particular because of the lower bound.’

‘On the sequencing: Well, there is a lot of discussion on the sequencing, but I must confess I fail to understand. We have started to use asset purchases, which we call unconventional policy measures, because they are conventional. They come after the conventional in my, in my sequence. We started to use purchases when we have taken interest rates in the vicinity of the lower bound. And we wanted to stimulate the economy further. And then we were forced to start purchases. … I can already hear the criticism that we would get if at the same time we hiked, we continued to buy assets, that is, to increase interest rates with our conventional measures and decrease interest rates with our unconventional measures. It would be schizophrenic, okay. When we consider that we should adjust policy in view of increasing inflationary risks, we will first of all stop pushing down interest rates and then start pushing them up. This discussion on, on the sequence … the concern emerged, especially in the US, while in a different cyclical position, that the phase-out from asset purchases could require too much time, and so the Fed will be behind the curve when it started tightening. But that was a concern when asset purchases were very substantial. The ECB will get in, in Q2 or … I don’t remember precisely, Q3 maybe, at €20 billion per month. We were at above €100 [billion] last year, so the phase-out from €20 can be done can be done overnight, very easily. So, there is no constraint in our framework. We can stop purchases from this very low monthly volume almost immediately, and we can start hiking whenever it would be ideal to do so. So, it would be inconsistent to, at the same time, decrease and increase interest rates, and … I don’t see the constraint in terms of timing of our tightening should it become necessary from the phase-out, the period which is … to phase out, without inducing instability in the markets from, to exit from our asset purchases. We can do it very easily, very quickly.’

‘On why I am optimistic. I’m not optimistic. As I said before, I’m trying to place risks on both sides. On the structural evolution of the economy, why am I more positive? Well, because the reaction of the authorities at large in the pandemic crisis has been pretty different from the reaction we saw during the financial crisis. We didn’t see austerity in the midst of a recession, we didn’t see hikes during a supply shock and after a sovereign crisis before a recession. We didn’t see that. We have seen a coordinated intervention by fiscal and monetary authorities. And this is reassuring. … What we have seen during the financial crisis is that demand has moved from one sector to the other, and this has caused bottlenecks and has pushed up inflation. Now, if we started … to contain, suffocate that inflation, given that the motivations behind that mismatch between demand and supply is not excess demand, it’s a problem that starts from supply, bottlenecks from reallocation, I think that the right way to go, would not be to, we cannot ignore it, of course; if inflation starts going above 2%, we have to intervene, but the right recipe, the right policy mix would be one in which fiscal policy intervenes to reallocate resources to stimulate growth in those sectors that are seeing an increase in demand, so that we do not see those bottlenecks, do not see those pressures on inflation and we do not force monetary policy to intervene to suffocate demand, which is already subdued in some sectors, without much hope to contain inflation coming from other sectors for reasons that are hardly affected by monetary policy. So we should have fiscal policies that allocate resources for digital transition, for technology now. Unfortunately, I’m convinced that we will see an increase in military spending. We will see a number of measures by governments that will, and I hope will continue to intervene to manage supply rather than hope of containing inflation by compressing demand, which is still below potential and which is, you know, pushed up in those sectors in which it is increasing rapidly for different reasons than taste, than exuberance. It’s bottlenecks, it’s mismatch between demand and supply. So I hope that this positive attitude, this positive interaction between monetary and fiscal policy will continue in the future, we will avoid unnecessary tightening by monetary policy. But of course, if we will have to do it, we will do it.’

‘We are not doing our monetary policy looking at debt-to-GDP ratios. We look at debt-to-GDP ratios to the extent that they can create tensions, they create frictions to the implementation of our monetary policy. The debt-to-GDP ratios’ sustainability are issues for governments. They become an issue for the ECB if they affect our monetary policy. And this is the gist of my argument today on fragmentation. We should take into account fragmentation, because fragmentation – again, let me be very clear; as we have seen in the past on repeated occasions - can affect, adversely affect our monetary policy. But certainly we will not calibrate our monetary policy on the basis or looking at the debt-to-GDP ratios.’

‘My view is that we should address inflationary problems that we can address, that we have some hope to address. If we see inflation being driven by an increase in oil prices, no increase in wages, no de-anchoring of inflation expectations, we may tighten. But we will not increase oil supply, which will be the only thing we need to contain inflation pressures. Or if we see a dislocation of demand among sectors, we can hardly influence that. Monetary policy cannot intervene on individual sectors. This can be done by fiscal policy.’

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’.

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.’

Kažimír (National Bank of Slovakia)

11 March 2022

‘The risk of inflation remaining above our 2% target for a longer period of time is even greater than before the war. Yesterday, the Governing Council of the European Central Bank decided to reduce the volume and speed up the end of the asset purchase program (abbreviated APP), despite the raging war in Ukraine. Why did we do that? Even before the Russian invasion of Ukraine, we faced a sharp rise in inflation, which was driven mainly by rising energy and food prices. Inflation in Slovakia and the entire euro area is surprisingly month-on-month, both for us and for analysts. The risk of inflation remaining above our 2% target for a longer period of time is even greater than before the war. Bloodshed brings record high prices for oil, gas, cereals and various other raw materials. Public spending on aid is rising, as is spending on armaments. If there is no ceasefire, sooner or later they will be reflected in the prices of other goods and services. This would have a very negative impact on the budgets of households and businesses. This poses a risk to the economy, including strong pressures for higher wages. The role of governments in Europe, but also of the European Commission, will be to protect the weakest. I consider the decision to reduce the pace of purchases within our APP program and the earlier termination of these purchases in September at the latest to be correct and I strongly supported it. All this is conditioned by developments in the economy and the financial sector in the coming months, which is reasonable in these uncertain times. At the same time, it is a sign of our unwavering determination to pursue a policy of gradually reducing inflation towards our goal in the coming years. This requires a phased normalization of monetary policy settings. The increase in key interest rates will not come immediately, it still has its time. We will determine the timing and pace of the forthcoming tightening of monetary policy according to the conditions in the economy, together with increasing information. Here, too, the extremely uncertain development encourages us not to tie our hands together too much. After yesterday's negotiations, we have maximum flexibility and a wide room for manoeuvre. The economic recovery after the pandemic is likely to slow down. Rising commodity prices, escalating uncertainty in the economy, as well as sanctions imposed on Russia, will affect economic performance. We will do everything necessary to ensure stability in the economy and financial markets. The situation is calm for the time being and we hope that it will remain so. In any case, we know how to mobilize monetary policy instruments quickly and effectively to protect the economy from the worst. We have already proved it several times. As for the Slovak financial sector, it is in good shape.’

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.’