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

18 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 14 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):

15 March 2022

‘Russia's invasion of Ukraine on 24 February and the reaction of the Western authorities, which has led to the introduction of unprecedented economic sanctions against Moscow, represent a new and predictably far-reaching disruption, with adverse consequences in terms of worsening economic performance and rising inflationary pressures. A first economic effect of the invasion of Ukraine stems from the fact that Russia and, to a lesser extent, Ukraine, are among the world's leading producers of certain energy and non-energy commodities, and that Europe is highly dependent on imports of some of these products - especially Russian oil and gas, but also Ukrainian grain. The conflict has already resulted in very high price increases for many of these commodities. This means, from a European and Spanish perspective, a very negative disruption in our purchasing power vis-à-vis the rest of the world. In other words, a relative impoverishment, which comes on top of the rise in the price of some of these raw materials - particularly energy - that had already been occurring before the invasion. All this without ruling out the possibility that, apart from the reduction in the production of some of these goods as a direct consequence of the war, there could be intentional cuts in their supply, which would obviously have an even greater impact on prices and economic activity. In this context, Europe has formally set out to reduce Russia's energy dependence on a structural basis, but this objective is unlikely to be achieved in the short term.’

‘Apart from the impact on commodity prices that I have just described, the conflict will generate distortions in the trade of other goods and services, both because of the economic sanctions and the expected deterioration of the Russian and Ukrainian economies. In this respect, the direct trade exposure of European countries to Russia is relatively moderate, being greater in the economies of Central and Eastern Europe and smaller in other countries, such as Spain. However, indirect effects can also be high. The complexity of global supply chains means that significant effects can be generated in some production processes, particularly in the context of trade and financial sanctions.’

‘Although the direct financial exposures of European banks and companies to Russia and Ukraine are, in general, very small (particularly, again, in the case of Spain), the fact is that, since the start of the conflict, there has been an increase in volatility in the financial markets and a tightening of financing conditions. In particular, there have been sharp declines in the euro area stock markets, which have been greatest in Germany and Italy, countries with the greatest relative exposure to Russia. There has also been a rise in capital market funding costs for financial and non-financial corporations. Not to mention the considerable uncertainty as to the medium to long-term implications of the exclusion of the Russian economy from international financial channels. This could be reflected, for example, in the development of more opaque alternative financial mechanisms or channels.’

‘Finally, the war in Ukraine undoubtedly has a negative influence on economic activity through the difficulties that different economic agents experience in anticipating future economic developments, in particular as regards the foreseeable evolution of their incomes, which in turn weighs on the consumption and investment decisions of households and firms.’

‘As to the magnitude of the impact on activity and prices, the available estimates are subject to extraordinary uncertainty.’

‘The decisions taken [last week by the ECB] balance the various risks to our price stability objective that arise in the current environment. On the one hand, the new shock increases the upward dynamics of inflation in the near term. Inflation had picked up strongly in the second half of the year and was proving to be more persistent than initially expected. In this scenario, the short-term inflationary effect of the conflict increases the likelihood of the emergence of second-round effects and thus of the pass-through of inflationary pressures to the medium term. Conversely, the war will have a negative impact on growth through a deterioration in real household and corporate incomes and an increase in uncertainty, which could be very significant, particularly in the short term and in a context in which the euro area economy is still far from its potential level. Such a negative impact could reduce inflationary pressures in the medium term. It should be borne in mind that the medium term is precisely the relevant time horizon for our monetary policy decision-making, as it allows us to distinguish between external shocks and domestic factors affecting inflation. In all scenarios analysed by the Governing Council, inflation is still expected to decline gradually and to stabilise at levels close to our 2% objective in 2024. Various indicators of long-term inflation expectations obtained from financial markets and surveys are also around 2% once risk premia are discounted. As a result of this analysis, and noting that in the current environment it is no longer as necessary as in the past to reinforce the accommodative stance of our monetary policy through net asset purchases, the Governing Council of the ECB decided to set the monthly net purchases of the Asset Purchase Programme (APP) at €40 billion in April, €30 billion in May and €20 billion in June. This means reducing the monthly volumes for these last two months compared to what was agreed in December. We also agreed that the calibration of net purchases for the third quarter will depend on the evolution of the economic outlook and our assessment of it. At the same time, given the extraordinary uncertainty we are experiencing, we emphasise the data-dependent nature of our decisions and increase flexibility and optionality in the use of instruments. First, we will take whatever measures are necessary to fulfil the price stability mandate entrusted to the ECB and to safeguard financial stability. This allows us to provide certainty to all economic agents about our commitment to these objectives at a particularly uncertain time. Second, we have explicitly stated that if, in the coming months, new data support the expectation that the medium-term inflation outlook will not weaken even after the end of net asset purchases, we will end net asset purchases under the APP in the third quarter. However, should the medium-term inflation outlook change and should financing conditions be inconsistent with continued progress towards our 2% objective, we stand ready to review the net asset purchase plan in terms of both amount and duration. Third, we have introduced a change in what has come to be known as our chained forward guidance. Indeed, in recent months, the Governing Council had been explicitly stating its expectation that net purchases would end shortly before policy rates began to rise. However, at our meeting last week, we agreed that any adjustment of interest rates will take place some time after the end of our net purchases under the APP and will be gradual. The change from shortly before to some time after means maintaining the sequential process by which we intend to adjust our instruments, but it widens the time lag between these two events: the end of net purchases and the point at which we start to raise our interest rates. And this increases the flexibility with which we can execute our decisions in such an uncertain economic and geopolitical context. For its part, the gradualness of the interest rate adjustment shows the Governing Council's commitment to avoid abrupt adjustments in monetary policy instruments.’

Villeroy (Banque de France):

17 March 2022

‘The Ukrainian shock is a negative shock to the French and European economy. A negative shock means more inflation and less growth, unfortunately. But one compares to the Covid shock, it’s a much less severe shock to activity. … As it’s a less severe shock, it does not justify a return to “whatever it takes”.’

‘I don’t think so [that it will come to recession]. … There is much uncertainty today, that’s why, exceptionally, the Banque de France published two different scenarios. In both scenarios, including the worse of the two, we maintain growth…’

‘It’s a shock of higher inflation. We see around 4% this year … 2022, on average. It’s going to remain high during some months, until the month of September. Again, that depends on the exact price of petroleum and gas. But it’s going to remain high. However, it will return to 2% between now and 2024. And that brings me to two remarks. The first is that inflation in France is quite clearly lower than the European average, thanks precisely to all these price protective measures for households. … That is also based on the commitment … of the European Central Bank and Banque de France to sustainably return inflation to around 2%. It’s our mission and we will fulfil it. … That’s between now and 2024; it could happen before, in function of the evolution of energy prices.’

‘A payment default is never good news, but it would have extremely limited consequences, because Russia is rather marginal outside of raw materials. Russia is rather marginal at the level of the global economy and finance.’

‘It is a negative shock for the French economy, but it is a manageable shock, it’s a less severe shock than Covid, so it does not justify a “whatever it takes”. At the same time, it’s a shock where we have to pay a lot of attention to inflation. That’s why we have mobilised to ensure price stability.’

14 March 2022

The Russian assault on Ukraine ‘is a negative economic shock, even if it is at least five times stronger for Russia than for Europe and France. It means less growth and more inflation, but in uncertain proportions: in the face of uncertainty, we are publishing two economic forecast scenarios, which is unprecedented.’

‘The main difference between the two [scenarios] is the price of gas and oil. In the moderate scenario, with a barrel price close to 100 dollars until April and then gradually falling, we would have [French] growth at 3.4% in 2022. In the second, worse scenario, with a barrel at 125 dollars until the end of 2024, we would be at 2.8% this year. Without the war, we would have had very good growth in 2022, at 3.9%, above our latest forecast of 3.6%, because Omicron had hardly any impact on the business. In short, depending on the two scenarios, we would lose half a point or a point of growth over the year. But in any case, until 2024, growth will remain positive, without recession. … The annual average in 2022 benefits from the "acquired growth" before the invasion of Ukraine; and one could still imagine other, more degraded scenarios. That said, the Banque de France does not have to be optimistic or pessimistic, but above all independent! The shock is objectively less severe than that of Covid. Remember, in April 2020, we said that there was a 30% drop in French economic activity which, fortunately, was very short. This time the shock is less severe, but it could have more consequences over time.’

‘The inflation surge was already quite strong, and the French are feeling it. It should have come down, but we will now stay at a high level for several months. However, in both scenarios, inflation would fall below 2% by 2024, and would remain well below the European average: the Banque de France and the European Central Bank are clearly committed to price stability.’

‘It [French consumption] is currently buoyed by the momentum of a very good year in 2021, when purchasing power, on average, increased by 2%. And some households have started to dip into their "Covid savings", which we estimate at 175 billion euros. So we expect consumption growth to be curbed, but to remain at least 4% this year.’

12 March 2022

‘I will try to be precise on this point while noting that there are a lot of uncertainties. It is true that we had a fairly favourable scenario before the invasion of Ukraine: there was stronger growth than expected because the effects of Omicron were much more limited than expected; and there was a bump in inflation, which the French are feeling, but which was destined to dissipate little by little. What does the shock we are experiencing mean? It is clearly a negative shock. It means more inflation because of the price of energy. It means less growth and, above all, much more uncertainty. … I am talking about several scenarios, and we could still imagine others. I don't want to limit the field of possibilities, but I'm going to start with the figures we have published for the Eurozone. On growth, starting from a favourable trend, the loss of growth could be up to 2 points of GDP between now and 2024 in the severe scenario. For France, it would probably be a little less because our dependence on Russian gas as well as on fossil fuels, thanks also to nuclear power, is lower than average. … Maybe one more thing about growth: in each of the ECB's scenarios and in each of the years, growth would remain positive. This is important. … In a more extreme scenario of a complete halt to Russian gas supplies, it is much more difficult to put a figure on it because we don't know what the replacement would be. But there, the loss would obviously be significantly higher. ... I'm not saying that [it would cause recession] but it's a more extreme scenario. Inflation would be much higher in 2022. In the Eurozone, we would be well above 5%. I would also point out a more favourable element for us, which is that inflation in France today is much lower than in the euro zone. There is a TWO-POINT difference. This is due in particular to the tariff shield, to the measures that have been taken to cap the price of gas and electricity. … Inflation is too high, let's be clear, and we'll talk about what the European Central Bank is doing because our mandate is to ensure a return to price stability. But in all the scenarios, and I want to stress this as an element of confidence, inflation would return to around 2% in the Eurozone by 2024. So Europeans and the French can have confidence in the value of the euro. … Compared to the Covid shock, on the growth side the shock is much less violent. I said up to 2 points of cumulative GDP loss. I remind you that the Covid shock in one year was minus 8%. So this does not justify, let's be clear, a general "whatever it takes" like two years ago. It justifies targeted measures in a resilience plan. On the other hand, on inflation... Let's talk about inflation: I think that what the ECB has done is part of confidence. Why is that? The difference with the Covid shock is that the latter resulted in less inflation. This shock is less violent on growth - I insist on that - but it translates into more inflation because of the rise in energy prices. So what did we say to the ECB on Thursday? We have to be precise. It was that we were going to take one decision among our various measures, and only one: to take our foot off the accelerator. The accelerator was that we would continue to buy more debt securities. This is an exceptional measure that dates back to the time when there was not enough inflation: it is the accelerator to inflation. To continue to press this pedal today would make no sense. But I would like to emphasise one thing: if we are going to gradually take our foot off the accelerator, it is precisely to avoid having to press the brake suddenly. … We have made it clear that we are not touching interest rates for the time being and that this is a decision that will only come later, possibly, in the light of the data. There is no automaticity between stopping the accelerator and raising interest rates. Let me add a very important point. … In the 1970s, we did not react to inflation. It was a negative spiral which I think the older generation remembers and which was very bad; inflation is very unfair. It took an extremely brutal brake in the United States at the end of the 1970s - the Volcker policy, named after the President of the Central Bank - which brutally raised interest rates and led to a recession. If we are taking our foot off the accelerator today with a limited measure, it is precisely to avoid this.’

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):

16 March 2022

‘What we’re experiencing here is a turning point. Trust in Russia – a country with which we had all manner of economic ties for decades – has evaporated and it won’t be coming back in a hurry. What this means for the economy are large-scale, costly adjustments. … Before the war broke out, we in Europe were already back at a point of being close to the growth path we had been pursuing before the onset of the coronavirus pandemic. Things were heading in the right direction. At present, we’re experiencing a painful lesson in how reliant we are on Russian commodities. Politicians and industry are now aiming to reduce that reliance. And that means a major, protracted restructuring process lies ahead. It overlaps with the energy transition but is supposed to take place at a much faster pace.’

‘Stagflation is not a scenario I am expecting at present, even if the fallout from the war drives up inflation and drags on economic growth. While it is true that the labour market is already tight, and there are looming problems in Germany due to the shortage of skilled labour, we see no evidence of a wage-price spiral at present. And we continue to expect an upswing – it will just arguably come later.’

‘I don’t think that’s surprising [that the ECB signalled an end to net asset purchases and thus also cleared the way for interest rate hikes]. Remember, we already made it clear at our February meeting that decisions would be made in March. Moreover, we have decided to proceed step by step and to keep all our options open. … Correct [that war has since broken out], but the war will not only dampen economic activity – it will further amplify what were already stubbornly strong price pressures. The ECB’s experts are now expecting euro area inflation to come to 5.1% this year, and the upside risks have tended to increase for the period after that, too. That is what we responded to.’

‘The idea behind this wording [some time after] is to clarify that we are keeping our options open about when we raise key interest rates after the end of the net asset purchases. And in light of the distinct uncertainty, I think it’s hugely important that we don’t commit ourselves in advance but remain flexible.’

‘Even if we deemed it necessary later on to react differently, it wouldn’t mean we regret what we did beforehand as we were acting on the data we had at the time. Responding appropriately to incoming data and forecasts is a matter of good monetary policy.’

‘That’s not how I see it [that ECB forecasts are just stabbing in the dark]. The models offer a good indication of what to expect in the future, based on past developments. But, in particular, the fact that many aspects of the economy are in a state of flux and models are not yet able to capture this properly means that we will not rely on their results alone.’

‘I take the increase in inflation seriously, and that’s something I’ve made clear on previous occasions. We need to keep our sights trained on the normalisation of our monetary policy. But what counts most of all, at the end of the day, is that we agreed on what I would consider a good, balanced decision.’

‘That’s not a balancing act [staying true to the Bundesbank’s stability-oriented stance while avoiding being pushed to the sidelines within the Governing Council] I need to pull off. People can count on the Bundesbank as an anchor of stability – that’s something I've said from day one. On the ECB Governing Council we all share a common task, which is to safeguard price stability. And the latest decision shows that we are looking to achieve just that. I see my role on the ECB Governing Council as a team player, but one who isn’t afraid to debate controversial topics if need be.’

‘We need to gear monetary policy to our objective of price stability. There can be no compromises on that score. Fiscal policy has a big responsibility at both a national and European level to be a dependable force ensuring sound government finances. Interest rates across the euro area countries are extremely low by historical standards. This is a favourable starting position that will make it easier to cope with interest rate rises.’

‘This [risk premia on government bond yields] is an area primarily for fiscal policy. It is not up to monetary policy to safeguard government financing. So far, risk premia are no higher than they were before the pandemic. And the thing to remember is that, during the pandemic, monetary and fiscal policy both worked well and each made a vital contribution to stabilisation.’

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):

17 March 2022

‘Setting aside the impact of the Russia-Ukraine war, the economy has been on track to achieve a greater utilisation of resources and a tighter labour market than before the pandemic. The last time the euro area saw unemployment rates at today’s levels was in the 1970s. Inflation expectations have also converged to our target of 2% across a range of measures, while inflation has become broader and measures of underlying inflation have risen. These measures have been influenced by energy prices and supply bottlenecks, but with pipeline pressures swelling, the upward impact may last for a while. An indicator of “sticky price inflation”, which captures items whose prices are changed less frequently, rose to 2.9% in December last year. All this suggests that inflation is increasingly likely to stabilise at our 2% target over the medium term. This was the outlook which led us, in December last year, to start with a step-by-step reduction in the pace of our asset purchases. We also adjusted our communication in February as the incoming data suggested that inflation was converging even faster towards our medium-term goal.’

‘The outbreak of the war has introduced new uncertainty into the outlook. In particular, the short-term factors pushing up inflation are likely to be amplified. Energy prices are expected to stay higher for longer, with gas prices up by 73% since the start of the year and oil prices up by 44%. The pressure on food inflation is likely to increase. Russia and Ukraine account for nearly 30% of global wheat exports and wheat prices are up by more than 30% since the start of the year. Belarus and Russia produce around a third of the world’s potash, a key ingredient, alongside natural gas, in producing fertiliser – which was already in short supply. Global manufacturing bottlenecks, which had shown some signs of easing over the last months, are also now likely to persist in certain sectors, prolonging price pressures for durable goods. For example, Russia is the world’s top exporter of palladium, which is a key input for producing catalytic converters and is hard to substitute with other suppliers. Ukraine produces around 70% of the world’s neon gas, which is critical for the laser lithography process used in semiconductor manufacturing. The euro area is highly dependent on Russia for cobalt and vanadium, which are key for the 3D printing, drone and robotics industries. The ECB staff’s latest baseline projections – which include a first assessment of the impact of the war – see inflation, on average, at 5.1% this year. In a more severe scenario produced by our staff, inflation might exceed 7% in 2022.’

‘When faced with a supply shock, the key question for monetary policy is whether the effect of the shock on inflation is likely to become persistent. There are several considerations that we need to take into account in the current situation. First, as this shock is hitting the economy at a time when inflation is already high, the risk of it infiltrating inflation expectations is greater. We know from research that households’ inflation expectations are strongly influenced by the prices of goods that they purchase frequently, typically fuel and groceries. Second, the war could set in motion new inflationary trends that take a while to play out. There has been much discussion since the pandemic about whether we are seeing a structural break in the inflation regime caused by de-globalisation and accelerated de-carbonisation. Now, the push for European strategic autonomy is likely to gather steam, with deliberate “friend-shoring” of critical supply chains. The energy transition is also likely to speed up, as the paths to achieving energy security and climate security now point firmly in the same direction. At the same time, the war poses significant risks to growth, in particular over the short term, and this could depress medium-term inflation if it means the economy returns to full capacity more slowly. The main risks are via energy prices and confidence. As the euro area is a net importer of energy, rising energy prices represent a terms of trade “tax” that transfers purchasing power to the rest of the world. Higher energy prices already created a negative income effect of 1.4% of GDP in the last quarter of 2021 compared with the same period in 2019, which was only partly offset by higher export prices. Historical experience suggests that this effect will likely become stronger now. ECB analysis shows that swings in energy supply have been an important driver of household real income during previous episodes of large energy supply shocks. This was true both when OPEC increased oil production in 1986, causing a collapse in energy prices, and when Iraq invaded Kuwait in 1990, leading to soaring energy prices. The conflict might also negatively affect confidence through at least two channels. First, we had expected the household saving rate to normalise this year and support stronger spending. But US research finds that large energy shocks typically lead to precautionary behaviour as consumers become more pessimistic. Even before the war, the rise in inflation since last summer seemed to have dented euro area households’ expectations about their future financial situation. At a minimum, higher energy prices are likely to eat into the savings households accumulated during the pandemic, diverting them away from non-energy consumption. The ECB’s consumer expectations survey shows that last year’s energy price spike has already led households to save less and dip into savings more by an amount equal to 1.1 percentage points of income. Second, business investment could be affected. Major geopolitical events that have increased economic uncertainty in the past – such as the two Gulf Wars and the 9/11 attacks – are found to have foreshadowed declines in investment in advanced economies. These effects are reflected in the ECB staff’s baseline projection, which sees slower but still relatively robust growth this year at 3.7%. But in the severe scenario GDP growth could be up to 1.4 percentage points lower than the baseline this year. These competing forces create a wider range of risks around the inflation forecast beyond the near term. This requires close monitoring of a broad set of real and nominal variables, including various measures of inflation expectations. One such variable is the response of fiscal policy. Fiscal policy can help buffer the war’s adverse effects on growth, while its impact on inflation depends on the nature of the support measures. Many governments are currently taking decisive actions to protect real incomes, particularly for those most affected by rising energy prices. And we are also likely to see more investment into the green transition and defence capabilities. A second variable is changes in household savings. If inflation expectations start to become de-anchored, that could come together with households frontloading their consumption and reducing the amount they save by more than would be necessary to pay for higher energy bills. But if savings start rising and consumption is postponed, it could indicate that growth effects are likely to prevail. A third variable is the behaviour of wages. In general, when the inflation target is 2% and productivity growth is around 1%, average wage increases of around 3% would be consistent with on-target inflation. If wages were to notably and persistently exceed that benchmark even as growth was slowing, it could be an indication that household inflation expectations are drifting upwards. However, if wages were to fail to catch up sufficiently – for instance because uncertainty leads to unions being more cautious – households would be exposed to an even stronger squeeze in real income. That could result in a fall in consumption and weaker growth in the medium term.’

‘When the Governing Council met last week, we weighed up these competing forces. We concluded that the challenges facing monetary policy are changing. We have become increasingly confident that the inflation dynamics of the past decade are unlikely to return. As a result, we decided it was appropriate to continue dialling back our net asset purchases, which were intended to combat an environment where disinflationary risks dominate. But we also agreed that we needed a policy framework tailored to the current environment of heightened uncertainty and the new challenges it presents. To that end, we decided that our policy should be governed by three principles: optionality, gradualism and flexibility. First, optionality should not be confused with ambiguity. It is about making clear how we will react to a range of scenarios, and ensuring that we are poised to react effectively if they materialise. We have therefore put in place a “conditional” approach to policy normalisation, conveying our reaction function under alternative scenarios. Specifically, 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, we will conclude these purchases in the third quarter. This increases our optionality by removing obstacles along the potential path of interest rate normalisation if our expectations play out. It also gives us more scope to adjust policy in a timely fashion should we see risks of excess inflation extending into the medium term. At the same time, we have decided that, if the outlook changes and financing conditions become inconsistent with further progress towards our 2% target, we stand ready to adjust the size and/or duration of our purchases. In this way, we are keeping open the option to take any necessary measures should the economic consequences of the war escalate and stifle the current recovery path. Optionality also means that the path of our policy over the coming months will be data dependent. We will confirm the way forward only once we have more visibility as to whether our expectation for medium-term inflation materialises. Under all scenarios, our stock of asset purchases is providing significant accommodation – it will exceed €5 trillion by the third quarter and will be reinvested even after the end of net purchases. Second, gradualism is a well-established principle for central banks in times of uncertainty. When faced with uncertainty about the resilience of the economy, it pays to move carefully. In keeping with this, we have adjusted our forward guidance on interest rates to temper expectations of any abrupt or automatic moves. We now say that the adjustment of key ECB interest rates will take place “some time after” the end of net purchases. This maintains our traditional sequencing logic, but also gives us extra space if needed after we stop purchasing bonds and before we take the next step towards normalisation. This will allow us to test whether the convergence of inflation to our target that we project today is robust to current and potential new shocks. The length of the interval between these two decisions will be determined by our strategy and by the three conditions that govern our forward guidance on interest rates. And we have made clear that future adjustments to rates, when they come, will be gradual. Third, flexibility is a special principle for conducting monetary policy in a monetary union, as we must continually focus on ensuring that policy is transmitted evenly to all parts of the euro area. With diverging initial conditions, exogenous shocks can affect economies asymmetrically. If this leads to financial fragmentation, the transmission of monetary policy can be disrupted. To reduce uncertainty under these conditions, the Governing Council has reiterated its commitment to flexibility. This means that we are ready to use a wide range of instruments to address fragmentation, including the reinvestment of our portfolio held under the pandemic emergency purchase programme. If necessary, we can design and deploy new instruments to secure monetary policy transmission as we move along the path of policy normalisation, as we have shown on many occasions in the past.’

‘Monetary policy today is facing a new challenge. We are increasingly confident that inflation dynamics over the medium term will not return to the pattern we saw before the pandemic. But we need to manage a shock that, in the short term, pushes inflation above our target and reduces growth. We have reacted to this new environment by increasing our optionality and emphasising that we will act gradually and flexibly in order to deliver our mandate of price stability. We have also outlined a conditional path towards policy normalisation if the necessary conditions are satisfied. And, at the same time, we are mindful of the risks ahead, and we are ready to revisit our plan if the incoming data require us to do so.’

15 March 2022

‘At our meeting on 10 March we made a first assessment of the impact of the Russia-Ukraine war. We concluded that it would lower growth and raise inflation through higher energy and commodity prices, the disruption of international trade and weaker confidence. But if the baseline scenario of the staff projections materialises, the economy should still grow robustly in 2022 thanks to the declining impact of the pandemic and the prospect of solid domestic demand and strong labour markets. However, we also acknowledged that the uncertainty surrounding the outlook had increased significantly. The repercussions of the war on the economy will depend on how the conflict evolves, on the impact the current sanctions will have and on any further measures taken. We therefore looked at two alternative scenarios for the economic and financial ramifications of the war. In these scenarios, growth could be dampened significantly and 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 of the inflation outlook and taking into account the uncertain environment, we decided to reduce the pace of our net asset purchases for the second quarter, while maintaining optionality to respond to changing circumstances. 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 net purchases, we will conclude net purchases in the third quarter. But 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 purchases in terms of size and/or duration. Any adjustments to interest rates will take place some time after the end of our net purchases and will be gradual. The path for interest rates will continue to be determined by our forward guidance and by our strategic commitment to stabilise inflation at 2% over the medium term.’

Schnabel (ECB):

17 March 2022

‘As we build a more sustainable economy, we face a new age of energy inflation with three distinct but interrelated shocks that can be expected to lead to a prolonged period of upside pressure on inflation. The first shock is linked to the costs of climate change itself, or “climateflation”. As the number of natural disasters and severe weather events is rising, so is their impact on economic activity and prices. For example, exceptional droughts in large parts of the world have contributed to the recent sharp rise in food prices that is imposing a heavy burden on people who are struggling to make ends meet. The second shock, “fossilflation”, is to blame for much of the recent strong increase in euro area inflation. In February, energy accounted for more than 50% of headline inflation in the euro area, mainly reflecting the sharp increases in oil and gas prices. Fossilflation reflects the legacy cost of the dependency on fossil energy sources, which has not been reduced forcefully enough over the past decades. … Embargos on Russian oil imports imposed by the United States and the United Kingdom as well as the European Commission’s plan to reduce Russian gas imports by two-thirds by the end of the year mean that fossilflation, and its broader repercussions on other input and output prices, is likely to remain an important contributor to headline and underlying inflation in the foreseeable future. A marked decline of fossil energy prices, as indicated by current futures prices, seems rather unlikely from this perspective. The effects of the third category of shocks, “greenflation”, are more subtle. Many companies are adapting their production processes in an effort to reduce carbon emissions. But most green technologies require significant amounts of metals and minerals, such as copper, lithium and cobalt, especially during the transition period. Electric vehicles, for example, use over six times more minerals than their conventional counterparts. An offshore wind plant requires over seven times the amount of copper compared with a gas-fired plant. No matter which path to decarbonisation we will ultimately follow, green technologies are set to account for the lion’s share of the growth in demand for most metals and minerals in the foreseeable future. Yet, as demand rises, supply is constrained in the short and medium term. It typically takes five to ten years to develop new mines. This imbalance between rising demand and constrained supply is why the prices of many critical commodities have increased measurably in recent months. The price of lithium, for example, has increased by more than 1000% since January 2020. Export restrictions on Russian commodities may add to pressure on prices over the near term. These developments illustrate an important paradox in the fight against climate change: the faster and more urgent the shift to a greener economy becomes, the more expensive it may get in the short run. So far, greenflation has had much less of an impact on final consumer prices than fossilflation. It is therefore misleading to claim that the greening of our economies is to blame for the painful rise in energy prices. But as more and more industries switch to low-emission technologies, greenflation can be expected to exert upward pressure on prices of a broad range of products during the transition period.’

‘How monetary policy should respond to these price pressures has become the subject of intense debate. Concerns have been voiced that monetary policy could slow down, or even stand in the way of, building a less carbon-intensive economy should it react to higher energy price inflation by removing monetary stimulus. After all, interest rates directly affect the cost of capital and hence the incentive to invest in greener technologies. Two concrete proposals have been put forward as to how central banks could continue to look through higher energy price inflation, even if it contributes to a prolonged period of inflation above our 2% target. Both proposals, however, come with important shortcomings. The first proposal is to raise the inflation target. It suggests internalising the inflationary impact of the green transition by moving central banks’ goalposts. A higher target would automatically reduce the need for policy adjustments. Last year, as part of our monetary policy strategy review, we carried out an in-depth assessment to determine the optimal inflation target for the euro area. There were arguments in favour of raising the target. In particular, given the secular decline in the real equilibrium interest rate, a higher inflation target may help increase the available policy space by reducing the time central banks have to spend at the effective lower bound, thereby improving the ability of monetary policy to stabilise the economy in the face of a disinflationary shock. The case against a higher inflation target was based on three main points. First, there is considerable uncertainty as to whether the secular decline in real interest rates will continue in the future. In fact, the significant need for private and public investment associated with the green transition itself is a reason to believe that real interest rates may rise from their subdued pre-pandemic levels. The energy transformation alone will require a doubling of global annual investments. Europe’s ambition to limit its dependency on global value chains in several areas of strategic importance will raise these investment needs further, while higher productivity growth in the wake of the digitalisation of our economies and an aging society that increasingly runs down its accumulated savings may add to upward pressures on real interest rates. Second, a higher inflation target increases the costs of inflation, which are likely to be non-linear. The current environment vividly demonstrates the burden on the population from higher inflation rates. Third, if central banks decided to move their goalposts when they fail to achieve their target, they would almost certainly lose credibility and public trust. It would create expectations of future adjustments and thus seriously undermine the anchoring role of any numerical target. So, just as central banks have not succumbed to pressure to lower their inflation targets in the face of a series of disinflationary shocks in the decade before the pandemic, they should be careful in raising their target at a time when the green transition holds the potential to loosen the binding constraint of the zero lower bound and to lower energy prices over the long run. This is not to say that inflation targets can never be adjusted. They may well be changed if there are good and robust reasons to do so. The fight against climate change, however, is unlikely to be one of them. The second proposal suggests setting the direction of monetary policy with a narrower focus on measures of underlying or core inflation that exclude more volatile items such as energy. There are two main problems with this idea. First, central banks typically look at exclusion-based measures to distinguish signal from noise. Exclusion-based measures often remove the most volatile items – prices that fluctuate a lot are not that relevant for inflation in the medium term. The green transition is likely to turn this argument on its head when it comes to energy. It calls for a different treatment of energy prices precisely because changes in these prices may become less symmetric during the transition, with imbalances in the energy and mineral markets limiting price movements to the downside. An inflation index that ignores a persistent increase in the relative price of energy is a misleading indicator of underlying inflation trends. Second, there is a reason why most central banks worldwide, including the ECB, focus on headline inflation – it is a comprehensive measure that best represents households’ expenses and thus provides the best guide for fully and effectively protecting their purchasing power. Permanently excluding items from this index is to a large extent an arbitrary decision: why, for example, exclude energy and not travel-related expenditure, the contribution of which to the HICP has also been highly volatile in recent years? After all, energy accounts on average for around 10% of total consumption expenditure in the euro area. For households with lower incomes, the share is often markedly higher. As with raising the inflation target, ignoring persistent trend increases in the price of energy would ultimately serve to undermine trust and confidence in our determination to protect price stability. This does not mean that the concept of underlying inflation will become less relevant for the conduct of monetary policy in the future. It just has to be defined differently. Trimmed mean measures, for example, offer more flexibility than exclusion-based indices as they include all items but attach less weight to those that have highly volatile prices. The Persistent and Common Component of Inflation (PCCI) measure is another alternative. It exploits the cross-sectional variation of all inflation components. A major benefit of the PCCI is that it also captures the impact of more persistent shocks to food and energy, while rightly putting less weight on short-lived price effects of categories that are part of more traditional exclusion-based measures, such as the aforementioned travel-related expenditures. During the pandemic, the PCCI has signalled an increase in underlying inflation earlier than other measures, in part reflecting the broader repercussions of the increase in energy prices.’

‘Overall, therefore, monetary policy cannot simply ignore the effects of the green transition if they threaten to jeopardise the achievement of our primary mandate of price stability. Already today, we are seeing that firms are passing on higher energy costs to final consumer prices, thereby contributing to a notable broadening of price pressures. Such indirect effects of higher energy prices can be a persistent source of upward pressure on underlying inflation. They are not a one-off price shock that policymakers can simply look through, in particular when pipeline pressures are continuing to build up, like today. Nominal rigidities, long-term supply contracts and global value chains imply that the lags with which higher input prices are passed on to consumers are long and variable. In many countries, for example, the recent strong increase in wholesale gas prices is yet to be passed on to households, while new shocks related to the green transition will likely add over time to current and past price pressures. All this means that when it comes to advancing the green agenda, fiscal policy needs to remain in the driving seat, as we stressed in our recent monetary policy strategy review. It is essential that the euro area’s revised fiscal framework creates space to frontload and speed up public investment in green infrastructure and technologies. Fiscal policy also has an important role to play in buffering the current supply shocks. However, these measures need to remain consistent with advancing the green transition. They should be targeted towards protecting those suffering the most from higher energy prices, while retaining, as much as possible, incentives to reduce carbon emissions. That said, the ECB can, and will, do three things to support the green transition. First, the distinction I made earlier between climateflation, fossilflation and greenflation matters for the conduct of monetary policy. Climateflation and fossilflation share many of the characteristics of both an adverse supply shock and a terms of trade shock. They require a finely balanced policy response. On the one hand, prudence is needed in order to minimise the negative impact that a change in the course of monetary policy could have on aggregate demand at a time when the economy is suffering from higher energy and food prices. This is even more true in light of the uncertainty that Russia’s invasion of Ukraine implies for confidence and aggregate demand in the euro area. On the other hand, even when considering this uncertainty, the current inflation outlook is no longer consistent with the exceptional policy measures we took to fight very low inflation. An end of net asset purchases in the third quarter of this year, as we currently expect, will still leave our overall policy stance highly accommodative. In this environment, prudence may also come at a cost: a reaction function that differs materially from that of other central banks facing a protracted period of above-target inflation risks amplifying the energy price shock by weighing on the exchange rate, thereby adding to the burden on real household income. Since June of last year, Brent crude oil prices have increased by around 45% in US dollar terms but by more than 60% in euro terms. Therefore, as we announced at our meeting last week, monetary policy normalisation in the euro area will proceed, but it is going to be gradual and conditional on the war in Ukraine not weighing on medium-term inflation. Only signs of a deanchoring of medium to long-term inflation expectations from our target would justify a more forceful policy response. We have not yet seen this in the euro area, but we are carefully monitoring the recent rise in long-term market-based measures of inflation compensation to levels above 2%: By contrast, greenflation is much more likely to be the result of a strong and persistent positive demand shock, or investment boom, that re-establishes the “divine coincidence” of monetary policy – that is, the ability of central banks to stabilise inflation and output simultaneously. In other words, once the nature of the shock changes, and the more benign price effects of the green transition start to dominate, the trade-off for monetary policy becomes less relevant. Second, the ECB will continue to green its monetary policy framework. Our goal is to ensure that our set of instruments is aligned as much and as soon as possible with the Paris objectives. In practise, this means that among the instruments that we consider equally effective, we will choose the ones that also contribute to the EU’s environmental goals. At present, there are still considerable operational impediments. In particular, there remain competing definitions and disclosure standards, which delays efforts to properly identify climate-related risks. Many banks, for example, do not yet effectively differentiate between green loans and other loans, making a green TLTRO difficult on a practical level. Overcoming these impediments is a daunting task. But the ECB will actively contribute to work that can accelerate change, acting where possible as a catalyst to progress on that front. Aligning our instruments with the Paris objectives does not necessarily mean that we have to wait until we launch new policy action. Take our corporate bond holdings as an example. We are currently holding around €380 billion of corporate bonds on our balance sheet, mostly under the asset purchase programme (APP). While we intend to reinvest, in full, maturing securities for an extended period of time after policy rate lift-off, we can change the structure of our bond portfolio even when keeping the size of the portfolio unchanged, or when we start to reduce the size of our balance sheet. In other words, while the degree of policy accommodation, and hence the size of our bond portfolio, is solely determined by monetary policy considerations, we could actively tilt our portfolio towards the Paris objectives once we have decided on how the market neutrality principle, which is currently guiding our bond purchases, should be modified. As I argued previously, if markets misprice the risks associated with climate change, an allocation according to the market neutrality principle may not favour an efficient allocation of resources. Third, we need to strengthen our joint efforts to green financial markets. Monetary policy is a demand-side policy that varies with the business cycle. It cannot provide structural support to the green transition. Any policy operation must first and foremost serve a monetary policy purpose. Financial markets are different. They can provide a permanent platform to help channel finance towards greener and more sustainable projects, provided the externalities of climate change are clearly and distinctly visible, which they are not yet today. Central banks can help build this platform. We have an important role as a catalyst in the financial industry. Our collateral rules, for example, have the potential to define the standards governing interactions across all financial market participants. An asset that is penalised in our operations will also face higher refinancing hurdles in the market. As a way of example, the Eurosystem could impose a limit on the volume of assets from high emitters that counterparties can mobilise as collateral at any moment. Over time, such changes can be expected to affect the entire collateral pool held by Eurosystem counterparties. Growing empirical evidence suggests that the efforts made by us and other institutions to green financial markets are showing first results. The green bond market is growing at fast speed. And recent analysis by ECB staff finds that for green bonds that are externally reviewed either through second-party opinion, certification or verification, there exists a “greenium” – that is, a premium investors are willing to pay for a green bond – and that this premium has started to become statistically significant over time. A financial market that better internalises the significant costs of climate change will provide strong incentives for green investment, even when monetary policy is normalising.’

‘The recent measurable increase in euro area inflation, and the upward pressure on prices that can be expected to prevail over the near term, is a strong reminder of the urgency with which we need to accelerate the green transition. Moving away from fossil fuels as fast and as forcefully as possible will not come without costs, however. The measures that are needed to support the people of Ukraine and to protect both our planet and the right of free societies for territorial integrity and independence will herald a new age of energy price inflation. Navigating through this episode will require solidarity and political cooperation at all levels: global, European and national. Monetary policy will play its role in this transition. It will protect the purchasing power of people by ensuring that the current protracted period of high inflation will not become entrenched in expectations, while remaining supportive of growth and employment. We will align our policies with the Paris objectives as quickly as possible, so that all the actions we take in the pursuit of our primary mandate will contribute to the greening of our economies and not undermine incentives to accelerate the green transition. And we will reinforce efforts to green our operational framework and work towards measures that strengthen the role of financial markets in providing the capital needed to build a more sustainable economy.’

Visco (Banca d’Italia):

17 March 2022

‘Before the Russian invasion of Ukraine, to understand the economic outlook on both sides of the Atlantic and how the policy mix should have evolved accordingly, three key factors were especially important. The first factor is related to the developments in the energy market. Oil prices rose, gradually but steadily, at the global level from the lows of the most acute phase of the health emergency: on the eve of the war, they were 60% higher than in January 2020 (for both the US and Europe). Gas prices in the US recorded similar dynamics, almost doubling with respect to January 2020 (Figure 4). But it was the cost of European gas, strongly dependent on supply from Russia, that really skyrocketed: between September 2021 and February 2022 it averaged at over 8 times the value of January 2020; after the outbreak of the war it was even higher, with a peak of 20 times the level of January 2020, before returning somewhat closer to the previous average in the last few days. This is particularly worrying due to the special role of gas in determining retail prices not only for heating and industrial uses, but also for electricity at large. It is consequently important to assess the effects of Europe’s energy crisis on consumer prices, also beyond their direct effects on headline inflation. A significant share of the rise in core and food inflation, in fact, is due to higher energy prices; in particular, we may estimate that, absent the energy shock, headline inflation in February this year would have been 3.5 percentage points lower, at a level, therefore, only slightly above the ECB’s 2% target. The failure of inflation forecasts in 2021 has been repeatedly highlighted: however, indirect effects stemming from the increase in the costs of production – mostly due to unpredictable geopolitical factors that are outside the realm of economics – explain almost entirely the upward surprises recorded on core inflation in the euro area in the second half of the year. The energy shock has also relevant consequences for aggregate demand in energy importing economies, where it translates into a drag on domestic resources. In the euro area, the deterioration of the terms of trade, mostly due to the rise of energy prices, has reduced the purchasing power of domestic incomes (which includes all sectors of the economy) by about 1 percentage point in 2021, and is expected to have an even larger impact in 2022. The repercussions of the energy shock are likely to be especially severe for households. In the euro area, should gas and oil prices remain at the exceptionally high levels currently implied by future contracts, the increase in consumer prices would cumulatively curtail their disposable income by around 4 percentage points in 2021 and 2022. These losses are asymmetrically distributed across families, hitting more heavily the less well-off who typically devote a larger portion of their incomes to energy purchases. The second key factor is related to the labour market. In the US the growth of nominal wages (measured as average hourly earnings) amounted to more than 4% last summer, nearing 6% in January 2022 (Figure 5). In the euro area, instead, the increase in wages (as measured by negotiated wages, which tend to grow broadly in line with actual earnings, but are much less volatile) still remains below 2%. The substantial slackening that we continue to observe in the intensive margin of labour utilisation – in the third quarter of 2021 hours per worker were still almost 2% less than on the eve of the pandemic – and the low level of vacancy rates – which does not suggest any potential signal of a mismatch between the supply and demand of labour – have not pointed so far to the possibility of a worryingly persistent acceleration of nominal wages. It goes without saying that this is a factor whose evolution will have to be closely monitored. The third factor concerns inflation expectations. In the US, longer-term expectations (beyond five years) do not show clear signs of a de-anchoring, providing an encouraging perspective on the possibility, for the Fed, of bringing actual inflation down without implementing surprising and abrupt changes in the monetary stance, which could trigger a recession (Figure 6). In the euro area, the process of the gradual re-anchoring of longer-term expectations from the lows observed in the last few years is being completed, even if a relatively large percentage of analysts continues to predict inflation to be somewhat below our 2% (symmetric) target in five years. Given these developments – while in the US the Federal Open Market Committee decided it wise to quickly reduce asset purchases and implemented an effective line of communication aimed at preparing the public for the lift-off of the target range for the federal funds rate – in the euro area a gradual normalisation of monetary policy was deemed to be the most appropriate stance. From the evidence that I have briefly summarised, I strongly believe that monetary policy in the euro area has not been behind the curve. Indeed, I would venture to say that the re-anchoring of inflation expectations, after a rather long period during which the ECB has successfully countered material deflationary risks, also bears witness to the success of the new monetary policy strategy completed in 4 July of last year. And there is certainly good reason to believe that, given wage prospects and the state of expectations, headline inflation will progressively converge to 2% as the serious disturbances generated by the dramatic evolution of the Russia-Ukraine war fade away. The rise in energy prices (which has also been accompanied by price increases of other commodities, most prominently food) is, in fact, a clear and unexpected supply-side shock, one that may admittedly last for some time. In addition, as I have observed, it is likely to have important negative effects on aggregate demand and, in turn, on the medium-term inflation outlook. While both monetary and fiscal policy may, in principle, counter the inflationary effects of energy costs, only the latter is able to directly influence these costs, also offsetting the loss in disposable income – at least in part and to the extent that it does not jeopardise debt sustainability – and limiting their impact on the economy. That said, the main response to what is essentially a tax cannot come from monetary policy, especially in the absence of a wage-price loop and with inflation expectations re-anchoring to the central bank’s objective. However, these issues emphasise the importance of swiftly designing a strategy, particularly at the European level, that, while in the short run helps to curb the unjustified spike in energy prices, on a more structural basis takes into consideration the issue of energy source diversification, energy storage and the identification of common resources for managing energy crises. It is a challenge that, today, goes hand in hand with the one posed by climate change and its resolution is essential also for avoiding uncontrolled and dangerous increases in the relative prices of fossil fuels.’

‘The Russian invasion of Ukraine implies some very important changes in the economic outlook of the euro area and in the assessment of risks. Further increases of energy prices will not only affect the short-term inflation outlook, but will also determine significant headwinds to domestic demand, while the announced sanctions and the sharp deterioration of Russia’s economic conditions will weaken external demand and cause potential risks to financial stability. Household and business confidence may be strongly shaken. This would result in a worsening of the prospects for GDP growth and, in turn, greater downside pressures to inflation in the medium-term, which could follow the large price increases observed so far and, perhaps, still to come over the rest of the year. The ECB staff has made some new baseline projections available – which were discussed by the Governing Council last week – built on the assumptions that disruptions to energy supplies and impacts on confidence are only temporary, while global supply chains are not significantly affected. Overall, GDP growth is projected to 3.7% in 2022 and 2.8% in 2023, a downward revision of, respectively, 0.5 and 0.1 percentage points compared to December 2021. On the other hand, inflation is set to average 5.1% in 2022, increasing markedly since December, and 2.1% in 2023. The outlook has severely worsened since the cut-off date used in the projections. Looking beyond the short-term volatility of oil and gas prices, whose fluctuations follow the unfolding of the conflict and of diplomatic efforts, there are grounds to believe that these projections are already outdated. It is clear that households will be hard hit by the energy (and food) price shock, particularly those in the lower income brackets, with higher propensity to consume and lower savings buffers. The situation of elevated uncertainty will affect the less liquidity-constrained households, whose precautionary savings are likely to rise, in line with historical regularities, negatively affecting consumption. The dramatic increase in uncertainty also suggests that, in the current circumstances, focusing on scenarios analysis is a more useful and wiser approach than relying on point projections. The war also considerably increases the tail risks. Here I am primarily referring to the worrying possibility of gas shortages pushing energy prices further up or forcing for some time gas and electricity rationing, disrupting production. But market integration and multilateral cooperation also risk being very much affected. What we are living through is a profound, as well as dramatic, watershed, which may lead to economic patterns that are now difficult to define. In this respect, I believe that the public discussion that has followed the ECB Governing Council’s latest decision about the perceived prevalence of a hawkish tone lacks focus. By acknowledging the situation of high Knightian uncertainty that we are facing we decided that we could not commit our actions beyond the very short term. Even proceeding along the path of gradual monetary policy normalisation, we chose to keep all our options open, as it is clear that we are not yet in a position to fully assess the economic implications of this unprecedented situation. On one hand, second-round effects on nominal wages and longer-term inflation expectations have to be closely monitored; on the other, the effects on real activity and incomes, and through them on aggregate demand and price developments, obviously have to be taken into account. Our contribution – and responsibility – in such difficult times is not to increase but instead to reduce uncertainty. To this end, another aspect that plays a very important role is the commitment that, within our mandate and under stressed conditions, flexibility will remain an element of monetary policy whenever the emergence of threats to the transmission mechanism of monetary policy jeopardises the attainment of price stability. Indeed, guaranteeing a smooth functioning of financial markets and assessing the implications of our decisions on financial conditions with great care are necessary conditions for delivering on our medium-term price stability mandate. Our decisions remain intertwined with those of the fiscal authorities. As I mentioned, a supply-side shock should be tackled predominantly by fiscal policy which could shield the economy by diminishing the transmission of price increases from energy to consumer goods and limiting the loss in disposable income. The de facto coordination between fiscal and monetary policy, which has worked well in the last two years to counteract and contain the economic and financial consequences of the pandemic crisis, is still necessary today. I believe that if fiscal policy is effective in attenuating the impact on households and businesses of the incredible leap in energy prices and if monetary policy proceeds with caution, absent the second-round effects that I already mentioned, we will be able to successfully continue the gradual normalisation of our monetary policy stance started at the end of last year.’

Knot (Dutch National Bank):

17 March 2022

‘‘The Governing Council is not targeting or responding to a specific level of the exchange rate. But it is clear that when the exchange rate falls it adds to inflationary pressure. Given that most energy prices are invoiced in US dollars, a decline in the euro versus the dollar even aggravates the loss of purchasing power because of the energy price inflation. So, in that sense there is a concern that if the exchange rate weakens too much it aggravates our problems with the high energy inflation in the very short term. We are there to serve our citizens. There is not much we can do about high energy prices, because they are created outside the euro area, they're outside our realm of influence. But let us at least make sure that such problems are not aggravated by a continued depreciation of the euro.’

17 March 2022

It makes no sense to be ‘overly precise’, but rates lift-off is possible in the coming months. ‘I find it a realistic expectation but by no means a certainty. I also cannot exclude two hikes this year but that is only in the case in which incoming data would point to a further upward revision of the medium-term inflation outlook.’ Prices are currently ‘the dominating worry’ and risks are ‘tilted to the upside.’

‘If the medium-term inflation outlook develops to the upside, then yes, maybe September would need to be available’ to end QE. If the outlook ‘were to deteriorate again, then maybe fourth quarter may slip into January.’

17 March 2022

‘I'm pretty confident that [the APP] will end in Q3. It would take a fundamental downgrade in the inflation outlook between now and June, because that's the last moment in which we have to take a decision on Q3, to not stop the APP in Q3, and I don't see where that would come from.’

‘[I am] comfortable with current market pricing of lift-off. … If such a scenario were to unfold, then my personal view is that there is no need to revisit the discussion on tiering as then the effective end of negative interest rates would be in sight.’

‘Each time we went down by 10 basis points we entered uncharted territory. On the way up there is no uncharted territory, so a priori, there is not such a strong rationale to have to go in 10-basis-points baby steps.’

‘It's not so much a tightening of policy, it is more normalisation. It's withdrawal of this unprecedented amount of stimulus, rather than moving into a contractionary, actively tightening domain.’

‘PEPP reinvestments will be our first line of defence’ against spreads widening. ‘If more is needed, then undoubtedly, we will come up with what is needed.’

‘Our starting point was very, very favourable, so we shouldn't dramatise in terms of talking about possible negative growth rates for 2022. And, second, our projections do not take into account fiscal policy. We are going to see higher spending on defence, and accelerated investments in renewables because we all want to wean ourselves off Russian gas and oil.’

‘The longer higher inflation sticks around, of course the likelihood of second-round effects culminating into higher wage contracts becomes larger and larger. And that likelihood is the relevant magnitude for us to take into account when setting policy.’

‘What matters is that at the end of the day we coalesce around a way forward, which is crafted by the chief economist and the president. The degree of consensus that we've had in the Governing Council over the last two and a half years has been remarkable.’

17 March 2022

‘A combination of factors are responsible for these [recent] price increases. Some of them are temporary, for example the price drops at the beginning of the pandemic that have now reversed and that are contributing to temporarily higher inflation. These factors had generally subsided by the end of the year under review. Other transitory factors seem to be more persistent than initially expected. These include pent-up demand, supply chain bottlenecks and higher prices for raw materials. The sharp rise in inflation in the second half of the year under review is mainly due to the exceptionally strong surge in energy prices of more than 40%. There is great uncertainty about the development of energy prices and there are upside risks: Russia's invasion of Ukraine will most likely keep energy prices high for longer and they may even rise further. Moreover, the much-needed measures by governments to curb climate change also have the potential to push energy prices higher. As a result, inflation is expected to remain high throughout 2022. A DNB analysis shows that inflation is due less and less to a number of specific factors, but is increasingly driven by a broad range of goods and services, thus increasing the likelihood that inflation will persist for longer. The longer the high inflation rate lasts, the greater the risk that this higher level will become anchored in inflation projections and thus in household and corporate behaviour. A higher level of inflation in the longer term must also be reflected in higher wages, which can give rise to a wage-price spiral. For the time being, wage growth is relatively modest, and we are not yet seeing these second-round effects. However, second-round effects are particularly difficult to predict, especially in these uncertain times of successive shocks that are unprecedented both in their nature and magnitude. It is therefore important to closely monitor inflationary developments and the dynamics of inflation projections so that monetary policy can be adjusted in a timely manner if necessary.’

‘Several factors are responsible for the economy’s rapid recovery. Firstly, businesses and consumers have adapted more readily to circumstances than previously anticipated. Whereas growth was negatively affected by the sudden dominance of the omicron variant and subsequent containment measures in the autumn of 2021, significant growth is still expected for 2022 as a whole.’

‘In December of the year under review, the ECB's Governing Council decided to terminate PEPP as of the end of March 2022, as the crisis phase of the pandemic has come to an end and price stability is more and more likely in the medium term.’

‘Overall, the policy mix during the pandemic has proved to be appropriate. In the years to come, policy normalisation and the restoration of new policy buffers will need to be addressed to ensure that the economy is able to cope with future shocks.’

‘In recent years, financial institutions have felt the pressure of low interest rates, which erode banks' interest margins, make it more difficult for life insurers to earn sufficient returns and make financing funded pensions more expensive. The recent rise in interest rates may, if this trend continues, alleviate the pressure on the business models of these financial institutions. At the same time, an abrupt rise in interest rates also poses risks, as financial institutions are unable to adapt readily to the new situation. Corrections in the housing market or financial markets resulting from rising interest rates may lead to a sudden depreciation of assets held by financial institutions. In addition to interest rate shocks, there are other uncertainties that are relevant for financial institutions going forward. For example, a higher than expected increase in bankruptcies may lead to an increase in the number of past-due or non-performing loans. In addition, Russia's invasion of Ukraine and the accompanying economic sanctions could result in losses for financial institutions. Companies that depend on trade with these countries will be affected, possibly resulting in losses for them as well.’

‘Alongside fiscal policy, monetary policy can also lead to imbalances. The current, long-term unconventional monetary policy is giving rise to more and more risks and undesirable side-effects. There is no longer any need for this policy now that the crisis phase of the pandemic is behind us and a 2% inflation rate seems likely in the medium term. After years of low inflation, it is conceivable that the greatest challenge in the years ahead will lie precisely in avoiding excessive inflation, given the expected changes in the euro area economy, potentially including greater emphasis on building resilience to future pandemics, the expected expansionary fiscal policy and the climate transition. These trends may lead to upward pressure on inflation. Monetary policy will therefore have to normalise in the years ahead, not least to create sufficient policy scope for dealing with a future crisis.’

17 March 2022

‘I realize that people look to us when it comes to protecting purchasing power. You can blame us if we fail to prevent high inflation from taking root and becoming intractable, as it did in the 1970s.’

‘I was honestly surprised that the idea had taken hold in the market that we would sit on our hands. We simply have one mandate, and that is price stability. Even before the conflict in Ukraine broke out, inflation figures for January and February were simply bad. And I don't even mean the absolute level. You saw for the first time that rising inflation had a broader basis than just energy prices. We had already announced at the beginning of February that we would respond to this in March. It is of course appalling that for the first time in more than 75 years a real war between sovereign states is taking place on the European continent. But in terms of inflation it's more of the same: a negative supply shock.’

‘If there is the impression that we are tightening the policy to do something about the high energy prices, that is a misunderstanding. There is absolutely nothing we can do about that, and monetary policy also works with a delay. But it is our job to ensure that this temporary high inflation does not become entrenched and leads to permanent high inflation. There is also the risk that wages will also react at some point. We don't see that yet, but the chance of that is starting to increase everywhere in the Eurozone.’

‘We are of course coming from a period in which we have had a rain dance for more inflation for about eight years. At the time, we were surprised that wages lagged so structurally. Back then, we always blamed globalization, the diminished power of the trade unions, flexibilisation in the labour market: structural factors that oppose an increase in wages and that still apply. Yet we had always thought: once the economy really runs at full strength, that should lead to stronger wage increases. I'm somewhat surprised we still haven't seen that. Perhaps in recent years there has been a lot of uncertainty about keeping one's own job. Job security always takes precedence over pay, which is also reflected in the policy of the trade unions.’

‘You are basing your question [as to whether the ECB is making the same mistake as it did when it raised interest rates in 2011 on the eve of the European debt crisis] on developments in economic growth, but again, I am mainly looking at inflation. The signals are opposite. If the Ukraine conflict creates further bottlenecks in international supply, causing inflation to accelerate even more, we must respond to them and not to slowing growth. We will, however, proceed with caution. We are still a long way from the area where policy is tightening. We are only concerned with making the policy less expansive by phasing out the unconventional policy. After the summer, we will then have our hands free to raise interest rates. The question then is: where is the neutral policy rate? The models indicate enormous margins of uncertainty, but I am counting on them to be at least around 1 to 1.5%.’

‘That contrast [between hawks and doves on the Governing Council] is very strongly emphasized. There are, however, differences of opinion. For example, about the effect of slowing growth on inflation. It is, of course, true that if the economy goes deep into recession, it has a lowering effect on inflation. But if you look at our estimates during the pandemic, not only has inflation been higher than we expect each time, but also growth. That has been completely underexposed in the reporting. Everyone is talking about negative supply shocks. That is true, and they are also very visible through the energy price. But at the same time, our economy has recovered much faster and much stronger from the initial corona dip, in the Netherlands but also in Southern Europe. We simply underestimated that.’

‘I have added some reports from that time [the 1970s stagflation]. They are completely full about the deteriorating competitive position and the lack of profitability of our business community at the time. Of course that is not the case at all now. Despite all the corona misery, we have continued to grow at almost 1.5% per year. Of course, there is now fundamental uncertainty. But the starting position of the Dutch economy and our business community is really excellent. That is an important difference between now and the 1970s, so I also think that we should not be too quick to get involved in a story about stagflation. Capital market interest rates are also at a fundamentally different level. Interest rates will rise and they should, but not as spectacularly as then. Limited productivity growth, an aging population and an increased demand for safe bonds are structural factors that continue to depress interest rates.’

‘The fear of this [that the ECB's policy freedom is limited by the highly indebted euro countries] is greatly exaggerated. Even if we start raising interest rates after the summer, as financial markets are pricing in now, those interest charges for countries such as Italy and Spain will simply continue to fall at first. Simply because the current interest rate is still lower than the average interest that these countries pay on their outstanding debt. As long as Europe continues to radiate unity, as it has clearly done during the pandemic and now in response to the Ukraine shock, and the ECB continues to make clear that interest rate differentials that get too out of hand will not be tolerated, then the risks are manageable.’

‘I am not dogmatic in this discussion [about communal financing]. At the present time, we can offer some public goods more efficiently and effectively at the European level than at the national level. Perhaps defence is one of them, in addition to energy infrastructure. And yes, then it is logical that some European financing should be part of this, for example by means of targeted Eurobonds.’

‘So far so good [with regard to the implications of the war for financial stability]. Of course, as regulators, we have always thought: do we not run the risk that the sanctions against Russia will hit back on parts of our own financial sector? So far, that's okay. A handful of banks have above-average exposure to Eastern Europe. But if you compare that to the total lending and the capital they hold, it is all very limited. Although we always have to be careful.’

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):

16 March 2022

‘We decided already last year a pass to the normalisation of monetary policy. The December decision is an example of this, and … we mean precisely taking on a more neutral stance. The normalisation sequence is well known, and it will be data-dependent. We don’t have a timing for that. So, what it means to have a more neutral stance at this stage is to continue our path of net purchases throughout this year, evaluate the data that we have at hand. Of course, inflation pressure is very high at this stage, but we don’t, we don’t see any evidence of second-round effects, and that’s precisely, I am also of the opinion that the conditions, for example for rate lift-off, are not met yet. Core inflation is driven by external factors and not by domestic factors such as wages and second-round effects. Indeed, the ECB forecast for wage growth was revised downward last week, and this is precisely where we are today.’

‘Well, it’s very difficult today to forecast the economy, the European economy, for, for the next few months. It all depends on the duration of the conflict, it all depends on how bad the sanctions will work in the European economy as well. So, we are prepared to act according to the developments in, in our economy, in, until the summer. That’s why we keep saying, and this is to be taken very seriously, that we extend our options, we can act in either way, depending on, on how the economy goes. The unemployment is probably the, the best indicator for the European economy these days. I mean, we have a very strong labour market coming out of the recession. It was usually supported by fiscal policy measures, that’s why I think coordination is a very important issue in Europe these days again … We took a very significant step in April 2020 in terms of the coordination of our monetary and fiscal policies, and we cannot lose that spirit. But, I mean, if, even if it’s not probably the most likely scenario today, a scenario with low growth and high inflation is not out of the possibilities in the near future, and we must be very careful.’

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):

15 March 2022

‘Logically, the invasion of Ukraine and the subsequent war is very bad news from an economic point of view ... and it will mean that inflation, which was already high, will be even higher, and economic growth will be affected. But we are not going into recession, even in the most severe scenarios that we have, the European economy is not going into recession. ... it is a situation that has logically increased uncertainty from the point of view of economic activity, but even in the most adverse scenario, we do not consider, we do not believe, that Europe will go into recession'.

‘Well, on interest rates, what we have done has been a normalisation of monetary policy. We have said we were going to reduce our purchase programme. But we have decoupled in a way the raising of interest rates from the ending of this purchase programme. And so it will depend on the data that we get. At our last meeting of the Governing Council of the European Central Bank, we basically indicated that we are dependent on the data, on the inflation data, which is our core mandate. ... But what I would basically say, we are in a process of normalisation of monetary policy from the point of view of purchases, but that does not at all imply that we are going to raise interest rates immediately.'

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.’

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.’