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

11 April 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 April 4 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)


Elderson (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):

29 March 2022

‘On the one hand, the new shock increases the upward dynamics of inflation in the short term and increases the likelihood of second-round effects and thus of pass-through to the medium term. Conversely, the war will generate a negative impact on growth, 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, which could reduce inflationary pressures in the medium term, the relevant time horizon for monetary policy.’

‘In all scenarios analysed, inflation is expected to decline gradually and stabilise at levels close to our 2% target by 2024. Various indicators of long-term inflation expectations obtained from financial markets and surveys are also anchored at around 2% when risk premia are discounted. There is less need to reinforce the accommodative tone through net asset purchases: monthly APP purchases are reduced for Q2 and the calibration for Q3 will depend on the evolution of the economic outlook. The data dependent character is emphasised and the flexibility and optionality in the use of the instruments is increased:

- Necessary measures will be taken to ensure price stability and financial stability.

- If, in the coming months, new data support the expectation that the medium-term inflation outlook will not weaken, net APP purchases will be terminated in the third quarter. However, if the medium-term inflation outlook changes, the net asset purchase plan (both amount and duration) will be revised.

- The scope for a longer time lag between the end of net purchases and the point at which interest rates will start to be raised is widened.

- Interest rate adjustment will be gradual.

- Need to avoid fragmentation with flexible reinvestment of PEPP debt repayments or, where appropriate, with alternative instruments.’

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):

22 March 2022

‘Such shocks could have an inflationary impact, particularly in the case of a negative supply shock, especially if it occurs in a disorderly fashion as is currently the case with the war in Ukraine. Conversely, some shocks could have a disinflationary effect, in case of increased uncertainty or financial disturbances linked to stranded assets. Such effects could combine, amplifying or mitigating the overall impact, but the most likely outcome of the transition is inflationary pressures, especially on energy prices. But let me be clear: climate transition policies are not responsible for the current rise in inflation. According to our estimates, the increase in carbon prices linked to the EU ETS explains only 7% of the increase in electricity prices in France in 2021. In terms of unexpected developments in the short term, there is a clear risk that the climate transition will be overshadowed - and perhaps delayed - by the war in Ukraine. The quickest measures to reduce Europe's dependence on Russian gas could result in increased reliance on coal and oil in some countries. In addition, Russia's war is likely to slow growth and keep inflation higher for longer, reducing the fiscal and monetary space available for financing green technologies.’

‘On the ECB side, we need to continue with the gradual normalisation of monetary policy in order to keep inflation expectations anchored - it is indeed time to take the foot off the inflation accelerator, as we decided at our last Governing Council. That said, we should not overreact to short-term volatility in energy prices; rather, we should focus more on core inflation and the medium term.’

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):

06 April 2022

‘That worries me, that worries all of us. Small and medium incomes are particularly hard hit by high prices. And that's where we, as central bankers, have to take action, because these high prices must not be allowed to become entrenched. And that will certainly be a task, especially for the Eurosystem this year.’

‘First of all, we have to say that there are of course many special factors that we know about, including this terrible war. Improvements can be expected when certain prices move out of these calculations. But all in all, it is of course a development that we cannot like, and if we now look at the annual average for 2022, we expect price increases of 6% on average. And that is of course too much.’

‘The worst case is always that this war remains, that this suffering remains, and the associated consequences, possibly even more price increases in energy prices, and overall these spillover effects on the real economy. That would be the so-called worst case.’

‘In our last monetary policy meeting in March, we agreed ... on a good path. We decided there that the purchase programmes would first be greatly reduced on a net basis, to €20 billion per month by June. That's quite a number compared to the earlier figures we saw there. And then, on the basis of the figures that we will see in June, we want to make a new decision. What we are seeing now at the current margin indicates that savers may soon be able to look forward to higher interest rates again.’

01 April 2022

‘We on the ECB Governing Council have been very clear: monetary policy measures are data-dependent. The inflation data speak for themselves. Monetary policy should not pass up the opportunity for timely countermeasures.’

21 March 2022

‘For spring 2022, the economy in Germany and the euro area was expected to literally blossom - after the Omicron wave subsided and the Corona rules were relaxed. The Russian attack on Ukraine is now darkening the economic outlook. Three influencing factors are particularly important. First, the war caused energy prices to rise dramatically. Oil and gas prices have at times reached extraordinary heights and could rise further. Losses of confidence and purchasing power may reduce private consumption. Secondly, the war, sanctions and counter-sanctions directly affect trade with Russia and Ukraine. This leads to supply disruptions - the effects of which we have seen not least in car production in Wolfsburg. And this at a time when the Corona-related material bottlenecks had eased somewhat, but had not yet been overcome. Third, the war brings considerable uncertainty and puts pressure on private consumption and investment.’

‘The ECB staff experts presented a new projection on 10 March. The baseline scenario showed economic growth of 3.7% in the euro area in 2022, down half a percentage point from the December forecast. However, growth could be a further 1.4 percentage points lower in the worst-case scenario according to the ECB staff estimates - if there were additional deteriorations in all three of the influencing factors I mentioned. So there are currently clear downside risks to the economy.’

‘Inflation has also developed differently than expected and has been surprisingly upward for several months. The inflation rate was already very high before the war in Ukraine: according to the Harmonised Index of Consumer Prices, it peaked at 6% for Germany in November last year. For the euro area, 5.9 % was reported last month. This is the highest inflation rate since the introduction of the euro. The strong price increase was only partly due to clearly definable special effects. More important was that the global economy recovered unexpectedly quickly from the Corona crisis. In the course of this, energy prices and transport costs as well as import and producer prices rose drastically. Food also became much more expensive, as did services, which were particularly affected by protective measures. In other words, price increases have been broad-based in recent months. The surge in energy prices due to the war is likely to further intensify the rise in consumer prices, especially in the short term.’

‘On 10 March, the ECB published the latest ECB staff forecast. For the current year, the ECB experts now expect an inflation rate of 5.1% in the euro area measured by the Harmonised Index of Consumer Prices. In Germany, the Bundesbank estimates that this value could be similarly high on average for the year. Sharply rising prices are a particular burden on people with low incomes. However, current inflation is largely determined by factors such as energy prices, which monetary policy cannot change directly. Targeted transfers are appropriate to relieve the burden on those who are particularly affected. However, we in the Governing Council must be determined to ensure that the strong upward pressure on prices does not become entrenched and lead to excessive inflation in the medium term. Here, possible second-round effects are a key risk. In the euro area, the unemployment rate has fallen to a historically low level and the shortage of skilled labour is increasing. This could strengthen wage dynamics. However, second-round effects can also arise from the fact that the current wave of inflation is raising inflation expectations. And the longer the high inflation lasts, the stronger it will be. The Bundesbank's online surveys provide a warning. For some months now, both private individuals and companies have been adjusting their inflation expectations for the next twelve months significantly upwards. And among experts, one realisation seems to be gaining ground more and more: Inflation rates will not be as low as they were before the pandemic for the foreseeable future. In my view, we need to be very wary of upside risks to price stability in the medium term. It is true that the ECB staff projections show declining inflation rates in the euro area over the next two years, moving towards our 2% target. But the uncertainty in the price outlook is extremely high. And it has increased significantly due to the war in Ukraine. Thus, the current environment argues even more strongly than before for keeping all options open with regard to the monetary policy stance, so that the ECB Governing Council can react quickly if necessary. President Lagarde put it succinctly on 10 March after the Governing Council's monetary policy meeting: "Maximum optionality in the face of maximum uncertainty." This has also shaped the decisions of the Governing Council. Net purchases under the APP securities purchase programme will be reduced more quickly than previously planned, from €40bn in April to €20bn in June. If the newly available data support the expectation that the medium-term inflation outlook will not deteriorate even after the end of net purchases, the Governing Council will discontinue these net purchases in the third quarter. For me, it is very clear: if the price outlook requires it, we will have to normalise monetary policy further and also start to raise our key interest rates. Monetary policy is always dependent on current data. In the current situation, we would do well to emphasise this data dependence. The adjusted forward guidance for interest rate developments also leaves room for data-driven action. The ECB Governing Council is now holding out the prospect of changes in key interest rates for "some time after the end of APP net purchases". In doing so, it will proceed gradually. What is clear is that there will be no change in the sequence communicated so far: The net bond purchases will be ended before the key interest rates are raised. If the net purchases end in the third quarter, as currently planned, this opens up the possibility of raising key interest rates this year if necessary. Until now, many were concerned that monetary policy could "stall" the economic upswing if it tightened the reins too early. In the end, there was even a threat of a return to a low-inflation environment. This attitude argued for patience and a wait-and-see approach. In the meantime, the risk of acting too late has become greater in my view. With all caution in view of the extraordinary uncertainty: we should not delay the exit from the very loose monetary policy. Otherwise, interest rates might have to rise all the faster or higher later on. But an abrupt rise in interest rates would put more pressure on companies and households. And it could expose existing vulnerabilities in the financial system and trigger strong market fluctuations.’

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):

05 April 2022

‘There are really three concerns [about the war] from the point of view of the economy. One, of course, is: we know energy is a big issue – the price of oil, the price of gas and the supply availability. So that's a big concern. A second issue is trade. Europe has traditionally been exporting many goods to Russia, and Russia is also important for tourism in some parts of Europe. But that is now gone with the sanctions. The third element is uncertainty, and this is the issue we are focusing on a lot. We have seen different indicators of investor confidence and of consumer confidence come down because, in a war situation, people are nervous. They don't know what the future will look like. And if you are uncertain, it makes people more reluctant to spend, to consume, to invest. So this is something that we are keeping a close eye on. Now, please remember that this year, outside of the war, there is the reopening of the European economy after the pandemic. The war is a major negative economic issue, but the reopening of the economy gives some momentum. So this year, for example, we should expect the tourist season to be better than last year.’

‘As we've just talked about, behind the inflation is this energy shock. The energy shock is of course very large. In March, for Europe, energy prices were 45% - nearly by half -- higher than they were one year ago. That is a major issue for firms, for households, for governments. In the context of a 45% increase in energy costs, right now inflation is more than we would like. We do think that there may be some months to go. Maybe by mid-year we will see the peak. But I think it depends on the war. Most likely, with the nature of the energy shock, prices will either level off at these high prices or will start to decline. But the momentum of inflation will slow down, so we do think that in the second half to the year, as you say, the inflation rate will come down. And we do think it will be a lot lower next year and the year after. It's very dramatic, but it essentially has an element that we do think will slow down and go into negative momentum.’

‘Let me emphasise: what we see right now is, when you have this energy shock, it's pushing up prices and it does reduce incomes in the economy. So it's a natural question to ask [whether stagflation is seen], but please remember: we have momentum in the European economy because of the reopening after the pandemic. We have Next Generation EU providing public investment in many countries. So when you put all of that together, what we think is – yes – a slowdown in the economy, but the economy will still grow this year. So that is very important, and we think that, unlike the 1970s, these are a few months of high inflation rates. It is not a decade of high inflation rates, and we do think the inflation will fall later this year. So please remember: this inflation is coming from outside, it is not coming from the European economy. This is why we do think it has this special characteristic.’

01 April 2022

‘Of course, this [March euro area HICP of 7.5%] is a very high number. Behind the overall inflation rate is a 45% increase in energy inflation between this year and a year ago, and that's a very large – yet another large – step increase from the 32% we had last month. So clearly here we are at the 1st of April and the war in Ukraine has added further upward pressure, as you just said to energy prices, to commodity prices. So, this asks the European economy to absorb a 45% increase in energy prices, which in turn is off the scale. And it's pushing up costs across the economy. All of the different sectors behind the overall number are seeing an increase in prices. This has many, many consequences. So as you said in the introduction, households will be suffering in terms of their purchasing power. Firms face very large energy bills, especially in the most intensive energy sectors. Governments are also, of course, responding in many ways to this energy shock. So, what we have to do as the ECB, is to analyse the consequences of these very high inflation numbers, which operate through a number of channels. Of course, through inflation dynamics – with these high numbers, there would be more momentum behind inflation through second-round effects and so on. But we also have to look at the implications for the supply capacity of the European economy – many firms will struggle with these high energy prices – and for demand. And then maybe the data point to note here is: the war has had many consequences for Europe, and we've also seen in recent weeks a big dip in some sentiment indicators. So, in our upcoming meetings we will be putting together the first order impact of these very high energy numbers, but also the implications for confidence for real incomes and supply. So it's of course a very major development for us.’

‘What I think we are seeing is it takes time for the wage response to the price increases. So I think early this year we are seeing some signs, but very mild, of wage responses to what's happened so far. But of course, for those who were negotiating wages in maybe in January and in February, that is before these high inflation rates have picked up yet again. What I would say is that in terms of what's being concluded so far, it remains the case that we see wages are only responding in a very limited way, but of course we have to take into account. And by the way, in our projections we do assume that wages will grow more quickly over the course of this year and into next year. I suppose really what I'm saying in that is that this is of course on its own terms something that will raise the cost of living, that will reduce our purchasing power and will be surely a factor in wage negotiations to come. On the other hand, the ability of firms to pay higher wages will have to take into account the fact that firms face higher costs also. And then we have the wider demand environment, where the loss of real income from paying these high energy prices will reduce demand. And on top of that, we have the war situation, where the uncertainty of the war also creates uncertainty and demand conditions. So, it's a situation where many things are going on. I would summarise it as a situation of uncertainty. And of course this is why in our March decision we emphasised optionality and flexibility in monetary policy. Because we have to realise under these situations that the correct monetary policy response will depend upon how the data arrive in the coming weeks and months.’

‘With this type of supply shock essentially, and the uncertainty shock, you do have that difficult situation. But in the end, this is why, when we – especially in our quarterly meetings – have a comprehensive assessment and new forecasts, essentially this has to be brought together, informing our medium term inflation outlook. And what we concluded at the March meeting is, essentially if the medium-term inflation outlook remains in a situation where we think inflation will not be falling below our target in the medium term and over the next couple of years – as you know our forecast for 2024 was a little bit below the target at 1.9 – in terms of our sequence the first decision will be – if the medium term inflation outlook is maintained – that we will be looking to end net purchases in the third quarter. However, if the outlook deteriorates by so much that the inflation outlook weakens, then we will have to think again. And what we have here is opposing forces: on the one hand, we have the energy shock and the prospect of second round effects are pushing up inflation; on the other hand, as you say, the weakening of sentiment and the fact that real incomes will suffer with the high energy prices – and especially so over a one- to two-year horizon – will have a negative pressure on the inflation outlook. This will be why it's going to be a lot of work, a lot of analysis, a lot of debate about the net impact of those opposing forces. So today, you know this is again highlighting the impact of the war, highlighting really levels of inflation we have not seen. So we have to properly assess this, to take it side by side with the news about sentiment. But by the way, yet another complication is we also have the reopening of the European economy, there is still momentum compared to last year in terms of the normalisation of economic activity. I think it's important that we take our time, and use the forecasting exercises to bring all of that together and form a net assessment in our upcoming meetings.’

‘Remember what we have now is: we have policies that that were introduced when we had inflation far below target. And what essentially we've been talking all year long is about the appropriate pace of normalisation. I think it ultimately remains the case that we now have inflation right now well above target, and these considerations you mentioned about possible hits to demand, possible slowdowns of the economy, to me it's really about the appropriate pace of normalisation. It's not a set of situations where I think additional monetary support compared to where we've been is really, I think, going to be part of the answer. But that reflects the fact that we're coming from a situation of having policies that were introduced to fight excessively low inflation, and that normalisation coming back towards neutral is a very different concept from a kind of situation of tightening. As you know, the yield curve has been moving all year long, so there's already been tightening going on in terms of financing conditions in a nominal sense, and we will have to assess – when we come to the upcoming forecasts – the net impact of the fact that we do have monetary tightening due to the upward movement in the yield curve. We do have this inflation pressure right now and then we have all the uncertainties of the war. So yes, it’s not so easy, no obvious answers here. But this is what we will be working on for the coming weeks.’

31 March 2022

‘In recent months, the improvement in the medium-term inflation outlook has been overshadowed by the surge in the spot inflation rate (Chart 16). For the euro area, the current high inflation rates reflect to a large extent a very substantial surge in energy prices in recent months and a pandemic cycle that has generated global bottlenecks for manufactured goods over the last year. These are factors that act to raise the price level but, conditional on the appropriate conduct of monetary policy, should not be a source of persistent inflation. The energy price shock, with energy prices 30% higher in February 2022 compared to February 2021, is the main driver of the high inflation rate, both through the direct contribution of energy to the overall price index and its indirect impact on costs across all sectors of the economy. However, even if energy prices, which historically have exhibited a considerable degree of short-term mean reversion, were to remain close to current levels, the level shift on inflation mechanically falls out of the inflation calculation over time. Similarly, the relative price dislocations associated with bottlenecks – demand-supply mismatches – should fade as extra supply becomes available and sectoral demand surges normalise. In analysing the current high inflation rate, the surge in energy prices constitutes an adverse terms of trade shock for the euro area, which imports more than 90% of its energy inputs. In addition, the bottlenecks in global supply chains are primarily external in nature rather than reflecting an overheating of domestic demand in the euro area. … Whereas the euro area goods trade balance generally registered a surplus of around 2% before the pandemic, the goods trade balance has gradually deteriorated over 2021. This deterioration reflects the steady worsening of the energy and food trade balance, which was largely driven by the rising bill for energy imports. By the same token, the euro area terms of trade have declined during 2021. Higher import prices for energy reduce the disposable incomes of households and the cash flows of energy-intensive firms. The impact of this terms of trade shock on euro area macroeconomic dynamics will warrant close monitoring in the coming quarters. The above-trend current readings for core inflation reflect to a significant extent the indirect effects of high energy prices and also global bottlenecks, with every sector hit by the energy shock. Chart 19 shows that around 70 basis points of core inflation can be accounted for by the energy shock. Charts 20 and 21 show that both non-energy industrial goods (NEIG) inflation and services inflation have been significantly affected by the oil price shock, with the bottleneck effects proxied by the PMI supply indicator also leaving a visible mark on NEIG inflation. … While the supply shock nature of the contributions from energy prices and global bottlenecks means that inflation should not be expected to persist at the current high levels , it is also plausible that medium-term inflation will not revert to the pre-pandemic below-target equilibrium but, conditional on appropriately-calibrated monetary policy, rather may stabilise around the ECB’s 2% target. This conjecture is supported by two basic underlying trends. First, there has been a considerable revision in inflation expectations over the last year. The anchoring of inflation expectations is a first order issue, since a persistent shift in inflation expectations can play a significant role in determining medium-term inflation dynamics. Surveys are signalling a recovery of longer-term inflation expectations that is consistent with inflation settling at our 2% target over the medium term. In the ECB’s Survey of Monetary Analysts, the modal value in the most recent round stands at around 2%. In addition, while survey participants unanimously expect inflation to remain above 2% this year, the distribution of those expecting inflation to stand at above 2% and below 2% is fairly balanced in 2023 and 2024. Similarly, in the Survey of Professional Forecasters the mode for longer-term inflation expectations has also materially shifted from 1.6% to 2.0%, although it is notable that the mass of below-target inflation remains higher than above-target inflation. Market-based indicators of inflation compensation also show a significant shift: model-based analysis suggest that the expectations component for inflation has moved closer to the 2% target, while model analysis largely attributes the recent spikes in measures such as the 5y5y inflation-linked swaps to the pricing of inflation risk premia. What might explain this revision in inflation expectations? At one level, the success of monetary and fiscal policies in countering the pandemic shock may have led to greater optimism that excessively-low inflation episodes would not be tolerated by policymakers. The policy commitment to resist below-target inflation was also reinforced by publication of the ECB’s new monetary policy strategy statement in July 2021, which articulated our determination to deliver our symmetric 2% inflation target, including through forceful or persistent policy measures in the neighbourhood of the effective lower bound. More recently, the surge in inflation since autumn 2021 also has potentially acted as a circuit breaker in terms of the setting of inflation expectations by overturning the pre-pandemic narrative that an array of structural forces would permanently keep inflation at a low level. While a re-anchoring of longer-term inflation expectations around the 2% target rate acts as a stabilising force and reinforces the credibility of the inflation target, complacency should be avoided. In particular, the current prolonged phase of spot inflation rates far above the target might lead some types of economic actors to make further upward revisions to their near-term and medium-term inflation expectations. Accordingly, it is essential for the ECB to monitor closely a wide array of indicators of inflation expectations and to ensure that its commitment to delivering 2% inflation over the medium term is understood by the full spectrum of economic actors. The second factor that can underpin the anchoring of longer-term inflation expectations at the 2% target is the re-assessment of the labour market. As shown in Chart 27, a supportive macroeconomic environment and targeted labour market policies resulted in the labour market performing much stronger than had been expected during the pandemic, limiting the risk of long-term scarring effects. The latest ECB staff macroeconomic projections foresee a substantial further decline of the euro area unemployment rate over 2022-2024 to levels not seen in decades.’

‘Against this background, the Governing Council sees it as increasingly likely that inflation will stabilise at our 2% target over the medium term. Under this pathway, the degree of monetary policy stimulus put in place to address the pre-pandemic challenge of persistent below-target inflation can be normalised in a gradual fashion towards a more neutral setting. At its December 2021 meeting, the Governing Council judged that the progress on economic recovery and towards the medium-term inflation target permitted a step-by-step reduction in the pace of our asset purchases over the coming quarters and the end of net purchases under the PEPP at the end of March. Subsequently, at the March 2022 meeting, the new inflation landscape warranted a further scaling back of the profile of APP purchases. Accordingly, monthly net purchases will amount to €40 billion in April, €30 billion in May and €20 billion in June. The calibration of net purchases for the third quarter will be data-dependent and reflect our evolving assessment of the outlook. If the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases, the Governing Council will conclude net purchases under the APP in the third quarter. If the medium-term inflation outlook changes and if financing conditions become inconsistent with further progress towards our 2% target, we stand ready to revise our schedule for net asset purchases in terms of size and/or duration. At the same time, the Governing Council revised its forward guidance on interest rates to signal that any adjustments to the key ECB interest rates will take place “some time after” the end of our net purchases under the APP. This formulation disentangles the calendar for a rate hike from the end date for net purchases and gives some extra space to test the conditions after we stop purchasing bonds and before we take the next step towards normalisation. The expression “some time” also conveys that, especially in an uncertain environment, the time interval between the end of net asset purchases and lift-off is not predetermined but will depend on the timeline for the fulfilment of our rate forward guidance criteria and the appropriate incorporation of prevailing economic, financial and market conditions in our interest rate decisions. This new formulation clearly enhances the Governing Council’s flexibility and optionality as it helps to manage in a more agile manner the specific steps regarding the implementation of the sequence of normalisation decisions, allowing us to attune such steps to incoming data. Moreover, the Governing Council reconfirmed that the path for our policy rates will continue to be determined by our forward guidance and by our strategic commitment to stabilise inflation at 2% over the medium term, and we also signalled that any adjustments to our interest rates will be gradual, which is especially important in times of uncertainty. More than ever, it is important to maintain optionality in the conduct of monetary policy. In current conditions, it is especially important to remain data-dependent and for optionality to be two-sided. On the one side, we should ensure that our policy settings are adjusted if de-anchored inflation expectations, an intensification in catch-up wage dynamics or a persistent deterioration in supply capacity threaten to keep inflation above target in the medium term. On the other side, we should also be fully prepared to appropriately revise our monetary policy settings if the energy price shock and the Russia-Ukraine war were to result in a significant deterioration in macroeconomic prospects and thereby weaken the medium-term inflation outlook.’

‘My overall assessment is that the monetary policy response of the ECB to the pandemic has been a success. Our ECB policy package (PEPP, revised TLTRO III, collateral easing and supervisory measures) preserved favourable financing conditions and enabled the large-scale fiscal response that was crucial to mitigating the economic and financial impact of the pandemic on households and firms. In particular, the PEPP has been a proportionate, well-designed and necessary asset purchase programme that fulfilled its dual role of stabilising financial markets and reversing the initial adverse impact of the pandemic on the projected inflation path. As recently emphasised by President Lagarde, 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. The pandemic was a particularly extreme exogenous shock and the PEPP has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective. 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. This means that we are ready to use a wide range of instruments to address fragmentation. One application of the flexibility principle relates to the reinvestment of the PEPP portfolio. In particular, in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic. Another application of the flexibility principle during the pandemic took the form of a set of collateral easing measures. In providing a timeline for the gradual phasing out of these measures, the Governing Council last week also noted that it “reserves the right to deviate also in the future from credit rating agencies’ ratings if warranted, in line with its discretion under the monetary policy framework, thereby avoiding mechanistic reliance on these ratings.” More generally, as noted by President Lagarde in her recent speech, the flexibility principle means that we are ready to deploy a wide range of instruments to address fragmentation.’

29 March 2022

‘If you go back to last summer, we would have had the view that inflation was still essentially subdued, and that we were basically in a campaign to bring inflation gradually to the 2% target. And remember, we published our strategy review last July, and so on. Then, what we’ve seen in the last number of months is the energy shock, which is by far the dominant factor and which is now further amplified by the war. This is quite sudden. People were not expecting this, governments were not expecting this, households and firms were not expecting this. For that reason, right now, clearly inflation is a huge issue across Europe, absolutely. And how to respond to this, the implications for fiscal policy, the implications for wage negotiations, the implications for demand and so on – this is a very important issue right now. But this relates to a second issue, which – for us and for everyone – is how long will this episode be? This is where we would still diagnose that this essentially is an imported inflation shock, it’s a supply shock. And for these reasons we would still maintain – by the way, I don’t think it’s unique to the ECB, it’s the general economics profession – that most of this inflation will fade away. Fading away from inflation doesn’t mean that these high prices will reverse. Europe may have to get used to higher prices. But the momentum – where every month you wake up and you read that inflation is higher than the previous month – that element, the momentum element, we do think will decline. We do think that inflation will decline later this year and will be a lot lower next year and the year after compared to this year. This is the kind of nuanced issue. The current episode is extremely serious, requires a lot of change in behaviour, but at the same time – going back to the very popular analogy of the 1970s – we don’t see this as a kind of locked-in phase where every year inflation will be high. We do think, because it’s imported inflation, that essentially the momentum will level off.’

‘It essentially boils down to the diagnosis that the balance between imported inflation and domestically driven inflation is different here. Remember, compared to the United States, first of all, Europe is a major energy importer. The United States is an energy producer as well as an energy user. So, for the United States, high oil prices will benefit some parts of the US economy, because of the oil producers. Whereas for Europe, because more than 90% of energy is imported, it’s essentially collectively bad news for Europe. So, number one is that the energy shock is more significant for Europe. And number two is that we don’t have the same domestic demand conditions. For example, the scale of the fiscal policy injection last year was much bigger in the United States than in Europe, and so the ingredients for domestic inflation are simply weaker in the euro area than they are in the United States.’

‘There are mixed signals coming through [on whether the projections are already obsolete]. The higher energy price is definitely above the baseline, that’s for sure. We also have quite significant and substantial drops in sentiment indices, both for consumers and for firms, which of course is a major concern. But so far we are not seeing the kind of very non-linear disruption in the supply of energy. We’re not seeing a scenario so far where not only is the price of energy fairly high, but the supply also becomes unavailable to Europe, which would be much more of an interruption to economic activity. This permeates our assessment. We also see a reopening of the European economy after the latest coronavirus (COVID-19) wave. So, if I put all that together, it basically says that some indices are showing upside concern for energy prices and other indices are showing downside concern for activity levels through the sentiment channel. Rather than making an assessment on a day-by-day basis, we’ll be closely monitoring the balance of these factors. … It revolves around the medium-term inflation, since that’s the key orientation for monetary policy. Let me decompose that. We have two forces. One is high current inflation, which runs the risk of creating its own momentum through second-round effects. On the other hand, if we see a significant downward revision in demand, that on its own terms will imply a downward revision for medium-term inflation. So, it’s essentially about quantifying the relative strength of those forces.’

‘What we said is that it is basically too early to know what the correct calibration of asset purchases is for the third quarter. In March we had an inflation outlook which was getting close to 2%. If that outlook is maintained, we will be looking to end net purchases in the third quarter. If it weakens, or if financing conditions deteriorate, that would be inconsistent with delivering that action. Then we would have to think again. So if we see a significant decline in the medium-term inflation outlook, that will be the trigger for revising the net purchase schedule.’

‘I don’t know [whether interest rates will be hiked this year]. We are trying to be as clear as we can that monetary policy will be data-driven. So there are scenarios where it would be appropriate to start to normalise interest rates later this year. And then, of course, there are scenarios where it could be appropriate to move at a later point. This is why this phrase “sometime after” was deliberately introduced. It’s supposed to explain and emphasise that the timing of interest rate moves will be in line with the incoming data. The end of the third quarter is six months from now. There is a lot of uncertainty surrounding the outlook given the war and the pandemic reopening. By the way, the latest COVID-19 issues in China show that the pandemic continues to add to uncertainty. Under these conditions, trying to give calendar guidance is not helpful. The commitment is that our monetary policy responses will ensure that, in the medium term, inflation will stabilise at 2%.’

‘First of all, let’s be clear that these were two scenarios [in addition to the baseline], but these were explicitly not intended to be tail scenarios. So worse scenarios can be envisaged. Our scenarios assume that the interruption of energy supplies is just temporary. These assume that later this year Europe will essentially have found alternative sources of supply. If you impose a longer period of interruption of energy supplies, then you would have a more significant drop in GDP. So that’s where people can make different calls about how long the interruption in supply might be. It is also important to remember that the European economy is recovering from the pandemic-induced recession. So you need to overlay the effects of the war, which is a substantial adverse hit under all scenarios on the European economy, on the fact that, at the very least, the European economy is normalising from the pandemic. For example, the summer tourist season should be a lot stronger than last year. At the same time, some of the supply chain issues that were there last year are easing. For example, towards the end of last year the car industry recovered to some extent from having been severely hit by the semiconductor shortage. Now there are new supply chain issues, but it is important to recognise that both the easing of some of the bottlenecks and the basics of allowing the services industry, travel, tourism and entertainment to normalise do give momentum to the European economy. Regardless of emergency scenarios, it still means GDP is going to be a lot weaker than without the war. It’s a bad news situation. It’s a downgrade to the recovery under all scenarios, whether it turns out to be such a strong downgrade that our economy shrinks for a while is not the only way to think about it. Even if the economy continues to grow, it’s still a very negative event.’

‘I think the analysis would say that the longer you see a situation where there is a more prolonged set of supply chain issues, that would create risks for next year. So again, that’s something that the ECB will be continuing to look at. But, in the end, all of this falls back to essentially our overall framework, which is saying, look, we’re in a world of extreme uncertainty. We tried to give some references to deal with the uncertainty by publishing several scenarios. But we also tried to be clear that these scenarios don’t cover every possibility. These focus on, essentially, a temporary hit to the economy rather than a long-lasting hit. I think that should be crystal clear. So these are not predictions. These are scenarios. The most important issue from our point of view is that we’ve laid out a monetary policy framework with flexibility and optionality, which is expressly designed to be capable of responding to whatever unfolds in terms of the medium-term outlook.’

‘Let me divide the issue. There are mechanical channels, where the important factors are energy, some supply chains, food… that’s for sure. But to recall, energy is a global market. Even if the overall global supply of oil and gas is more limited, there are options for Europe to find alternative suppliers eventually. The world will have to deal with less supply, so collectively the world faces an issue, but also for Europe there will be options there eventually. So then the bigger issue is if this is a trigger for a big decline in sentiment. All economies operate on confidence, and what we see now in terms of these first readings of confidence indicators is a concern. But essentially this goes back to the course of the war, diplomatic possibilities and so on. There are two possibilities: either this initial confidence shock will become embedded and people will settle into a long period of being hesitant, or, if the war finds a diplomatic solution sooner rather than later, those confidence indices could maybe recover. So this is why essentially, right now, uncertainty dominates. I can conceive of each of those paths. One is that we get more clarity about the possible diplomatic solutions to the war and these confidence indicators recover, or we settle into a prolonged period where, essentially, people are reluctant to make significant decisions given the uncertainty. And so if you have a pausing of investment plans, of recruitments plans, pausing of consumption, then clearly that is a pretty general way to slow down the European economy, even if quantitatively the direct exposures to the Russian economy and Ukraine are limited enough. … The timeline is that these sentiment indices are leading indicators. We don’t see the investment decisions on a day-by-day basis. These sentiment indicators have proven in the past to be a leading indicator of what might happen next. But again, let me come back to the basic point: there’s an overlay here of all of that, side by side with the pandemic recovery, which I do think is ongoing. There will be a reopening of travel and tourism once the latest wave of COVID calms down, and people will be more willing to go out to restaurants, cinemas and so on. So it’s difficult not to overstate the basic point here: Europe was not in a normal economic situation when this war began. It was in a situation where – and remember this winter we had a further holding back of the European economy with a new wave of COVID – sooner rather than later this artificial holding back of the services sector in Europe will come to an end, and that should lead to a significant rebound in activity. This is why it’s not a normal war situation – it’s side by side with a normalisation process in the economy, which we think will continue.’

‘I’m not saying there’s a perfect replacement, but compared with the immediate shock, over time alternative sources of oil and gas can be found. I’m not saying that to make the lack of Russian supply irrelevant, but there is an adjustment mechanism. So I do think, again, this will have spillovers to other parts of the world, as of course Europeans have to pay high prices for energy. But high prices for oil and gas will have spillover effects on other parts of the world which are also energy importers. Just think about Africa, Latin America, South-East Asia and so on, which will probably suffer more from higher prices. … There is a lot of effort to find alternatives. Part of the adjustment will also be a change of behaviour. Over time, households will find ways to try to reduce their energy usage in particular. So there will be behavioural changes which will also help to reduce the initial impact of the energy shock. But what I’m saying is simply that we’re just at the end of the first quarter here in late March, we’re talking about nine months until the end of the year. To say that there wouldn’t be some success or some effort to find some alternatives in the course of this year would not be plausible… I think there are going to be a lot of efforts to find alternatives. I’m not saying that it totally eliminates the impact, but when you have a possible supply disruption, the biggest impact will be at the start, when you have not had time to find alternatives. And every month as Europe races to find alternatives, that worse impact at the start becomes weaker. And that’s just simply the straightforward adjustment. When you have a surprise interruption to supply, the maximum impact will be at the start and then, over time, the effort will be there to find alternatives.’

‘Essentially there’s a two-phase issue here. Definitely, at the bottom of the pandemic shock – I think the price of oil was USD 25 in May 2020 – prices were extremely low. Then a recovery took place in the first half of 2021, which could simply be seen just as a demand recovery. Then there was a new phase in the second half of the year, and by the autumn [of 2021] the price of oil was around USD 80. But what’s happened is that now it’s USD 120. So we’ve had this extra phase. There was already a lot of debate about how we handle USD 80. Pre-pandemic – between 2014 and 2019 – the price of oil was fluctuating, but basically between USD 40 and USD 70 a barrel. So you’ve had different levels of intensity. There was already a pretty big debate in the autumn about the implications of USD 80 a barrel. Adding 50% more to reach USD 120 was pretty significant. Another element which was new was gas. Gas, as you know, has an unusual pricing structure. You had a really large increase, so that remains a significant issue. If there was some entity out there that was calling that this was going to be an outcome with a high probability, we missed it, but by and large it is something the world collectively missed. We can always reflect on whether we can do better. … Our analysis would be that in the first half of the year [2021], rising oil prices could simply be seen as the recovery of the world economy. In the second half of 2021 what seems to be happening is that supply was not keeping up. There seems to be supply issues with oil, you know OPEC+ and now with Russia. But then there are supply issues with gas as well. So essentially there are a range of factors at work. When it became a supply side issue in the autumn, there was concern around that. The normal relationship between economic activity and energy prices was thrown off by the fact that basically interruptions to supply were becoming more important.’

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):

30 March 2022

‘The economic impact of the war is best captured by what economists call a “supply shock”, which is a shock that simultaneously pushes up inflation and reduces growth. Three main factors are likely to take inflation higher. First, energy prices are expected to stay higher for longer, with gas prices up by 52% since the start of the year and oil prices up by 64%. Second, the pressure on food inflation is likely to increase. Russia and Ukraine account for nearly 30% of global wheat exports, while Belarus and Russia produce around a third of the world’s potash, a key ingredient in producing fertiliser, thereby exacerbating supply shortages. Third, global manufacturing bottlenecks are likely to persist in certain sectors. For example, Russia is the world’s top exporter of palladium, which is key for producing catalytic converters. Ukraine supplies around 70% of the world’s neon gas, which is critical for semiconductor manufacturing. At the same time, the war poses significant risks to growth. As the euro area is a net importer of energy, rising energy prices mean a loss in purchasing power for consumers here and a gain for our import partners. This effect already reduced income by 1.2% of GDP in the fourth quarter of 2021, compared with the same quarter in 2019 before the pandemic. Expressed in euro, that figure would imply a loss of about €150 billion in one year. The conflict is also starting to drain confidence through at least two channels. First, households are becoming more pessimistic and could cut back on spending. Consumer confidence this month has fallen to its lowest level since May 2020 and stands well below its long-term average. Based on national surveys, households’ expectations of growth have worsened, while their inflation expectations have risen. This suggests that people are expecting to see their real income (i.e. their income adjusted for inflation) squeezed. Households are likely to save less, which should absorb part of this shock, but they have also revised down their spending plans. Second, business investment is likely to be affected. The latest survey data suggest that business activity held up relatively well in March, but firms’ expectations in a year’s time fell sharply. Suppliers’ delivery times, capturing manufacturing supply disruptions, also deteriorated again. How much inflation rises and growth slows will ultimately hinge on how the conflict and sanctions evolve. Reflecting this uncertainty, at the last Governing Council meeting ECB staff prepared different scenarios to capture some of the possible outcomes. Clearly, the longer the war lasts, the higher the economic costs will be and the greater the likelihood we end up in more adverse scenarios. This is why we are continually monitoring the incoming data and updating our analysis accordingly.’

‘With the right policy response, we can mitigate the economic consequences of the war and manage the high levels of uncertainty we are facing. To offset the short-term effects of higher energy prices and sanctions, national fiscal policies have a range of tools to deploy, such as tax cuts and subsidies. And rules at the EU level are being loosened so that governments can take the necessary measures to protect their people. The additional fiscal measures announced in the euro area since the invasion amount to 0.4% of euro area GDP this year. Similarly, Cyprus is acting to reduce taxes on energy and to diversify tourism flows via new flight routes and schemes to encourage domestic tourism. But in the longer term, we need a European approach, working across borders, to adjust to the post-invasion world. The war has underlined the deep strategic vulnerabilities in our security and trade relationships, which we can only address by being more united. This is rightly bringing Europe’s objective to achieve “strategic autonomy” to the forefront. The European Commission has already announced some ambitious goals, such as doubling Europe’s share of the global market for semiconductor production to 20% by 2030. Last week, Europe’s leaders agreed to reduce demand for Russian fossil fuels and bolster our energy security by diversifying liquefied natural gas (LNG) supplies and investing more in clean energies. This is clearly desirable, but it will create some costs during the transition. Supply chains need to be restructured and the energy supply reorganised, while greening the economy is likely to increase pressure on some of the metals and minerals that are already in short supply. Electric vehicles, for example, use over six times more minerals than conventional cars. So, Europe needs a plan to ensure that the necessary investment comes online as quickly and smoothly as possible, with public and private finance reinforcing each other. The Next Generation EU facility – the €750 billion fund set up to aid the recovery from the pandemic – will help spur public investment over the next few years. Almost 40% of spending has been allocated to the green transition. Here in Cyprus, you are already building a new LNG import terminal, funded largely by grants from the EU and loans from the European Investment Bank. But we need private finance to step up as well, and for that we need to better mobilise Europe’s large pool of private capital. At present, capital markets in Europe are segmented along national lines rather than spanning the continent. That is why the capital markets union – the project to integrate Europe’s capital markets – has become more important than ever. For our part, the ECB has made it clear that, in the context of the ongoing conflict, we will take whatever action is needed to pursue price stability and safeguard financial stability. We have also put in place a policy response which is tailored to the uncertainty we face today. As I explained last week, the best way that monetary policy can navigate this uncertainty is to emphasise the principles of optionality, gradualism and flexibility. First, optionality means that we are prepared to react to a range of scenarios, and the course we take will depend on the incoming data. In particular, 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 net purchases under the asset purchase programme (APP) 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 asset purchases in terms of size and/or duration. Second, gradualism means that we will move carefully and adjust our policy as we receive feedback on our actions. Any adjustments to the key ECB interest rates will take place some time after the end of our net purchases under the APP and will be gradual. And third, flexibility means that we will use our toolkit to ensure that our policy is transmitted evenly across all parts of the euro area.’

‘Europe is entering a difficult phase. We will face, in the short term, higher inflation and slower growth. There is considerable uncertainty about how large these effects will be and how long they will last for. The longer the war lasts, the greater the costs are likely to be.’

26 March 2022

‘The war is expected to have a considerable impact on the global economy, and especially on the European economy due to Europe’s proximity to Russia and dependence on Russian gas and oil. It will likely lower euro area growth and push up inflation in the short term through higher energy and commodity prices, confidence effects and the disruption of international trade. Of course, the overall impact will very much depend on how long the war lasts. Our baseline projections, which include an early assessment of the impact of the war, don’t foresee a recession, given the euro area’s strong labour market and the fading pandemic. The projections see the economy growing at 3.7% this year and 2.8% in 2023. However, given the significant uncertainty, ECB staff have prepared two alternative scenarios: an adverse and a severe one. In the severe scenario, growth could be as low as 2.3% in 2022. But there’s a lot of uncertainty around these estimates.’

‘So far, incoming data don’t point to a material risk of stagflation. The euro area is back to its pre-crisis level of output, growth continues and the labour market remains strong. In the short term, the surge in inflation is due to factors related to the pandemic, stoked more recently by disruptions to global energy prices related to the war.’

‘…our decisions and the path of policy normalisation are entirely data-dependent. Our forward guidance is very clear about the conditions that we need to see before we would consider raising interest rates. In current conditions, more than ever, we need optionality in our monetary policy. That is clearly reflected in our latest policy decisions in March. We revised the path for net asset purchases and will reduce them step-by-step in the second quarter of this year. We indicated that if the incoming data support the expectation that the medium-term inflation outlook won’t weaken even after the end of net asset purchases, we will conclude net asset purchases in the third quarter. If, on the other hand, the outlook changes and financing conditions deteriorate in a way inconsistent with our 2% inflation target, we stand ready to revise our schedule for net asset purchases in terms of size and/or duration. We remain very attentive to the prevailing uncertainties. The calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook. We will take whatever action is needed to fulfil our mandate to pursue price stability and safeguard financial stability.’

‘This [worst-case scenario of 7.1% inflation in 2022] is not the baseline scenario in the ECB’s staff projections. It is also important to stress that, in all our scenarios, inflation is expected to decrease and settle at levels around our 2% target in 2024.’

‘Higher energy prices are mostly a result of geopolitical tensions, and you can’t easily foresee the impact of such tensions. We try to cater for the high uncertainty stemming from the current situation, which is why our latest projections were accompanied by the more negative scenarios. Energy prices were also affected by unusual weather conditions, which were also not possible to forecast.’

25 March 2022

‘We were on the cusp of the most spectacular recovery after the most brutal economic shock that we had seen in the century. Jobs were up, growth was up, incomes were up. Inflation was up a little bit as well, and we were getting ready to normalise monetary policy. So, it all looked really good, almost too good to be true. And then the war broke out. So, those forces that were already out there - you know, high energy prices because the demand was strong and there was constrained supply, various bottlenecks that industrialists experienced – all that was amplified, aggravated, and to add to it, uncertainty clearly grew out of the war. And the element that we have no clue about, which is what is going to happen? How long will it take? When will people sit at the table to actually negotiate peace, rather than fight and kill each other? So, uncertainty is what has compounded everything else, which is leading us to keeping all options all the table, continuing the path that we had initiated, but certainly with more humility, more flexibility, and the certainty that we want to constantly revisit our projections and determine our monetary policy accordingly.’

‘Fiscal remedies are needed. There is so much that monetary policy can do, and monetary policy will take its course, will normalise in the conditional fashion that we’ve identified, will be data-dependent. But fiscal is going to have to play a role. Now hopefully, fiscal authorities will target, will tailor their fiscal support properly and will really focus on those most exposed, most vulnerable to the shock that we are suffering.’

‘…at this point in time, globalisation as we know it … will not continue. It will take a different form. I hope we’re not going back to, you know, “Let’s do business behind our borders and have nothing to do with each other.” Because a good, sensible globalisation with respect, with [a] level playing field, with good trade rules is something that can be extremely helpful. But it is going to be rethought through, and you know, the sort of outsourcing, offshoring without any consideration for friends or foes as long as there was business to be had, I think that will probably be revisited, and it’s probably for the better.’

‘There will be an end to this. How soon is a big question mark. What form will it take – huge question mark. And we will certainly see a very weakened Russia as a result of what has happened.’

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):

02 April 2022

‘Russia’s invasion of Ukraine is a turning point for the global geopolitical order. Above all, it brings unspeakable human suffering to the people of Ukraine, but it is also having a marked impact on the euro area economy, raising new challenges for fiscal and monetary policy. Inflationary pressures are rising further from elevated levels, both through higher commodity prices and through new strains on global value chains as sanctions ban trade with Russia. Meanwhile, aggregate demand is suffering from considerable uncertainty, which is weighing on consumer confidence and making firms’ investment and employment decisions riskier. That, in turn, exacerbates the already heavy energy-related toll on real incomes. Close commercial ties of the euro area with the Russian and Ukrainian economies amplify these shocks. This is most evident when considering the euro area’s dependency on Russian raw materials, which increases the impact of higher commodity import prices on euro area consumer prices. … I will argue that, given the exceptional accommodative monetary policy measures still in place and the growing risks of inflation settling above our target over the medium term, continuing the process of policy normalisation that we started in December 2021 remains the appropriate course of action for monetary policy. Fiscal policy, in turn, can help buffer the impact of the war on private demand and thereby support monetary policy in its pursuit of price stability. But fiscal support should be targeted so as not to add to medium-term price pressures at a time when the economy itself is expected to generate sustained inflation and Europe’s ambition to achieve strategic autonomy will already necessitate significant public investment spending.’

‘The war will measurably slow the pace of the recovery, and it will lift inflation further away from our target, and for a longer period. In this new environment, fiscal and monetary policy again need to play their part in shielding society from the economic and social costs brought about by abrupt changes in global economic conditions. But the way to achieve this is more intricate than at the height of the pandemic. When faced with an adverse supply shock at a time when current inflation is well above the target, monetary policy encounters a difficult trade-off between accommodating the expected decline in private demand and controlling medium-term inflation. Central banks have typically managed this trade-off by calibrating policy according to the likely persistence of the shock. If the shock to inflation is expected to be temporary, monetary policy can, in principle, look through higher inflation or even accommodate the economic fallout. In this case, there is less of a need for discretionary fiscal policy beyond the use of automatic stabilisers. If, however, the shock is expected to be more persistent and to affect inflation over the medium term, monetary policy needs to act in order to remain faithful to its primary objective of price stability. Then, fiscal policy should ideally buffer the effects on private demand.’

‘How, then, is the war affecting the medium-term outlook and what does this imply for monetary and fiscal policy? Even though the forecasting community, including central banks, has severely underestimated the persistence of inflation, it is still reasonable to assume that part of current elevated inflation will vanish over time even without monetary policy action. Supply bottlenecks, exacerbated by the war and by the recent pandemic containment measures taken by China, will eventually ease and the extraordinary rate at which energy prices are currently rising can be expected to slow. How fast this will happen cannot be said with any degree of confidence. But the data before the invasion were consistent with a gradual shortening of suppliers’ delivery times. A considerable part of inflation is likely to prove more persistent, however – to an extent that, without monetary policy adjustment, inflation risks settling above our 2% target over the medium term. There are three factors that could make inflation “sticky”. The first relates to pipeline pressures. Producer prices in the euro area increased by more than 30% year-on-year in January – a level never even remotely seen in the past, and significantly higher than in other parts of the world, including the United States. Core measures that exclude the exceptional effects of energy paint a similar picture. In January, euro area producer prices for core consumer goods expanded at a pace eight times their pre-pandemic historical average. Transitory supply shocks can only explain part of this rise. A recent analysis by the staff at the International Monetary Fund finds that strong aggregate demand has been as much a driver of recent pipeline pressures in the euro area as supply bottlenecks. Their analysis shows that even in the absence of supply shocks, producer price inflation in the euro area would still run at levels close to historical highs. This is consistent with survey evidence showing that, in the entire history of the euro area, the share of manufacturing firms reporting demand as a factor constraining output has never been lower than today. The war means that, at least over the near term, pipeline pressures will strengthen further, even if demand will slow. So, while the composition of the drivers is bound to shift, their aggregate effect on final consumer prices will be felt over a protracted period of time, as nominal and real price rigidities imply that pipeline pressures will gradually build up. Consistent with this, selling price expectations by firms have increased to unprecedented levels in all economic sectors in March. The second factor relates to structural forces such as demographic change, the green transition and globalisation. There is broad consensus that, before the pandemic, supply-side factors played an important role in putting persistent downward pressure on inflation across many advanced economies, including the euro area. Inflation had been running below central banks’ targets for many years, with no signs of accelerating, as firms competed in an increasingly globalised world in which a large part of consumers had a high propensity to save. Today, the impact of many of these factors on inflation is increasingly likely to reverse. Take globalisation as an example. The response to Russia’s aggression is unambiguous. European governments are seeking to limit their dependency on global value chains in areas of strategic importance, such as the semiconductor or pharmaceutical sector, and they want to do so as fast as possible. Cutting ties with foreign suppliers will accelerate the reshoring efforts that had already been gaining momentum after the outbreak of the pandemic. De-globalisation may thus undo, or weaken, a trend we had seen before the pandemic: faced with risks of offshoring, unions had become more restrained with their wage demands, prioritising job security over higher pay. The war can be expected to loosen this brake on wages and hence inflation. The energy transition will add to upward price pressures over the medium term. While our economies will benefit from lower electricity prices once energy demand can increasingly be met with renewables, rebalancing away from fossil imports will induce upward pressure on euro area inflation during the transition. Substitutes for Russian energy inputs will very likely be more expensive over the short and medium run. Such structural energy shocks are not a new phenomenon. We have seen them over the last decade – only with the opposite sign. In the wake of the “shale oil revolution”, the United States significantly increased its production of oil and natural gas, gradually pushing up supply and putting persistent downward pressure on global oil prices. As a by-product, the shale oil revolution has reduced the United States’ dependency on energy imports – an endeavour Europe now urgently needs to pursue as well by accelerating the green transition. The third factor relates to wages. In February, the euro area unemployment rate fell to yet another record low of 6.8%. The ratio of unemployed workers to job openings – a measure of labour market tightness – hit a new record low at the end of last year. Survey data collected after Russia’s invasion of Ukraine suggest that businesses continue creating jobs at a fast pace. A labour market so tight at such an early stage of the recovery is a good predictor of strong future wage growth. But even if the war may weigh on labour market dynamics, the likelihood that workers will ask for compensation for the loss in real income is measurably higher when inflation has been high for a long period of time, like today, than when inflation is running at more moderate levels. There are two reasons why this catch-up in wages has not yet happened in the euro area. One is that job retention schemes kept a lid on labour market churn. Relative to the size of the shock, the unemployment rate in the euro area barely budged. By contrast, unemployment in the United States rose sharply. When the economy reopened, the creation of new job opportunities allowed workers to bargain for higher wages. Recent analysis by the OECD quantifies the impact of higher job mobility on wage growth. It suggests that in the United States, earnings growth of workers switching jobs is about four times higher than for workers staying in the same job. The second, and related, reason is that adjustments at the intensive margin – or hours worked – often predate wage adjustments. In the euro area, total hours worked have still not fully recovered to pre-crisis levels. To a large extent this reflects supply constraints and remaining contact restrictions. Those working reduced hours are unlikely to bargain for higher wages. It is therefore not surprising that we have escaped the kind of fast and frontloaded wage pressure afflicting other parts of the world. In the euro area, we are much more likely to see a delayed and staggered, and possibly longer-lasting, response of wages to both inflation and a tight labour market, thereby putting persistent upward pressure on inflation. Elevated uncertainty due to the war will further delay the time by which we can expect to see visible changes in aggregate wage growth. Together, these three factors – pipeline pressures, structural change and wage catch-up – imply persistent upward pressure on inflation even as the recovery slows. We are also conscious of the fact that measured inflation, albeit at historical highs, is still understating the true loss in purchasing power. While owner-occupied housing is an important contributor to inflation in other regions of the world, it is not yet part of the official price index in the euro area. Our estimates suggest that headline inflation in the third quarter of last year – the latest available data – would have been 0.3 percentage points higher. Underlying inflation would have been higher by 0.6 percentage points – a significant difference. The question, then, is whether the impact of the war on real incomes is sufficiently strong and long-lasting to offset these forces, in particular after taking into account the response by fiscal policy. Russia’s invasion of Ukraine comes at a time when the economy is showing broad underlying strength and when large excess savings provide a cushion for part of the population. The baseline scenario of our most recent ECB staff projections, which include a first assessment of the impact of the war, still foresees output this year to expand by 3.7%, well above potential. More recent private sector forecasts expect the economy to slow more markedly. Yet, expected output growth remains above 3% in 2022. Surveys suggest that these forecasts carry a high level of uncertainty, with risks to economic growth tilted to the downside in the near term. On the one hand, they point to significant concern among businesses about future activity, reflecting the exceptional uncertainty about how the war will affect the global economy over the medium run. On the other hand, they suggest that the immediate impact of the war on economic activity is moderate, also as the easing of pandemic-related contact restrictions is providing an offsetting boost to sentiment and activity. From today’s perspective, therefore, it is uncertain whether, and to which extent, the drag on private demand will weigh on medium-term inflation. Indeed, according to financial market participants, the capacity of the economy to generate inflation in line with our target over the medium to long term remains robust. On the contrary, we are observing that investors are demanding a rising compensation for the risk of medium-term inflation turning out higher than currently expected, pushing inflation swap rates over these horizons visibly above our 2% target, and thereby contributing to the increase in nominal interest rates. We are also seeing that actual inflation outcomes increasingly influence private sector forecasters’ beliefs about future inflation, similar to what happened around the launch of our asset purchase programme in 2015 when a long period of low inflation contributed to drag down long-term inflation expectations. By showing resolve, monetary policy can break this dynamic and reduce the trade-off central banks face between stabilising output and inflation. A central bank that is perceived as being committed to protecting its mandate can contain inflation at a lower economic cost, since the expectation that adequate policy action will be taken is itself stabilising. Such credibility is vital for the conduct of monetary policy. Continuing the path of policy normalisation is therefore the appropriate course of action. The speed of normalisation, in turn, will depend on the economic fallout from the war, the severity of the inflation shock and its persistence. We have stressed the importance of optionality and data dependence in our March Governing Council decision: we expect to conclude net asset purchases under our asset purchase programme in the third quarter, as long as the incoming data support the expectation that the medium-term inflation outlook will not weaken. We will hike interest rates some time after, as appropriate in light of incoming data.’

‘As monetary policy is focused on preserving price stability and anchoring inflation expectations, the headwinds to growth can be buffered by fiscal policy. There is no possibility for the euro area as a whole to escape the costs associated with protecting our freedom, supporting the people of Ukraine and reducing our dependence on fossil energy. That said, unless the economic situation deteriorates markedly – a contingency that cannot be excluded – current circumstances call for targeted support rather than broad-based fiscal stimulus, for two main reasons. First, monetary policy remains highly accommodative even if nominal risk-free interest rates have started rising in recent weeks. To see this, it is useful to look at the real interest rate that investors expect to prevail in three years’ time – that is, when the adverse effects from the pandemic and the war are likely to have faded away. This rate, which ultimately matters for consumption and investment decisions, remains in deep negative territory and close to its historical low, meaning that there is a long way to go before monetary policy becomes restrictive for growth and employment. This point cannot be overstated: even if we continue the path of policy normalisation, monetary policy, which is currently configured to deal with very low inflation, will remain highly supportive. Therefore, should the economy remain resilient, it would not be appropriate to provide a strong pro-cyclical stimulus. An overly expansionary fiscal policy would increase the risk of a de-anchoring of inflation expectations, thereby aggravating the task of the central bank. It would ultimately lead to an economy paying a higher price over the medium term in terms of lost output and higher unemployment at a time when the economy itself is expected to generate sustained inflation in line with the target. Second, euro area governments face a trade-off themselves, namely between business cycle stabilisation and debt sustainability. Debt has increased materially as a result of the pandemic and fiscal deficits remain sizeable. Governments need to face the current shock mindful of the fact that, in the absence of a common fiscal capacity, high debt levels leave the euro area vulnerable to sudden and costly shifts in investor sentiment. All this means that fiscal policy should follow a two-pronged strategy. First, governments should prioritise spending on investments that will raise productivity and potential output, thereby reducing the burden of high legacy debt. A key lesson from the war is that Europe needs major public investment in green energy infrastructure and military defence. Implementing faithfully the structural reforms linked to the Recovery and Resilience Facility will be an important part of this endeavour. Increased public investment will at least partly offset the negative output effects stemming from depressed consumer and business confidence. Second, governments should provide temporary and well-targeted support to protect those seeking refuge from the war and those who are most vulnerable to the sharp increase in energy prices and the sanctions imposed in response to Russia’s invasion of Ukraine. Importantly, both types of measures need to remain consistent with each other. In particular, this means supporting the green transition by retaining, as much as possible, incentives to reduce carbon emissions rather than muting price signals. Several Member States have already taken important action at national level. The general escape clause that remains active this year implies that there is short-term budgetary flexibility. Preliminary estimates suggest that these measures could compensate for a non-negligible part of the estimated impact of the war on aggregate demand. Coordinated action at European level could complement national initiatives, emphasising our determination to shoulder the costs associated with protecting our fundamental values in unity and solidarity.’

25 March 2022

‘Exactly, the Fed has done it [hiked]. … It is so that during the pandemic we massively expanded our bond purchases … All major central banks did it. And if one now takes monetary policy back again, then one does it in a particular order. And we have decided on the order that we first reduce the bond purchases and only then do we hike interest rates. And now in December of last year we decided to end the bond purchases under the pandemic programme at the end of March. That’s happening now. Then we decided now in March that we will reduce the bond purchases under our, so to speak, normal bond purchase programme such that we can end them in the third quarter of this year. And we said that we will do this if the economic situation develops the way we think at the moment. … We kept the door open, so to speak, by saying that if we now enter a serious recession due to the Ukraine crisis, then we have to reconsider it again. If we don’t … then we will end bond purchases in the third quarter, and as soon as we have done that, then we can at any time, depending on how inflation has evolved until then, raise interest rates.’

‘Assuming something bad were to happen that led to us getting massive market distortions, then it naturally can’t be excluded that we have to expand the bond purchases again. … In fact, the financial markets reacted relatively calmly to the war.’

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):

23 March 2022

‘Well, first of all, we see inflation increasing substantially. It has been a surprise to an extent because probably we … as the overall community of central banking, but also policymakers and analysts and so on did not foresee the bottlenecks … and the difficulties to match the increase in demand across the globe. But actually, energy prices have spiked up much more than justified by the excess of demand, and a simple measure – the one which I mentioned in the ECB Watchers meeting last week – is, is very simple: in Europe, gas prices, gas prices increased by 10 times on average – 8, 9, 10 times – between early 2020 and February 2022. In the United States, two times, twice. So, this is not really a measure of excess demand. It’s a measure of the difficulties we have been facing during the year, last year already with Russia. This is the price part. What is the effect of that? Obviously, the purchasing power of households goes down, and therefore, there is a demand effect. So, we have at the same time a supply shock and a negative demand shock, not a positive demand shock in Europe. … it may be worse if there is … drastic shortages in gas supply, oil, if the imports from Russia are completely cut off and so on. But the issue of stagnation is a different issue, because it is very much dependent on the reaction of policy, and there are various kind of policy reactions. Clearly, a supply shock and this kind of negative shock cannot be countered simply by monetary policy doing something. It is the fiscal responsibility. There are costs. We have to remember in this case that the worst response is higher inflation through increases in incomes and nominal incomes and so on, because that does not redistribute the tax.’

‘I think that there is uncertainty, and the response that we are seeing is a response to uncertainty. If there is one word that I would really use, it’s this one, coupled with disbelief and grief, basically. And this uncertainty has had an effect on markets of clearly somehow looking with more care to the exposures, direct and indirect exposures. This is why the banking sector has [been] most severely hit. This is why the high yields have been, we have seen this high increase in corporate spreads, but overall, markets have remained, I’d say, relatively calm, obviously helped by the high liquidity that has been and is maintained, supplied and is maintained by central banks.’

‘Monetary policy in Europe is something, monetary policy elsewhere is something else, and this is a crucial thing. I mean, if you consider what’s happening in the United States, it’s obvious that monetary policy can only be restrictive there. There is a clear … demand shock … In Europe, I don’t see a major demand shock at all. I see a supply shock co uncertainty, which goes in the other direction. There is a risk. And the risk is what normally is called second-round effects. … We have been able, also helped by the increase in costs, by the way, to see expectations going back towards 2%. They are not being de-anchored now. And also, we are not seeing excessive wage increases in Europe. As a matter of fact, the negotiated wages are still are on average at 2%, while in the United States they are 6%. There might be pressure. We know that we have to be very careful in that. … if the war does not last too long, and as a matter of fact if peace comes back … then I think we may certainly not have a stagnation with inflation; inflation may go back.’

‘Well, basically, we are coming out from a monetary policy stance which was well defined in a deflationary period, or disinflationary, or strong disinflation. We had a number of instances in which actual prices were going down and on average a number of countries and so on. Now, what we have decided in December is to start a gradual normalisation of monetary policy. Gradual with a new word, and the word is optionality. What does optionality mean? There are two words which have to be defined: flexibility and optionality. Now, optionality means that all options of course are open. We are in this state of uncertainty; we can only see the risks now in the very short term. We consider that going, somehow reducing our purchases and then ending them, which were designed to cope with deflation risks, is, is something that normalised gradually. We want to maintain a smooth financial market working, and therefore we will keep maintaining favourable financing conditions. We have now very, very negative real interest rates. It is, I think a normal world, a world in which we have to go is a world in which real negative rates are not there anymore.’

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. 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):

06 April 2022

‘Satisfied’ and ‘very comfortable’ with market expectations of two rate hikes by end-2022.

‘Monetary policy in 2022 has more dimensions than just the policy rate.’

High inflation mostly ‘out of our control’.

Prolongation of war will boost inflation and dampen growth, ‘very tough shocks for central bankers’.

‘The picture is rather dominated by the four sectors that suffered a lot from the lockdowns and who were on the talk shows every night. A lot of other sectors have had excellent years. That is an important difference with the 1970s.’

‘Inflation in the euro area has risen sharply in recent months, driven by higher energy prices. Energy prices rose in March by 45% compared to March last year and contribute 4.9 percentage points to overall inflation. For consumers, fuels have become more expensive and gas and electricity bills are much higher. But inflation is rising even without energy, as food has also recently become more expensive. And disrupted supply lines are still causing higher inflation in industrial goods, especially consumer durables. Producers are seeing the supply problems reflected in the prices of energy, raw materials and container transport. The supply problems and the accompanying price rises are in principle temporary as long as they do not trigger a wage-price spiral. However, the supply problems have lasted longer than we thought. Some prices had already fallen when the war in Ukraine began, but have now risen sharply again. Inflation is not only high but also widely dispersed, and therefore more persistent than previously thought. ... Inflation risks are mainly on the upside, in the event of: further increases in energy and commodity prices; stronger wage-price spiral and possible disinflation of inflation expectations; strong fiscal stimulus.’

‘An increase in interest rates will not take place until some time after the end of net purchases. This depends on new information on the economy and may, but does not have to, take place this year.’

04 April 2022

‘We are living in an environment of extreme uncertainty, caused by a pandemic that has held the world in its grip and the outbreak of a war in Europe. Against this background, inflation has risen sharply. In the US, it has reached levels last seen in the 1980s, while in the UK, the annual CPIH inflation rate has never been so high since 1992. In the euro area, current inflation rates are unprecedented in the history of the Economic and Monetary Union. Confronted by persistently high inflation, experts, markets and the public at large are expecting central banks to act. Although inflation is also influenced by factors outside of the control of central banks, I will argue that monetary policy can and should play a role in bringing inflation back under control. And that our new monetary strategy will help us do so. My first argument of why central banks should act hinges on the role of demand factors in current inflation dynamics. In the early stages of the pandemic, both consumer demand and supply shrunk markedly. Despite an offsetting effect from fiscal policy, the net effect, however, was deflationary. This changed when the lockdowns came to an end. The combination of a release of pent-up demand, and continuing supply bottlenecks, led to a mismatch between demand and supply, which pushed up inflation. Rising energy prices did the rest. Inflation has, however, been persistently high. To understand why, it is important to note that a mismatch between demand and supply clearly has two sides. We often hear a narrative that mainly focused on the supply side of the economy lagging behind the demand side. However, there are two pieces of evidence that high inflation is not only a story of supply shocks. First, a closer look at forecast errors since mid-2021 reveals that both GDP growth and inflation have surprised on the upside. Second, price changes measured for individual sectors of the economy show that high inflation has become a broad-based phenomenon. This suggests that aggregate demand has recovered far quicker than expected, and – at least over recent quarters – has been an important driver of inflation. Since the outbreak of the war in Ukraine, however, supply side factors have again come to play a big role. Initially at least, the war has been a large negative supply shock putting downward pressure on growth and pushing up inflation. The latest surge in prices of energy and commodities related to the war in Ukraine is clearly supply-driven. The longer-term consequences of the war are still unknown but could be far reaching. My second argument for why we should act in the face of high inflation relates to the risk of inflation expectations getting de-anchored. A cornerstone of the ECB’s strategy review is that inflation expectations anchored to the central bank’s inflation target are essential for the transmission of monetary policy and for achieving price stability. In recent years, policymakers have benefited from important insights from the research literature. One such insight, which we owe also to Ricardo Reis, is that we should focus not only on whether expectations by markets and professional forecasters remain anchored to the central bank’s target but also on expectations held by households. A further insight is that when the structure of the economy is changing, as it is now, the public learns only slowly about this new structure. And when forming its expectations about future inflation, the public is looking more to the past than to the future. If expectations are backward-looking, the current state of the economy will also influence the future state. In this situation, there are clear risks of a de-anchoring of expectations and of monetary policy becoming less effective. In fact, Ricardo Reis has emphasized evidence that households’ inflation expectations are not perfectly anchored to central banks’ inflation targets (Reis 2022, Reis et al., 2022). Importantly, as he argues, de-anchoring appears to be happening from the upside. In turn, inflation expectations by households are likely to have a significant impact on aggregate demand. Recent research carried out on Dutch and Italian households, for example, shows that higher inflation expectations have led to lower spending on durable goods (Coibion et al., 2021; Rondinelli and Zizza, 2020). Another lesson from the recent research literature is that the private sector does not understand completely changes in the way monetary policy is conducted. For example, there is evidence that Fed communication about average inflation targeting had no significant impact on household inflation expectations (Coibion et al., 2020). This suggests that overly complicated communication is not effective in steering the public’s expectations. I have tried to convince you that monetary authorities can and should act. I want to conclude by mapping these insights to our latest monetary policy decisions and sharing lessons from the ECB’s strategy review on how to act. In the process of policy normalization, the evaluation of the proportionality of our decisions and their potential side effects will play an important role. This is a key element of the ECB’s strategy review, which we still need to operationalize, and which will help us to credibly confront this new environment. Notably, the path of normalization will likely have an impact on the stability of the financial system, in a context of high and rising debt. The Covid crisis and the war in Ukraine have also major impact on the financial sector. Financial vulnerabilities have increased further during the pandemic and are approaching levels that are relatively high from a historical perspective (Figure 2). Public and private debt has risen. This puts a premium on strengthening our analytical tools to identify the build-up of financial imbalances in real time. A main priority in a changing environment and high uncertainty is to be predictable, and to provide a clear and simple message about monetary policy. Most importantly, the ECB needs to be clear that its primary mandate is to safeguard medium-term inflation and that it will not hesitate to act to prevent a de-anchoring of expectations. A gradual but timely normalization prevents the need for bolder policy interventions in the medium run. It is within this context that, at its last monetary policy meeting, the Governing Council decided to accelerate the wind down of our asset purchases. At the same time, the Governing Council retains full optionality and stands ready to adjust all instruments when needed.’

01 April 2022

‘No, of course not [being gradual is not a mistake]. I, I mean, inflation comes up, but of course, I mean, today’s inflation in some ways is water under the bridge, right? I mean, this is all energy price inflation, it’s coming from outside the monetary union, and our main task is to make sure that this temporary inflation doesn’t become entrenched into permanent inflation. For that we closely watch the medium-term inflation outlook, what it will do, let’s say, two years from now, and there are sufficient indications that inflation is still to converge back to our 2% target. And as long as that is the case, yes, we can afford to be gradual.’

‘Well, we’ve already gone through a series of negative supply shocks, so in the scenario [in which inflation continues to mount and supply shocks worsen] it’s basically more of the same. It would mean that the dent to growth would be even more pronounced than it was already in our March projection, but at the same time it would also mean even higher inflation for an even longer period … of time. So, if anything, then we should look for the most ambitious way to normalise monetary policy in a scenario like that. … Well, within, for instance, the parameters that we’ve set for ourself in March, that means that we will have to wind down the APP as quickly as possible. We said within Q3 - well, that would imply at the beginning of Q3 rather than at the end of Q3 – and then, after the summer break, I think all options would be on the table and would have to be on the table.’

‘Well, that [unwinding before Q3] would need a real change in the inflation outlook, in the medium-term outlook, for which I don’t see any convincing evidence yet. That would require a major shift, for instance, in the wage-setting process. We are, perhaps, beginning to see the first sort of signs of, let’s say, the waking up of the Phillips curve that has been hibernating for quite some time in countries like mine that are at the forefront of tight labour markets. If we saw a dramatic sort of increase in wages, that could be one scenario. But I’m still very much thinking along the lines that Q3 is fine - probably the beginning of Q3, not the end of the Q3 - and then we can keep the gradual [unintelligible] as we decided in March.’

‘That [an oil and gas embargo] would be a scenario that I would call more of the same. It would mean a bigger dent to growth, but also higher inflation coming from the energy side. And what we of course have to watch is the extent to which that higher energy inflation would be filtering through to … other inflation of goods and services as well. And the one thing of course that is a little bit worrisome is that in the slipstream of higher inflation, core inflation and measures of underlying inflation are also creeping up. And that is a thing to follow.’

‘Well, there are a lot of factors going on at this moment, and just to pick out one I don’t think does full justice to the sort of multi-pronged impact that the conflict in Ukraine is going to have. The direct impact will be …. negative on growth, but then to some extent it will be cushioned by fiscal policy, it will be cushioned by additional spending on defence, on refugees, on having to move to renewable energy, on compensation of our citizens for the loss in purchasing power, and it will depend on the balance of all these factors how big the impact on growth will be.’

‘Well, I’m not talking about a recession [in the event of an oil embargo]. I would at most be talking about slowflation, given that the starting point, we should not forget, with less than two months ago we were looking into a growth number for ’22 [of] four plus. Okay, now it’s going to take a dent, and maybe the impact will be larger even than the impact that we already had in our projections in March, but then there is still some way to go before we would be in a situation of stagnation, let alone recession.’

Confident inflation will return to normal ‘because of the nature of the inflationary shock, which is a negative supply shock, it’s driven by energy. Again: we carefully watch whether there are second-round effects, we carefully watch whether it is filtering through to other products and services as well, wages is a thing to monitor, and at this moment, we don’t see a very strong effect that makes us question the inflation outlook over the medium term. Our own projections are not our only information feed; we look at … information from other sources as well. … It [repeated shocks] increases the likelihood of course that there will be second-round effects through wages at some point. So, that is, the shock … itself are temporary, but the likelihood of becoming translated into more permanent inflation is becoming larger with every shock, and becoming more uncomfortable.’

‘Well, as I said, I believe we should be out of asset purchases before the summer, and then when we come back from our summer break, I don’t think we are currently in the position to exclude any possible scenario with respect to lift-off. So, yes, that could be September, October, December – it should all be possible.’

‘I don’t think that that is necessarily the case [that there is a big difference between hiking from below zero versus hiking from above]. I mean, when you go sub-zero, it is uncharted territory. But on the way back, it’s all charted territory. So, in the sense that there’s no reason to view it any differently than an interest rate increase above zero.’

‘My biggest concern is probably an escalation of the conflict into domains that we haven’t seen. …if the war were to broaden beyond Ukraine, into, for instance, NATO territory, that would make it very, very difficult to gauge also the economic impact. … At that point in time we will formulate a policy response, but I don’t think you can formulate it already in advance.’

‘Well, yes, to some extent it [the volatility in the exchange rate] does [make our job harder]. Although I would also say that the exchange rate has been remarkably stable. I mean, it could have been far worse. But what is an additional concern for me is also that most energy prices are invoiced in US dollars. So, if the euro were to weaken too much, that would even aggravate our problem with high energy prices and the loss of purchasing power that our citizens suffer from.’

19 March 2022

‘As a central banker, I am focusing on the economic consequences of this conflict, in particular on price stability, which is our primary mandate. The Ukrainian crisis has amplified a pre-existing situation. It is creating a new supply shock that will result in higher inflation over a longer period of time. It will also have a negative impact on growth in the euro area. … We are in an era dominated by what I would call fundamental uncertainties. Several scenarios for the economy can be envisaged, although it is extremely difficult to determine which one is the most likely to happen. Nevertheless, we came out of the pandemic crisis in much better shape than most people imagined. Before the war broke out, growth in the Eurozone was expected to be over 4% in 2022, so I don't think we are already facing a stagnation of the economy or even a recession, as some might fear. Especially since the budgetary response to the Ukrainian crisis has not yet been factored into our projections. Fiscal spending to increase the defence budget, develop renewable energies, finance the shelter of refugees or compensate for the loss of household purchasing power will significantly cushion the negative impact of the crisis on growth.’

‘As far as our monetary policy is concerned, it is clear to me that we have achieved our primary objective. Inflation is converging towards our 2% target in the medium term and the conditions for starting a normalisation are in place. There is no longer a reason to maintain such a high level of monetary stimulus via the asset purchase programme and negative policy rates. This is why it was legitimate to announce, on 10 March, the likely end of our Asset Purchase Programme (APP) in the third quarter. However, if the financing conditions of the euro area countries were to become fragmented again - which would undermine the smooth transmission of our monetary policy to all countries - we would not hesitate to react. If the spreads were to widen excessively, our first line of defence would be to redirect reinvestments from the PEPP. Should this not be enough, then the ECB Governing Council would take further action, as it has done in the past. For now however, despite recent adjustments, spreads remain at historically low levels.’

‘There is little the central bank can do about rising energy prices. It is a shock that comes from outside the Eurozone, beyond our control. On the other hand, it is our responsibility to prevent this temporary inflation from becoming anchored in inflation expectations and leading to structurally higher inflation. The best we can do is to carry out our mandate. As inflation appears to be converging towards our 2% target in the medium term, there is no need to maintain unprecedented monetary support.’

‘Although we have already revised our projection upwards, I think the risk is that inflation in the medium term will rise further. For January and February, five of the six different indicators that we use at the ECB to gauge underlying inflation were at their highest levels in 22 years and the sixth is close. There has, therefore, been a build-up of inflationary pressures beyond energy prices. It is true that we do not see any second-round effects on wages at the moment but the task of a central bank is not to wait for these effects to manifest themselves because it is then too late to act. The longer the period of high inflation, the greater the likelihood that wages will start to rise later this year. We have to take this risk into account when deciding on the course of our monetary policy.’

‘The opposite question [of whether companies are ready to increase wages at a time when the crisis in Ukraine and inflation are weighing on their business and earning prospects] could also be asked. Why would workers accept a loss of 5.1% of their purchasing power when the unemployment rate in the euro area is at its lowest level since the Economic and Monetary Union was established? The greatest surprise we had after the COVID pandemic was that the labour market strengthened much more than we had anticipated. This gives employees a stronger hand in wage negotiations.’

‘The markets did not expect us to announce the end of the APP [on March 10], which I found a bit surprising. The inflation surprises for January and February were well-known, and we had already announced that we would react in March. In times of uncertainty, a central bank must be a beacon of predictability. Our predictability comes from the fact that we have a very clear mandate: price stability. Only when this goal is secured can we turn our attention to secondary goals such as economic growth and unemployment. By the first quarter we had already started to reduce the pace of asset purchases without creating any market turbulence. After a short initial reaction to our March decision, markets stabilized around slightly higher yield and spread levels. In fact, the decision was very well absorbed by the markets, even if it initially surprised them somewhat.’

‘We have announced that net asset purchases under the APP will likely stop in the third quarter. Provided, of course, that in the meantime there is no weakening in the inflation outlook that would lead us to revise our commitment. However, again, a rise in inflation is more likely than a fall. If the outlook is the same in June as it is today, we will decide to stop buying. As for the exact date of this halt – July, August or September – it should be noted that, since the last quarter of 2021, we have been reducing purchasing volumes by 10 million euros per month without sparking any market turbulence. It should also be noted that in June, we will only have a budget left of 20 million euros.’

‘This [continuing monetary support] would imply that we would pursue a different mandate from the one set by the Treaty. The Asset Purchase Programme is an instrument to combat the risk of deflation. Legally, its role is to reinforce the accommodative effects of low interest rates. This is a thing of the past. We are in a period of high inflation. The rationale for the existence of the APP has disappeared. It is desirable to wind down our purchases without creating market turbulence. If we were to maintain bond purchases only to create favourable financing conditions for states, it would create a situation of unacceptable fiscal dominance. Of course, if the political powers want to change the Maastricht Treaty, which defines our mandate, they can. We live in a democratic society. However, I would regard this as neither likely nor desirable because price stability is the best protection we can offer for our citizens’ purchasing power.’

On whether, if net purchases stop in the third quarter, an initial rate hike would take place before December: ‘Nothing is completely certain or inevitable in an uncertain environment. Depending on the information available to us at the end of the summer concerning the impact of the Ukrainian conflict on the medium term outlook for inflation, we will decide when it is appropriate to raise the policy rate. Today, I believe that the market's assumption of a first rate hike later this year is quite realistic.’

‘Over the last decade we have continuously increased our efforts to combat low inflation. I used to quip that we performed a huge 'rain dance' to get it going again. We moved rates into negative territory, we launched waves of LTROs and TLTROs, we put in place asset purchase programmes. We will not hesitate to act if inflation were to stabilize below 2% again.’

‘The war in Ukraine has shown us how important budgetary discipline and consolidation are. It is essential to create financial safety margins, not least because during crises like these public spending will have to be increased. We need budgetary rules, but they can be improved for instance by replacing the ambiguities around structural deficits with a more robust expenditure rule. Coming out of the crisis, debt levels will also have to come down in the Eurozone. I still think that 60% debt-to-GDP is an appropriate target but that the adjustment path towards this target must be individualised. It is not realistic to think that countries with a debt of over 100% can return to 60% in 20 years.’

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 globalisation, 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):

31 March 2022

‘Can monetary policy then really react … ? Because some countries are afraid with more debts than the average that they won’t be able to bear the costs increase in the … interest rate. And then something which is still a threat above us which influences the discussions about monetary policy has to do that at the moment, inflation expectations still seem to be broadly anchored at the level of 2% of the inflation rate we have put forward as an objective of the ECB monetary policy. But there are first signals there on the market measured that … the inflation expectations may [be] moving upwards. And this of course … pushes us to act more quickly than otherwise. So that’s an area where … the shadows of the past are hanging a bit.’

‘What does the shock [from the war] consists in? Well, the main part of it is … the dependence of Russia as a trading partner. … If this trade doesn’t take place, there will be an impact, but this will not … destroy western European economies. A bit more problematic is the dependence of oil and gas … which is high, but – and this is part of the problems what we have for why we cannot do any kind of moves we would like to do there. But this … creates a situation in which … the baseline … which we had for our discussions in early March, what policy to adapt, well, a reduction of half a percent of GDP and a little bit of inflation, perhaps a percent more. Again, it matters, but not crucial. The problem what we have now – and this is what happened through the simulations what we did – is that the more the war drags on, the higher the impact on inflation and the stronger – inflation up – and the stronger the impact on output coming down. So the more the impact will matter. … But by now, they [the alternative scenarios] may be considered … not as the severe, this may be … the baseline what we have now. The severe is even worser. So the severe nowadays is different as the war would drag on. We may come to a situation in which there may be inflation rates up to 9, 10, more percent, and output down to, we will move towards zero or negative. So a dragging on of the war is a major, major drag on European economies, which of course makes the question for a solution even stronger. But what would be a solution, and what would be long-term outlook? … My sense is that Russia or that China has a major part in the decision. If China is able to [be brought] around to come with a solution, we would have a very beneficial outcome for Europe and the rest. If the Chinese were to decide against that, we may end up with something which is a bipolar world, and which would affect the monetary system over the next decades to come. And this is something which would have major consequences … also for Europe, for the European currency and European integration. So, there’s still hope, but the solution possibilities…are not increasing, but shrinking by the day.’

30 March 2021

‘The announcement that we made in March was, there will be an exit also from the APP ... unless there is a change due to external circumstances, and then a formulation that is deliberately ambiguous. Then we also plan to do something about the interest rates, whereby the question is to what extent we should make it possible to do this as quickly as possible compared to the old wording, but also to postpone it. In any case, what was and is planned is to stop buying assets before the first interest rate step is taken. However, according to the forward guidance, the formulation, this can also take place quickly, and therefore, even if it were decided that there would be no more securities purchases as of July, one could, if one wished, take the first interest rate step in September and the second in December. That would be consistent with the announcements.’

‘I don't know if it's [my preferred approach] more aggressive. The thinking is this ... if we were to wait a little longer, and we find out in December that inflation may not have fallen too much, but has risen, we would certainly then have to take a larger interest rate step, which perhaps cannot be taken immediately, because it will be difficult to go beyond 0.25%. Given the information we have at the moment, it is good to think about taking two interest rate steps now. It is also important for me to say psychologically that we will return to zero as far as deposit rates are concerned, the key interest rate will be raised accordingly, and we will start the new year with interest rates that are no longer negative. I believe that this negativity of interest rates is an anomaly and would therefore, I believe, in addition to the, if you like, monetary-mechanical reasons, also be a signal to the people in Europe that the ECB is taking the concerns about inflation and nominal interest rates seriously. … It is certainly my wish, but, I believe, not just illusion. Given the way things are developing at the moment, because a number of my colleagues have also made similar statements. You have certainly already heard Mr Klaas Knot's statement... And since inflation, as we also forecast it, will be higher than we assumed at the beginning of the year, even a slight increase as proposed here would still keep the real result lower than at the beginning, which means that even if we were to make this increase, we would still not be ahead of the curve, but slightly behind it.’

‘What we have seen [regarding inflation expectations] is yes, there are slight movements, and individual data indicate that there is an upward movement. But a disanchoring ... is fortunately not the case at the moment. But that doesn't mean that we can rest now, but rather that we must do everything that is possible and sensible within the framework of our understanding of monetary policy to keep it from coming to a disanchoring.’

29 March 2022

‘We observe developments very closely and then strive to draw the right conclusions. We cannot fall into a state of shock. The most important thing now is that there is a peace option as soon as possible to end the terrible human suffering. And that would then also be good from an economic point of view - for growth and for inflation. Conversely, this also means that the longer the war lasts, the greater the economic damage will be.’

‘The March projections were characterised by the fact that there was very little time to incorporate the events in and around Ukraine. The baseline scenario was already somewhat outdated at that time. The situation now corresponds more to the so-called adverse scenario, in which growth in 2022 is 1.2 percentage points lower and is expected to be around 2.5%.’

‘As things stand, we expect neither a recession nor economic stagnation. The decline in growth is noticeable, but not threatening at present. This also has to do with the fact that growth prospects were very good before the outbreak of the war. The economy was leaving the pandemic behind. The scenario we are currently assuming is also far from stagflation.’

‘For us, too high inflation is definitely the top priority on our agenda. People feel inflation every day in their purchases and in everything they do. The reduction in economic growth is not so directly felt by them, also because the labour market in Europe is still very strong.’

‘Inflation already started in the late summer of 2021. Even then, tendencies were foreseeable that inflation would be strongly driven mainly by external factors. This applies, for example, to energy prices, especially gas prices. The Chinese switch in electricity production from coal to natural gas was a major price driver. It was also foreseeable that food prices would rise worldwide due to poor harvests. A third important point is the supply chain issue, and here we have to admit that we do not yet fully understand the development. After two years, it would have been expected that it would have dissipated or that the economy would have adjusted to it. But that did not happen. We underestimated that and perhaps we are still underestimating it now. Incidentally, this also applies with regard to the Ukraine war. ... Because of a few missing parts from Russia and Ukraine, entire production facilities are sometimes at a standstill. If this happens to individual companies, it is bearable for the economy as a whole. If it happens across the board, it's a problem. We still lack sufficient data and analyses.’

‘There are good arguments for the assumption of inflation falling again in the medium term. Energy prices are likely to fall back from the current peak, especially since high prices make investment in energy production more attractive - which increases supply and should lower prices. In addition, high inflation weighs on real incomes, so aggregate demand is weakening - which also dampens prices. In addition, inflation expectations are still in the range of our 2% target. There is no de-anchoring of inflation expectations so far. That is good news. But we must not rely on it. We have to be absolutely vigilant.’

‘High inflation will certainly lead to higher wages. The trade unions will not necessarily be satisfied with 2% now. But the big question is how strong this trend will be. So far, we do not see excessive wage growth across Europe. However, it is also crucial how productivity develops. With higher productivity, higher wage agreements may seem appropriate. We have to keep a very close eye on wage developments and take countermeasures if necessary. There are some big wage rounds coming up in the autumn. That will be a test.’

‘In my estimation, there is no reason for a course correction so far. So far I see no reason not to let the bond purchases expire in the summer. And my impression is that this assessment is shared by a not inconsiderable number of my colleagues on the Council. The decision will be made in the next few months, in June at the latest. Then there will be new projections again.’

‘I am very grateful to Klaas Knot for taking up my proposal [of two interest rate increases this year]. Raising the deposit rate to 0% by the end of the year would be important for monetary policy because it increases optionality. You have more options if you do it than if you don't. If things develop as we now assume, inflation will be higher this year than we had originally expected. At the same time, that means that the real interest rate is even lower than we thought, so monetary policy is more accommodative than we thought. If we now find towards the end of the year that inflation will remain higher for longer, we would have to tighten monetary policy more and raise interest rates more significantly. If we were not already at 0% for the deposit rate, we would be too late. If inflation does not turn out to be higher than expected anyway, we could simply stay at 0% for the time being.’

‘The famous but unknown real equilibrium interest rate is currently likely to be between -1% and -0.5%. Since the real equilibrium interest rate is not measurable, these are estimates. With an inflation target of 2%, the nominal equilibrium interest rate is thus around 1% to 1.5%. Anything below that means we are on the monetary policy accelerator. Anything above that means we are on the brakes. So if we raise the deposit rate to 0%, we are still a long way from normalising monetary policy - and there is certainly no question of tightening. We are slowly taking our foot off the gas, but we are still a long way from putting on the brakes. And all the more so if one does not use the target inflation rate of 2%, but the actual inflation.’

‘I don't think the comparison with 2008 or even 2011 is justified. Back then, there were big problems in the banking sector and on the financial markets, there were problems with liquidity. Things are very different today. The banks are all well capitalised and have no problems meeting the investment wishes of companies. And the financial markets are also in good shape despite the crisis because of the Ukraine war. There is plenty of liquidity. That's why there is no reason to stick with the APP bond-buying programme beyond the summer.’

‘Yes, absolutely [the criticism that the ECB is overreaching in view of the current high inflation is exaggerated]. And this is all the more true when you consider that even after the end of the net bond purchases, we will probably continue to reinvest expiring securities for some time to the tune of tens of billions of euros per month. This means that we are still providing a lot of liquidity to the market.’

‘We are not under pressure to match the Fed in terms of monetary policy. The economic and financial cycle in the euro area lags behind that in the US by about half a year. So we have more time than the Fed. But it is also true that if the Fed now raises its interest rate significantly, this will not remain without influence on the euro exchange rate. We have no exchange rate target. But if the euro depreciates significantly, we will import even more inflation. So far, however, the movements are still comparatively small, even in a historical context.’

‘The strategies are similar, but not identical. The big difference is that the Fed aims to offset years of undershooting the target in the future. We explicitly do not. Our target is 2% no matter what in the past. At the same time, there is no reason to get nervous about 3% or 4% inflation as long as it is heading towards 2% in the medium term and inflation expectations remain well anchored at 2%. That is not a catastrophe then and there is no reason to overshoot in terms of monetary policy.’

22 March 2021

 ‘I don’t think so [that another oil price shock is imminent], because as developments in the past have shown, the development of oil prices follows a yoyo, that is it goes up and down.’

‘To put it briefly, no [I don’t agree with the ECB’s clearly defined sequencing of policy withdrawal]. In my view, the ECB could certainly turn around the sequencing, that is the order. Other central banks do that. … But at the Council meeting on March 9 and 10 of this year, the ECB decided to adhere to this sequence. I’m a member of the Council. It was a unanimous decision that I agreed with so as to have at least some movement in a direction.’

‘The reason why I’m for bringing forward the interest rates versus purchases is that the interest rates are perceived by the general public. Interest rates rise – everyone knows. If the purchases are reduced or stopped, the understanding of what that means is comparatively limited among the general public, even in banking circles, and therefore does not have the same symbolism. And important is that interest rate hikes mean to people, “Aha! My central bank, the ECB, is taking inflation seriously and doing something.” For me that was the main reason.’

‘… this new shock [of war] will have an impact again also via demand and supply effects. Inflation will be higher than we had thought. Growth will be lower. And probably for some time. And we will also need corresponding instruments again to fight both: inflation and the simultaneous risk of a weakening of the economy. That means a very, very big challenge for central banks in Europe and worldwide.’

‘This 1.9% [2024 HICP ECB staff forecast] is part of a mechanism for the decisions of the ECB. If certain conditions are met, then we can act. … For me that is the most optimistic scenario that one can imagine. It is not inconceivable, but not very probable. Personally, I believe that inflation in the coming years will be higher. It will go back down, but it will be higher than this 1.9%.’

‘The exchange rate is not a target variable for the ECB. … But we watch the exchange rate very closely, because a depreciation naturally means, as we have seen most recently, that external prices rise and thus an additional inflation impulse occurs that we don’t want to have. Therefore, that all is monitored very closely.’

‘No, no way [do we have to expect inflation of 10%]. Even if it were so that we would have that for a few months, it is so that everything would be undertaken to reduce this inflation as quickly as possible.’

‘Such a risk [of stagflation] is naturally there … but I do not see it at the moment, because stagflation is always also associated with high unemployment. At the moment, the labour markets are very, very tight. That means that current developments do not lead to stagflation.’

19 March 2022

'Without the Ukraine war we would have been on a wonderful growth path'.

'The system of bond purchases is difficult for the population to understand, an interest rate hike would have been a signal that everyone would have understood'.

'This issue [of sovereign indebtedness] is taken very seriously by the Eurogroup, but as we know, there are different ways of looking at it.'

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 “normalisation” 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 industrialisation 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 labour 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):

01 April 2022

‘At this juncture in time, the historical challenges are considerable. In addition to the pressing debt legacy, climate change and digital transition challenges – particularly important in the traditional banking sector –, the economy was hit by two exogenous, now partially overlapping, shocks: the Covid pandemic and the Russia war on Ukraine. The short-term effects are clear. The Russian invasion of Ukraine, in itself a demonstration of the lack of social capital, is slowing down the recovery. Also it is causing an inflationary environment, adding to the ones already in place, and temporary, due to the fast recovery from the COVID crisis. The new pressures on prices result from the escalation of commodity and energy prices, reduced confidence of economic agents and the effects of commercial and financial sanctions imposed on Russia.’

24 March 2022

‘[N]ormalisation of the ECB’s monetary policy will be carried out gradually and proportionally at the end of this year.’

21 March 2022

‘Last week's decision has to be read in two moments. In one, perhaps more structuring, which places it in the context of the decisions that the ECB has been taking since the end of last year. And which are a very clear sign of a gradual path towards the normalisation of monetary policy. What does this mean? It means putting monetary policy in a more neutral position, less accommodative, as we say in monetary policy jargon. This is the dominant dimension and the one that I consider most important in interpreting last week's decision. However, in fact, between the February meeting and the March meeting an event occurred which is not insignificant: the beginning of the conflict between Russia and Ukraine - in fact, of Russia with Ukraine - which is a new and very important fact that deserves our attention. And it was considered in the decision and therefore the decision has to be read with that additional caution which was, by the way, expressed very clearly by President Christine Lagarde. The ECB remains available to act in either direction in which its policy can have an effect. At the moment, we have taken a decision to accelerate very restrainedly the reduction of net purchases, in a context of inflationary pressures that concern us but, in fact, we have not lost any of our instruments and we will continue to use them in a very open way and always attentive to the information that we have.’

‘The position of the Council wanted it to be interpreted as it was announced, as a unanimous position... As for my sensitivity, on the one hand I would like to reaffirm that the possibility of net purchases continuing, as decided until the end of the year - or at least closer to the end of the year - is open and the final decision will always depend on what the data tells us throughout the year. I always emphasize that the data here are the companies and families that form them. When we say that we are concerned with the data, we are saying that we are objectively concerned with what happens to businesses and households in the euro area. And within the impacts that households and firms have, inflation is the biggest of our concerns but it is not the only one. We are also concerned about financial stability, about monetary policy transmission mechanisms - which means that situations of financial fragmentation are highly undesirable - and the ECB has instruments for that. My position was to make it explicit, on the one hand, that we understand the challenges posed by the conflict in Ukraine and that we understand the need for a path of normalisation of monetary policy. And these two dimensions intersect at this moment and will be with us in the coming weeks, throughout the next meetings in April, May and June, which will be another important moment. And then we will have to evaluate.’

‘If the data that we had in that alternative scenario showed us that there were reasons to do that, that could happen [i.e. the stimulus cut could have been brought forward]. What is important to ensure is that monetary policy continues to play an important role in what are its core missions - and inflation is a core issue - but in order to do so, it needs space. Hence, it is often said that monetary policy must have options and must create these options for itself - and one of the constraints on the conduct of monetary policy today is the very low level of interest rates. We have to create conditions to move away from this apparent trap, which has played a very important role in the past but which, desirably, should give us options in the future.’

‘Without commenting on the [Portuguese] President's statements [warning the ECB against withdrawing stimulus], I think that he is reading these historical episodes and what I would like to guarantee is that in the ECB this perception, this knowledge, this analysis is made and we will certainly take decisions that are compatible with maintaining financial stability, the concern with financial fragmentation in the euro area, in a context of anchoring inflation expectations. And today we are more satisfied with these results than we were a year ago: a year ago many of the analyses that were made of the success and commitment of monetary policy to achieving the inflation target were often labelled as failures. Because, in fact, medium-term inflation expectations were very low and it is not desirable for the European economy to remain, as I said earlier, in this trap of very low interest rates.’

‘We have to understand that, for Portugal - and this already happened in 2016 - the effective limits of monetary policy are stricter than for many other European countries, which has to do with both the rules of the PSPP (the programme that was instituted by Mario Draghi in the past) and this pandemic emergency purchase programme that was of essential importance in the success with which we managed to combat financial and liquidity issues in the euro area. Now... When it ends, it ends for everybody and I can guarantee that when it ends it will end in a scenario where the euro area's own difficulties - which, fortunately, in the economic dimension, are very different from other jurisdictions like the US or the UK, the economics behind the ECB's decisions are very different from those - and we have our own characteristics but the concern about fragmentation is there. Now, what is the instrument we have to combat fragmentation? It is PEPP, the emergency instrument - we can retain confidence that it will continue to play its role even if PEPP net purchases end this month. … Exactly, the reinvestments. And the reinvestments are going to be done with enough flexibility to allow purchases that had originally been made in one jurisdiction to be directed to other jurisdictions if the market signals that there is such a need. … Exactly [i.e. without necessarily following the capital key]. I want to draw attention to this dimension of flexibility that has been transposed to reinvestments to say that, like almost all insurance in economics sometimes it is more important that they exist than the actual use we make of them. For example, this flexibility, which was already originally in the PEPP, was used very actively for a very, very short period of time, and then the deviation from the capital key was corrected over the following months - and today that deviation is very small. The flexibility is there, it is used when it has to be used, but for the markets the message that the ECB should send is that we are vigilant and we will act when necessary. And the reinvestment amounts, they are not public - I cannot share with you - but they are very significant. … They are very significant, I don't know what comparison we can make but they are very significant amounts because they actually catch the whole maturity of debt that will [come to maturity]... No, it's [the ECB] not going away. That's a good conclusion.’

‘As I said, the ECB will leave the accommodative character when the need for accommodation is no longer present. That is a guarantee that I can give. … It is true [that need may no longer be present in Germany but continue in Portugal], but I would like to underline something that is very important and that we sometimes overlook: the fact that for the first time in the last two or three decades we have private debt levels in Portugal that are at the level of the euro area. This was achieved through a reduction of almost 80 percentage points of GDP of the weight of private debt, relative to GDP. Portugal has made absolutely remarkable progress since 2013, plus 2014/2015, until today in reducing the weight of debt to GDP - households and companies. And so it is true that we should prepare and we should be prepared for that but it is also true that the level of interest rates has no comparison with the levels we were facing five, six, seven years ago. Even when ECB interest rates are no longer in negative territory, the level of interest rate that households will face is much lower than the one we faced a few years ago. I'll give just one number, regarding the State, the public administrations - which impacts on all of us because all the difficulties or financing costs are paid by our taxes - at the beginning of 2017, five years ago, the Portuguese State was financing itself with rates above 5% [3.5%, 10-year, at the beginning of 2017]. We are not, in any scenario that we have in front of us, talking about interest rate variations that reach those values. In other words, it is true, there is a change in the cycle, I insist: this change, if it occurs in this context that I am giving, is very beneficial (for the space it creates for the ECB's monetary policy, for the signal it gives to all agents that the economic cycle is maturing and we can finally get out of the very negative scenario for the economy that is inflation rates close to zero, sometimes even negative). The message is: let us be prepared for that moment - it is true that we will have to re optimise some of our accounts at home and the State and companies but what positive this brings for the conduct of policies is very important.’

‘We have a scenario with a not insignificant probability - that's the translation of "inescapable" - that the conflict that Russia initiated with Ukraine, even if it does not leave the geographical area of Ukraine, will have a fairly significant impact on the growth of the Eurozone (and also of Portugal). This, in 2022, will be identified in what we estimate, quarter after quarter, of the chain growth. I am drawing attention to this apparent statistical preciousness: because the growth path of 2021 was so pronounced that the carry-over effect to 2022 is very significant. This means that even if we do not grow at all in 2022, we have a very significant growth for the year compared to 2021. When I said we don't grow at all it was keeping the level of GDP in each of the quarters of 2022 identical to the fourth quarter of 2021. … Exactly [i.e. acceleration]. Even if the chains are all zero, we have a very powerful growth drag effect - 2% in the euro area, in Portugal it is 3.6%. Even if all quarters are equal to the fourth quarter of 2021 in the whole year the Portuguese economy would grow 3.6%. And that would be only the second highest growth since we've been in the euro - only beaten by 2017. So it's a very significant growth. But going back to the actual growth, the growth that would take the Portuguese economy further ahead, that is where the scenarios worry me, in fact, because in this scenario of zero chain growth in all quarters we were, in fact, putting a very significant brake on economic growth that would pose challenges facing 2023 - because the so-called drag effect from 2022 to 2023 would disappear - and, therefore, in the growth dynamics that worries me. And it is this scenario that we are warning of the risks that it may come to pass. I do not think it is a very likely scenario... In Portugal, and even in the euro area. We do not know when the conflict will end. This scenario will become increasingly likely as the conflict lasts. And so it was, if you like, the governor of the central bank warning of a risk that could come. Regarding stagflation, in the economics books, it also has a very significant dimension in the labour market - and there, we don't see any evidence of contagion of this brake on growth in the short term in the labour market, in the sense of increasing the unemployment rate.’

‘Support, in the context of this war, should be adapted to its real consequences - and I don't see that they can even be similar to what happened in 2020. Therefore, the proportionality of the support must always be present - particularly because we are still talking about impacts that should be temporary, that should disappear with the end of the conflict, unlike a pandemic, in which the end of a pandemic is a long process, the consequences may change from being pandemic to endemic and it may continue to cyclically disturb our daily lives - the end of an armed conflict does not have these characteristics. In short, for better or for worse, on the day the end of the conflict is declared, it is highly likely that the negative effects we had during the conflict will be reversed, will disappear, and we may, in fact, gain a mood among businessmen and investors that obviously does not exist today because we are all worried.’

‘…if we anchor this analysis to what was the projection that the ECB staff released last week, and which was the basis of the decisions taken by the Governing Council, we have a downward revision with some dimension in the euro area — they are actually five tenths, for the year as a whole —, very concentrated in the second quarter of this year, and a little in the third quarter, with the fourth quarter already having a behaviour with some recovery, given the negative effect — not much, but some — of this shock caused by the conflict that Russia started with Ukraine. That is, the downward revision is a natural thing. Its size depends a lot on the duration of the conflict and it is very difficult to honestly make scenarios. We will, on Thursday, also publish an adverse scenario, as the ECB did with two alternative scenarios. We're only going to have one, but we're going to add some of the other effects to this adverse scenario.’

‘Yes, the external demand estimates on which our estimates are always anchored are produced by the ECB and there is also an interesting effect there, which is: these external demand estimates for 2022 are being revised upwards, because 2021 was better than that which was previously projected in the Euro area. It is the symmetry of what is happening with Portugal in these knock-on effects. In other words, external demand directed to Portugal was better in 2021 than what was expected and this has a positive effect on the estimate for 2022 as well. This is an analysis that looks at the continuity, so to speak, of these variables. Now, it is true that the transmission and transmission channels to the Portuguese economy of the Ukraine crisis will act more. So, I completely agree. I saw more indirectly what our biggest customers are, and the countries with which we have more economic relations, than directly with Russia, Ukraine or Belarus. … There it is, if the adverse, severe scenario of the ECB occurs in these countries, it will have a very direct, immediate translation into our scenario as well, and that is where we begin to approach scenarios with lower chain growth rates. Eventually, in the intermediate, second and third quarters, together, the estimate, in the adverse and severe scenarios of the ECB, is even of negative growth, that is, that the Euro area may experience non-year-on-year drops in activity. Again, it has absolutely nothing to do with the disruptions to economic activity that we observed in 2020, not even in the first quarter of 2021 when the Portuguese economy fell by three percentage points compared to the fourth quarter. We are talking about much lower magnitudes, but it is still unfortunate that, for the first time, perhaps in 80 years, we have two consecutive exogenous supply shocks in our economies, at a time when we were trying to gain space to normalize the monetary policy. Therefore, we have to do the analyses much more carefully.’

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):

22 March 2022

‘Monetary policy really isn’t a tool that could affect energy prices.’

‘If Russia’s invasion doesn’t cause a major blackthorn winter for the European economy, we’ll continue normalising the monetary policy gradually. An interest rate increase can thus be expected either toward the end of this year or early next year.’

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 normalisation 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 normalisation 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):

24 March 2022

‘We should be careful not to create additional uncertainty in the markets by seeming to waver in our commitment to price stability due to the war in Ukraine. We are not hesitating in our commitment to price stability, which is our main objective.’

‘There should be a dramatic shift in the medium-term outlook for inflation for that [the end of net asset purchases in 3Q] to change. Personally, I don't see a high probability.’

‘[W]e can still assume that the war in Ukraine will not completely derail the economic recovery in the euro area.’

‘It's important to recognize that we are pretty much at our target, and this is the reason why it's important to start normalizing [our] monetary policy stance.’

‘We shouldn't rule out interest rate hikes in 2022. I wouldn't be surprised if that will be the case at the end.’

‘Only when we move [interest rates] in positive territory will the impact on the economy become more significant.’

‘I'd be careful to not distort market signals too much by compressing spreads to a very narrow band, notwithstanding possible changes in the risk outlook for different sovereigns.’

Investors ‘can take comfort in knowing that the ECB in the past has been able to design and deploy quickly new policy tools.’

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):

22 March 2022

‘The invasion of Ukraine, first of all … is going to give rise to a lot of uncertainty, that’s going to be quite clear. Secondly, it’s going to increase inflation … inflation … will be higher for longer. And … it will have an impact on growth.’

‘So, we can so far dismiss the possibility of a stagflation, because even in the [worst] scenario, we are looking at growth at around 2% in 2022.’

‘In terms of, you know, the comparison with what happened two years ago, I think the situation now is much better. We have not seen, you know, that markets have dried up in terms of liquidity.’

‘The first line of defence has to be fiscal policy. … I hope that over the next weeks the European authorities will take decisions in that respect.’

‘…supply-side components are the main factors behind the evolution of the inflation. … for monetary policy the key aspect that we have to consider is the possibility of having second-round effects. This is going to be key. If we start to see a sort of spiral of wages and prices that could be … detrimental to the inflation outlook, and … even to growth, this is something that should be avoided. And … there is a role for fiscal policy … And secondly, there is another factor, is the possibility of de-anchoring of inflation expectations. This has not happened, but that would be, you know, certainly detrminental to the credibility… So these are the two factors that we have to monitor in order to determine the future course of monetary policy: second-round effects and the evolution of inflation expectations…’

‘The impact of the terrible invasion and the war in Ukraine has not been comparable to what happened two years ago, when the Covid … shock started to … be felt in the … world economy and in the European economy. We have had the volatility in the equity markets, but now you know the situation is much more quiet, much more calm. Even, we saw at the beginning that, especially in the case of bank shares, the prices went down and clearly underperformed the … general index, but, you know, we have seen a recovery … in the last days. With respect to the covered bond market, we have seen nominal yields going up, but the spreads … have not widened much at all. This is not comparable to what happened … in the past or at the beginning of the pandemic. In the corporate bond market as well, we saw a little bit of, let’s say, lack of issuance at the beginning, but now the situation is quite normal. And perhaps the only market that we have to look at very carefully is … the commodity derivatives, because the volatility or the increase in commodity prices has given rise to an increase in margin calls, and you know, some difficulties in order to honour these margin calls. But so far, we have not seen … a lot of stress there and the majority of the margin calls have been perfectly honoured by, you know the subscribers of these margin calls. So that’s … the situation … and … the reason is very simple. It’s because the exposure of the European economy to … Russian paper, let’s put it that way, is quite limited... I think that the main channel of impact of … the Russian invasion of Ukraine on the European economy … and the European financial sector is going to be on the macroeconomic scenario. … in terms of inflation … and … in terms of growth. And this is something that we have to look at very, very carefully.’

‘Shortly the Governing Council will take some decisions on the eligibility of Greek bonds for collateral and for the PEPP purchases, the reinvestment phase. … I do not prejudge the decisions that the Governing Council is going to take. But let me say, you know, my personal opinion. My personal opinion is that we have seen a lot of improvement in the Greek economy, both in terms of structural reforms and fiscal consolidation. And this has been, you know, reflected in the decisions taken by the … ratings agencies. Continuously, you know, they have improved, they have upgraded the opinion on Greek bonds. And I think that this is something that we should take into consideration. So, without any sort of prejudgment of the decision taken by the Governing Council, I think that there is … a real element that we have to take into consideration. and bear in mind. … the Greek economy has made a lot of progress, is much more resilient than it was only two, three years ago, and I think this is something that we should take into consideration. But this is my personal view without any sort of prejudgment of the opinion of the Governing Council.’

20 March 2022

‘I wouldn’t say so [that we are now heading towards stagflation]. Before the outbreak of the war we had assumed a growth rate of 4% for this year and a little bit less for next year respectively. In the most recent projections, even in our most adverse scenario for the current year, we still foresee growth of more than 2%, so no stagflation. Inflation, however, is likely to remain higher for a longer period than expected before the war.’

‘We do not target a particular exchange rate. We are of course aware that a weaker euro exchange rate will make certain imports more expensive. On the other hand, the currency movement is most visible against the US dollar, which is still in demand as a safe-haven currency. If we focus on the basket of currencies of our trading partners, we see that the euro has remained quite stable. … We aren’t intervening in the foreign exchange market because we don’t target any exchange rate.’

‘What matters for us now is the extent to which wages respond [to high inflation]. Because if wage increases are too high, they can push prices up even more and contribute to persistently higher inflation. We have not seen any signs of that yet, but we need to monitor developments closely. The same goes for inflation expectations. On the basis of survey information and market data, expectations for the next three to five years are anchored close to our inflation target of 2%. But we need to keep a close watch on that.’

‘The most important decision taken during our meeting [on March 10] was to delink the potential interest rate hikes from the asset purchase programme; interest rates will not need to be increased automatically after the end of net asset purchases. In this way we are keeping all our options open to respond flexibly to the data. … It [when the first rate hike will come] all depends on the data. We are monitoring developments in inflation very closely. We will be extremely vigilant concerning second-round effects and we will be attentive to any developments that could indicate a wage-price spiral, where both factors become mutually reinforcing. Fiscal policy should also play a role here. … The price shock in energy and commodities that we’re currently experiencing is making many firms and workers worse off. Fiscal policy should provide temporary, targeted support to help reduce the burden. This would also reduce the danger of a wage-price spiral.’

'I would say it’s [the decisions on March 10] a normalisation’ rather than a tightening.

‘At the moment making projections is particularly difficult. One reason for the drop in inflation [in 2024] could be that the significant increase in energy prices cannot last for too long. Prices can stabilise at a high level, but no longer increase at the current high rate.’

‘Over the past year we have underestimated inflation, as other institutions and economists have too. Forecasting is particularly challenging in periods of high uncertainty. Past trends play an important role in the models. Models have a tendency that projected inflation levels revert to the historical mean. … Our decisions are based on the data. If we continue to underestimate inflation, we will respond. All options are on the table. Second round effects and a potential de-anchoring of medium-term inflation expectations will be the deciding factors. If we see those, then we will act.’

‘Our monetary policy is wholly determined by our price stability mandate [and not sovereign indebtedness]. Our monetary policy decisions and the available instruments are geared to meeting our inflation target. A fragmentation of the euro area, with for instance major divergence in interest rates in the bond markets, could undermine the effect of monetary policy. However, the risk premia on these countries’ government bonds are about the same now as they were before the pandemic. They remain clearly below the highs seen around 2011 and 2014. In addition, nominal yields are still very low overall.’

‘We have the possibility to counteract that [a rise in risk premia] in a targeted way through reinvesting in a flexible way the purchases to replace maturing bonds under the pandemic emergency purchase programme (PEPP). But we have to make a clear distinction between this flexibility and our general monetary policy objective. Our task is price stability.’

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):

05 April 2022

‘Based on the current outlook, so with positive economic growth, we will raise interest rates to 0 by the end of the year. It's actually a no-brainer for me. But I have to say that even within the ECB there has been no discussion about raising interest rates.’

28 March 2022

‘The future is uncertain. We don't know how big the shock will be or how long it will last, but for the moment there is still economic growth. Of course, we can't rule out complicated months of negative growth, but that is not the basic scenario at the moment.’

‘In the next few weeks, it is not impossible that we will reach the 10% mark, but we are close to a peak. For a number of reasons, some of them technical, the inflation rate is likely to fall in the second half of the year.’

‘Now I don't think it's necessary to take big measures to support the economy either. We're talking about an overheated economy again, where companies are finding it difficult to find workers. That's going to be less the case obviously with what's going on now.’

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):

04 April 2022

ECB must be ‘very careful’ to take timely action.

‘The most important thing for me is that we will start this process not very late in the year and have the opportunity to be out of negative territory by the turn of the year.’

‘We’re still expecting quite strong positive growth rates, and if that scenario materializes I don’t see any reasons why we wouldn’t continue with policy normalization after the turn of the year and go above zero with interest rates.’

‘…we don’t want to remove needed support to the economy’, but want a ‘slightly faster’ normalisation.

That’s ‘one element affecting my understanding of not only inflation, but especially inflation pressures which are in the pipeline at the moment. It also gives me additional insight into what’s happening in the labor market and how these expectations regarding wages will be formed in future months and quarters.’

Baseline HICP forecast for 2022 of 5.1% ‘is still quite realistic’.

‘My expectation is that in a quarter or two we’ll see the peak of inflation and then a gradual easing by the end of the year. The last inflation reading was indeed very high, but in the context of the conflict and the rising prices across various energy segments, it was something which wasn’t so unexpected.’

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):

08 April 2022

‘It is a supply side shock … which is creating very high inflation, spot inflation. We could kill it if we wanted … but if we do it this way, then we’re going to kill the economy, too. I’m saying so in order to give you the trade-off we are facing. Definitely we will not let inflation expectations get out of hand. We will not … let inflation to pass on the labour markets and in wage developments. So we’ll do whatever it takes, and I will stop here, because we are in the silence period, we’ll do whatever it takes not to let inflation, a temporary inflation becoming a structural and permanent one.’

‘At this moment the probability of this [stagflation] happening in Europe is very small. In the United States, too, despite the fact that we had an inversion of yield curves a few days ago, that some people, they say that it predicts stagnation. But I don’t agree with that. Sometimes evidence … from bonds markets is very volatile, it changes from one day to another. It has changed already, by the way. So I, although there are negative effects on inflation – the inflation is going up – and on growth -it's going down - I don’t think that at the moment Europe is at the risk of having a recession.’

07 April 2022

‘The Russian invasion of Ukraine on 24 February 2022 has fundamentally changed the international situation, bringing the European Union (EU) and the Western developed world as a whole in front of the greatest challenge since the end of the Cold War. The war has unpredictable consequences not only for the global and the European economies, but also for international geopolitical stability, security, peace and cooperation. Shoring up the European economy against the effects of this new shock and preventing an interruption of the ongoing recovery is a key priority for economic policy. The magnitude and duration of these effects will depend on how the war unfolds, on the impact of the current sanctions and on the response of fiscal and monetary policies. The war in Ukraine is a new, major exogenous supply-side shock to the global economy that also affects, through various channels, aggregate demand. It occurred at a very critical time, when the economies were rebounding from the health crisis and the severe recession. It exacerbates the already strong inflationary pressures through further rises in energy prices and a new wave of medium-term price increases in metal commodities and basic consumer goods, notably in the food supply chain; it erodes investor and consumer confidence and disrupts global trade and the international financial system. Globalisation is in fact reversing. The result is a slowdown in the European and global economy and rising prices and interest rates. The main challenge for monetary policy in the euro area is how to prevent a temporary inflation from becoming structural, without undermining the ongoing economic recovery. Furthermore, regarding the broader economic policies of the euro area, the key challenge is further financial integration, as well as progress towards common, accepted policies in the areas of energy, defence and fiscal rules. Today, fiscal authorities in the euro area are called upon to provide targeted support to vulnerable households and bolster the viability of certain firms that are overly exposed to the energy crisis, without jeopardising fiscal sustainability. This tough problem would be easier to solve by a common response compared with uncoordinated and individual approaches. The recent lessons from the highly successful fiscal and monetary policies that were pursued during the pandemic in the euro area, preventing its fragmentation, should be a guide for the future, in the management of the current geopolitical crisis as well as any other potential crises.’

‘Uncertainties related to the pandemic have been contained so far, thanks to the high vaccination coverage of the population and the flexibility shown by European economies in adapting to the new circumstances. By contrast, the war in Ukraine poses persistent risks to the path of inflation, fuels inflationary expectations and negatively affects consumer and investment decisions, slowing the growth momentum. Another risk stems from the large increase in global debt in 2020-21. The unprecedented fiscal support measures have prevented the pandemic crisis from turning into a depression, but have inevitably accumulated large debts. Governments now have to manage a high stock of public debt, whose sharp increase was facilitated by historically low borrowing rates as a result of coordinated action by central banks. However, as the risk of inflation mounts, central banks are shifting their focus to rising inflation and resurging inflationary expectations. Accordingly, they are adjusting their monetary policy stance by raising interest rates or ending net asset purchases, thereby increasing the cost of money. The pre-pandemic period was marked by stable, albeit moderate, growth rates, price stability and high yields in asset markets. The pandemic has changed all this. At the same time, it has acted as an accelerator for the transformation of the economy along two main axes: green transition and digitalisation. Meanwhile, economic convergence and tackling income inequality remain key challenges. The first post-pandemic period is characterised by greater macroeconomic instability worldwide, fuelled mainly by high levels of debt and financial market volatility. Moreover, shifting global geopolitical balances minimise the scope for economic cooperation and intensify a retrenchment behind national borders, with adverse effects on global trade and activity. The geopolitical crisis is, however, a historic opportunity for deeper economic and political union in Europe, with a view to strengthening EU institutions across all areas, including defence, security and energy autonomy. The new economic reality will be characterised by higher public and private spending on health, clean energy, digitalisation and automation, but also on military equipment and cyber security.’

‘In the euro area in particular, GDP growth in 2021 reached 5.3%, driven by private consumption on the back of higher savings and rising asset values. A slowdown is projected for 2022, due to the protracted energy crisis, worsening supply chain disruptions, heightened uncertainty, declining confidence and higher inflation persisting for much longer than previously expected. Safe forecasts cannot be made, but only estimates based on scenarios, given that the extent of the effects will depend on the duration of the war and the impact of the sanctions imposed. In any event, however, the economic consequences are significant. According to the baseline scenario of the ECB staff macroeconomic projections (March 2022), which incorporates a first estimate of the negative impact of the war, growth in the euro area will continue, but at a slower pace. Assuming that the war in Ukraine will end soon and the current disruptions are temporary, euro area GDP growth is projected to average 3.7% in 2022 (revised downwards from 4.2%), 2.8% in 2023 and 1.6% in 2024. Growth will be driven by a strong labour market, the use of accumulated savings to finance consumption, and the stimulus from the Recovery and Resilience Facility resources. Continued fiscal and monetary policy support is another important factor. The ECB has also considered two alternative scenarios assuming a longer duration of the war. In the adverse scenario, growth in 2022 falls to 2.5% and even more significantly, to 2.2%, in the severe scenario. HICP inflation turned out at 2.6% in 2021 and is projected in the ECB’s baseline scenario to increase further to 5.1% in 2022, before falling back to levels close to the medium-term target of 2% (2.1% in 2023 and 1.9% in 2024), as both inflation expectations and nominal wage growth remain contained so far. In the adverse scenario, associated with a more protracted war in Ukraine, inflation in 2022 would reach 5.9%, and in the severe scenario 7.1%.

Striking a balance between:

(a) a gradual and cautious normalisation of highly accommodative monetary policy to cope with inflation;

(b) a flexible fiscal policy, combining the withdrawal of pandemic-related emergency support measures with the adoption of temporary targeted measures to support the most vulnerable social groups;

(c) adjustment to changing circumstances through the faster implementation of the envisaged reforms; and

(d) commitment to the principles of fiscal responsibility

is crucial to limiting the risk of stagflation and maintaining a brisk pace of growth, especially in countries with increased fiscal vulnerabilities and inherent weaknesses. Such a strategy would ensure the sustainability of public debt and facilitate the work of central banks in curbing inflation.’

‘Taking into account the progress of economic recovery and the need to control inflation, the Governing Council of the ECB has already embarked on a gradual and cautious normalisation of monetary policy. Net purchases of assets under the Pandemic Emergency Purchase Programme (PEPP) continued in the first quarter of 2022, but at a significantly lower pace, and the programme was terminated at the end of March 2022. The reinvestment horizon for the PEPP was extended until at least the end of 2024. In this way, the single monetary policy, although becoming less accommodative, retains flexibility to cope with potential negative shocks, such as a resurgence of the pandemic, but also the recent geopolitical shock. It is important to note that monetary policy flexibility includes the ability to purchase Greek government bonds, as part of PEPP reinvestments, over and above rollovers of redemptions, although they still lack investment grade and are therefore ineligible for the Asset Purchase Programme (APP). This inclusion limits the increase in the borrowing costs of the Greek State and facilitates the smooth refinancing of public debt from the markets. By the decision of 10 March 2022, monthly net purchases under the standard asset purchase programme (APP) continue in the second quarter of 2022, while the volume of purchases for the third quarter will depend on the path of inflation. Reinvestments of the principal payments from maturing securities will continue for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. Meanwhile, the key ECB interest rates have remained unchanged. According to its decision of 24 March 2022, the ECB Governing Council continues to allow national central banks to accept as eligible collateral in Eurosystem refinancing operations Greek government bonds that do not satisfy the Eurosystem’s minimum credit quality requirements, for at least as long as reinvestments under the PEPP continue. This decision is very important because it gives time to the Greek authorities to make headway with the restoration of fiscal sustainability and the implementation of the necessary structural reforms, both of which are seen as essential prerequisites for a further upgrade of Greece’s credit rating.’

30 March 2022

‘It [the economic fallout from the war] depends on how long the conflict lasts. Today the markets are more optimistic as we speak. We anticipate that there will be peace talks that something will come out. Of course, we've seen that in the past few days. It did not materialise. I hope this time it will be real. So the answer to your question is as long as the crisis lasts we will be on alert. Right now we only have scenarios. We have three scenarios at the European Central Bank, the same at the Bank of Greece, which has to do with if hostilities stop now the impact on GDP will be 1% lower. The impact on inflation 1% higher than it was before the war. … At the extreme we don't have a recession yet. No. No. We will have a recession, avoidable of course if what we're seeing now lasts too long. It lasts until the summer and beyond. Which we don't see happening. Political analysts say Putin wants May 9 to celebrate the victories.’

‘What I said is that there is a wind of stagflation blowing. What does that mean? There are stagflationary trends. That is this supply-side shock, meaning that the chains, the supply chains are being hampered. This is a supply-side shock. That means that prices go up and production goes down and employment goes down. Employment in Greece is increasing, but unemployment is still high. We have an unemployment rate of 13%, 13.5%. It was of course 20% and 25% before. So we have a very big drop, but it is still high. So there are stagflationary tendencies which have not at this moment resulted in stagflation. We only have high inflation. We don't have a recession. I hope we don't. This morning, of course, the yield curves in America have inverted. That's what a lot of people are saying is a recession forecast. I don't take it 100% at face value because right now the global bond markets have been affected by central bank interventions. However, hold this, that in America the markets today, if you open up the international press, they are saying that the markets are predicting that at some point America will go into a recession because of the reversal of 10-year and 2-year bond yields. I wouldn't say that's something we should take for granted, but let's keep that in mind.’

‘In my view, no [the debt crisis won’t return], for two reasons. The first reason is that after three difficult memoranda and a lot of pain and effort, Greece's public debt has been fully refinanced. A refinancing of 280 billion euros at very low interest rates. At the moment the average interest rate for the public sector, the average interest rate, what we call the average effective interest rate, is 1.4 to 1.5%. It is lower than Italy, for example, it is lower than Portugal, for example. This is very, very important. Yes, the 10-year may marginally be 2.7% - 2.8% today. So that adds very little though because we are borrowing little relative to the large volume of debt. So imagine when you have an average forward rate of 1.4% and a nominal growth rate of 4 or 5% this famous snowball effect which brought us down in the previous years of the crisis, i.e. the difference between the growth rate and the interest rate, is now working in our favour. One is this. The second is that we have now all learned our lesson. We cannot have irresponsible fiscal policies, I think everyone recognises that today. For me, it remains a very big goal, I would say a national goal, to get investment grade as soon as possible. It has been many years since we have lost the investment grade, I think now is the time to get it within the next year I would say, and we all need to realize that this is the most important thing that needs to be done.’

‘I want to answer first of all some questions that many international analysts are asking. The European Central Bank - they say - that it missed the inflation forecast. Let us see what exactly is happening. Economics, as you know, is not a laboratory science, it is not open to experimentation. There are also very large uncertainties which cannot be put into a model, into a model. We can model something that can be predicted. But economics is what it is. It is society. There are things that you cannot predict. For example, the pandemic, we couldn't predict it, at least the effects that such a pandemic would have. What happened now in Ukraine, you cannot be in the mind of every Mr. Putin.’

‘So there are things which cannot be predicted by their nature. So they came, one came and then the other came. That, don't waste your time, that means inflation on the supply side, not on the demand side. On the supply side it means that monetary policy cannot easily deal with it, and if it does, using the heavy artillery that is interest rates, it's... to put it simply, it's like seeing, for example, a very large fly on the wall and taking a bazooka and swatting it. The building will fall down. It's kind of like that. The interest rate is a heavy tool and if you use it to reduce inflation and if you use it uncritically, some people lightly say "raise interest rates 100 basis points". But if we do that, we will neither persuade Mr Putin to give more gas nor to withdraw from Ukraine. On the contrary, it helps him. It will reduce inflation, but it will be reduced mainly by a very large reduction in output and employment. That is what we are trying to avoid at the European Central Bank. We are trying to use, as we say, our strategy consists of three elements today: First as we call it optionality i.e. to have options. Optionality means that we will only move if the evidence shows us that we have to move. Right now our compass is medium-term inflation, not today's inflation. Medium-term means '23 and '24. Unless we have clear indications that inflation in '23 and '24 will not rise above 2-2.5% we should not move in a careless way. So what are we looking at? We look at two things: wage demands, net of the change in productivity, that is, we look at how what we call unit labor costs change, one. And two, how markets price inflation in the future. This comes out of models showing bond swaps in swaps. And both of these we now have the evidence and in America even where the output gap is positive, that is where there is excess demand. In Europe we don't have excess demand yet, in Europe this inflation has not passed through to medium-term expectations.’

‘I don't rule out that we may have a small increase in interest rates towards the end of the year. But this is not something that we can say now, nor will I rush to say right now that there should be an interest rate increase.’

‘The European Central Bank's base rate is negative. So even today as we speak monetary policy is expansionary and why the base rate is negative, the deposit taking rate at the European Central Bank where we take deposits from the Banks that is, is 0.5% across the Eurosystem and the Bank of Greece and the Bank of Italy, everywhere. This is one element that shows that monetary policy is still expansionary. The second element is still expanding the balance sheet of the Central Bank because until tomorrow pandemic bonds will be bought and until the end of June the bonds of the quantitative program will be bought. So as we speak today monetary policy is still expansionary. To make it neutral, interest rates will have to go up and quantitative easing will have to stop. … The "interest rate is neutral" is a long conversation because it requires calculation of the famous natural rate, which you know these are calculated... as I said economics is not a laboratory science, you cannot determine every variable by experiments. You determine it with models, with econometrics, econometrics is about the past because the data, the future may be different, there are nonlinearities, so I'm just putting you a little bit into the difficulty of calculating certain variables. So I want to conclude here, the crisis plays a very big role, what we call how we as the Governing Council of the ECB ultimately assess the situation in order to change a key instrument such as the interest rate. We have our models, every time we go for two days we spend many, many hours looking at what the models say, but ultimately what plays the final role in the decision is our judgement, how we see developments.’

22 March 2022

‘…mostly it’s [the war] a stagflationary shock. We know that monetary policy is not the best instrument to tackle a stagflationary, a supply-side shock. But we needed to act, because inflation has exceeded our target and there’s a danger for inflation to be entrenched in expectations … and also into wage contracts. This is why central banks react. … We know that this is a supply-side shock, we know that monetary policy is not the best instrument for a supply-side shock, but the fear is that it might affect expectations, inflationary expectations and also wage contracts. So, we are careful in the ECB. We have chosen three principles: gradualism, flexibility and optionality. This is what we call our strategy now. Which means we move very carefully. Still, our monetary policy is expansionary … the basic interest rate is still negative, we are still on the expansionary side of the QE. We have simply taken a decision to decelerate the rate of growth of these purchases. So, we are in a different phase compared to the Fed and the Bank of England, because the output gap in Europe is still negative, it’s not positive.’

22 March 2022

‘We live in a rapidly changing and interconnected economic environment, where ‘tail risks’ have significantly increased. The Russian invasion in Ukraine a few weeks ago, was the second such event within the past two years. The first was the pandemic. This ‘perfect storm’ came at a time that vulnerabilities are still elevated and both the Greek and European economies as well as their financial sectors are recovering from the effects of the pandemic. It creates stagflationary forces and monetary policy dilemmas for the ECB as well as fiscal, energy and defense issues for the eurozone and national governments.’

‘Starting with the impact from the pandemic in the asset quality indicators; so far the flow of new non-performing loans (NPLs) has been contained, as the support measures taken by the fiscal, monetary and supervisory authorities averted the defaults of corporates and households and supported the balance sheet and the profitability of the banking sector. However, the performance of obligors that have received state support after the complete phasing out of these support measures will be critical for the asset quality of European lenders. The recent spike in inflation -and especially in energy prices-, the squeeze in the disposable income and the still weak corporate fundamentals, will put more pressure on vulnerable obligors and consequently upon asset quality. The still very uncertain consequences for the banking sector of the war in Ukraine and of the disruption in the energy sector and in various supply chains are yet to be assessed.’

‘In Greece, there has been a very substantial progress over the past few years in dealing with NPLs. With end-December 2021 data, the NPL ratio has dropped to 13%, the lowest percentage seen for more than a decade. We may recall that in the peak of the crisis, the NPL ratio reached 45%, and since then the reduction in the stock of problematic loans was more than 80%. Of course, further effort is necessary for Greek banks to reach the EU avg. (2,1%), amid the aforementioned challenging economic environment.’

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):

06 April 2022

‘The exit from the pandemic had already produced a sharp rise in energy and commodity prices. In addition, the emergence of supply bottlenecks had raised the prices of durable goods. Now the Russian invasion of Ukraine is exacerbating each of these individual forces. Oil and gas prices will stay higher for longer and remain subject to unprecedented uncertainty. Not only is Russia one of the world’s largest exporters of these products, but the EU is also the largest and most dependent importer of energy from Russia. Food prices could increase further. Russia and Ukraine account for about 25% and 17% of total global exports of wheat and maize respectively. And Russia is a crucial provider of the raw materials used in fertilizers. Other raw materials will also be impacted. For example, Russia accounts for over 20% of global exports of vanadium, cobalt and palladium, which are used in the production of 3D printers, drones, robotics, semiconductors and catalytic converters. Russia and Ukraine are also among the largest exporters of iron ore and nickel, which are used in the iron and steel industries. The economic consequences of these shocks are significant and are accumulating over time. The steep rise in oil and gas prices over the past year represents a massive “terms of trade tax” for the euro area. As the euro area is a net importer of energy, rising energy prices mean that the euro area is losing purchasing power and our import partners are gaining it. This transfer in purchasing power to the rest of the world already amounted to 3.5% of euro area GDP in the last quarter of 2021 compared with the same period in 2020. In absolute terms, this would imply an estimated loss of about €440 billion in one year. Individual households are feeling the pain. Imported inflation is pinching people’s real incomes and eating into demand. Since households cannot easily reduce their consumption of food and energy in response to rising prices, they will have to cut back their spending on other items, reverberating across the economy. Low-income households will be particularly hit, as consumption of food and energy absorbs a larger share of their income. Leading economic indicators suggest that such demand destruction is already underway. In March consumer confidence saw its second largest drop on record. Households are expecting higher inflation and lower economic growth. As a result, they are revising down their spending plans. Business expectations for activity in a year’s time have also slumped, foreshadowing lower investment. Overall, annual growth in 2022 will mainly reflect the mechanical effect of the rebound in GDP from its trough. But quarter-on-quarter growth rates will be very low this year. The adverse impact of the war could well bring them into negative territory and produce longer-lasting effects.’

‘So how should monetary policy react to this situation? I see three key elements. First, we should explain clearly to the public the nature of the inflation shock we are currently facing, and what monetary policy can realistically do to mitigate it. The high inflation we are experiencing is mostly due to global factors – including the increase in the prices of oil, gas and other commodities – over which monetary policy has little leverage. It does not fundamentally result from an economy that is running above potential, that is with excess demand that could be offset by tightening monetary policy. For this reason, and this is my second point, asking monetary policy alone to bring down short-term inflation while inflation expectations remain well anchored would be extremely costly. A monetary policy tightening would not directly affect imported energy and food prices, which are driven by global factors and now by the war. We would instead have to massively suppress domestic demand to bring down inflation. That would mean considerably lowering real activity and employment, knocking down wages and income. In practice, we would have to amplify the ongoing sacrifice in real income suffered by the European economy. And with the current levels of imported inflation, in order to hold headline inflation to 2%, we would need domestic inflation to be deeply negative. In other words, we would induce domestic deflation. In this situation, a coherent fiscal and monetary policy strategy would alleviate the cost of reducing inflation. Against the backdrop of a considerable hit to real income, fiscal policy can help mitigate the challenge of higher inflation by containing the effects of higher energy prices, for example by reducing indirect taxes or increasing transfers to the most affected households. Supply-side public intervention can also address the challenge of more persistent supply-demand mismatches through direct investment, incentives or regulatory intervention. Monetary policy will play its role, adjusting policy in line with the medium-term inflation outlook. And it must ensure that its policy stance is transmitted evenly throughout the euro area, which would also prevent financial fragmentation from hindering the necessary monetary and fiscal interventions. However – and this is the third element – our price stability mandate implies that we would not hesitate to tighten policy to safeguard price stability if supply shocks were to feed into domestic inflation through de-anchored inflation expectations and accelerating wage growth inconsistent with our inflation target and with productivity gains. We do not see evidence of such second-round effects today. And they may not materialise given the credibility of our commitment to preserve price stability, which helps anchor inflation expectations, and the exceptional degree of uncertainty we face today, which may induce workers to prioritise job security over wages rises. For now, that uncertainty continues to require careful and gradual steps in adjusting policy.’

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):

08 April 2022

‘We are focussed on price stability. There is absolutely no doubt at all that the Governing Council wants to and is going to deliver its mandate, which is to get inflation to 2% over the medium term. Secondly, we are experiencing now … a series of supply side shocks, the response to which would not normally be monetary policy. So, in normal circumstances, we would be looking through the … what we’re actually seeing. The big question for us now is to look at the evidence and look at the data and try and understand exactly what is happening and the extent to which the inflation we’re seeing is creating spillovers, which would mean that we need to take some sort of action. But the picture is not clear-cut, notwithstanding that inflation is at a level that’s very concerning, and it’s impacting, especially families … on lower incomes, older households, rural households are being affected. But whether or not we need to take action and when we might need to take action, I think that’s incredibly uncertain. There has never been – if I can just say this – there has never been, certainly in modern history, a period of economic closedown, which we saw during the pandemic, followed by the lifting of all restrictions all of a sudden, followed by a war. So, … these circumstances are pretty unique, so they pose interesting challenges… The people see what the Fed is doing and therefore say the ECB needs to do the same thing. That’s a mistaken conclusion. Certainly … the Fed and the dollar and the decisions they make have an influence on the whole world. But the US economy right now is in a different situation to the Eurozone economy, and I think that’s very important. It was actually in a different place at the beginning of the pandemic. The fiscal impulse that we saw during the pandemic in the United States was much stronger than in the EU, and the energy price shocks that we are experiencing in Europe are different to the US. If you talk to Americans, they’ll tell you it’s terrible what’s happening to their gasoline prices. But they haven’t lived in Europe, is my short answer to that. So, the situation in the US is different, and there the economy is running hot, and basically that’s why the Fed is taking the action it is. And it is different here. That’s not to say we haven’t got similar circumstances.’

‘I think there’s always the danger that we talk ourselves into a recession, and I think the evidence at the moment anyway is that there’s going to be less growth and there’s going to be more inflation, but there is going to be growth, and that’s more likely than not to continue.’

30 March 2022

‘The current rates of inflation are driven by higher global energy prices and supply bottlenecks, with some knock-on implications of the energy price rise for the prices of other consumer goods and services. And it should be noted that these increases in official consumer prices for energy and fuel are yet to reflect in full the developments of recent weeks and the implications of the conflict in Ukraine. Nor do we understand yet the full impact of the latest increases in COVID-19 case numbers across the world. We are concerned at the impact of inflation. From a euro area perspective, as a member of the Governing Council of the European Central Bank (ECB), the experience in Ireland is similar to that across member states, and indeed across the globe. As for the economic consequences of the war in Ukraine, it is too early to give a definitive view. It clearly represents a significant challenge to the outlook for inflation and growth and adds new uncertainty to what had started to become a less uncertain picture. The war is likely to have a material impact on economic activity and inflation in the euro area. But in some countries, including Ireland, the effects will be more indirect than for others although that does not mean they will be insignificant. Of course, as far as inflation is concerned, the Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability.’

21 March 2022

‘… despite the emergence of the Omicron variant, the economy has proved remarkably resilient, and rather than further pandemic-related output losses being our primary concern, focus has been shifting in recent months to the issue of inflation as a potential economic headwind. Even before the invasion of Ukraine, inflationary pressures were being stoked by a range of bottlenecks within the global economy, leading to supply-demand imbalances in many sectors. From the point of view of the Irish economy, the tragedy unfolding in Ukraine can be thought of as an exacerbating factor which will make more acute many of the difficulties that were already causing inflationary pressures in recent months, in particular relating to energy supply and prices, and availability of other goods including inputs to food production.’

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 normalisation 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):

08 April 2022

‘Interest rates should not react simply because inflation is higher than 2%. In our forward guidance there are three conditions that need to be met in order for the monetary policy and the interest rates to change. And one of those conditions … is the medium-term outlook of inflation. So, we need to make sure that in the medium term, it is at 2%, but also the economic underlying factors are there to sustain it at 2%. … So, we need to make sure that all those conditions within our forward guidance … are fully met in order to proceed with any changes. Now, … we are having supply-side shocks, and unfortunately those shocks have been exacerbated further by the war, because before the invasion, 50% of the increase in inflation came from energy prices. Now we are almost at two thirds of that inflation explained by supply side energy shocks, and we need to make sure that we know that by changing interest rates, those supply-side issues will not be resolved. On the contrary, the squeeze that the household incomes are currently feeling and the profit squeeze that enterprises are currently feeling will be exacerbated by the increase in financing costs. … If we see spillover effects or demand side effects, then of course we will move. … And just to expand a bit on … what’s different in the US … the economy there is running hot, and the labour market over there compared to the European labour market is much tighter and wage increases are much higher. Hence, the Fed policy is quite different, justifiably so, than the ECB policy.’

‘Yes, the expected growth rate is on the one hand less than expected because of the impact … of the war, but there’s still a healthy GDP growth that is comparable to what the GDP growth rate was pre- pandemic, as things stand. And at the same time the labour market is still dynamic within the Eurozone. So, I share the view [that stagflation is unlikely].’

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)

30 March 2022

‘If there is no dramatic escalation of the conflict in Ukraine, the first interest rate hike could take place towards the end of this year.’

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 normalisation 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.’

Elderson (ECB)

24 March 2022

‘The analysis confirms that the present circumstances represent new headwinds to growth, emerging at a time when previous, pandemic-induced, headwinds were finally waning. In particular, there are two important channels through which the war weighs on the euro area economic outlook: negative confidence effects, which have an impact on both international trade and on financial markets, and high energy prices. This is reflected in a downward adjustment of growth in the baseline of the latest staff projections. At the same time, it should be noted that the outlook that prevailed before the Russian invasion was quite favourable, showing the euro area economy emerging from the pandemic on solid footing. This implies that in our updated baseline outlook, and also in more adverse and severe scenarios for the impact of the war, stagnation is not foreseen. While we are facing downward pressures on growth, inflation has continued to surprise on the upside. After having fallen sharply in the first months of the pandemic, it started rebounding around one year ago and has increased above our 2% target since last summer reaching 5.9% last month. The strength and the persistence in the rebound of inflation has consistently surprised many analysts and professional forecasters, including us. Unexpectedly high energy costs contributed most to these surprises, yet we do also see that price rises have become more broad-based. Even if global oil prices do not increase any further and stabilise at high levels, we currently expect inflation to be above our 2% target well into 2023, before settling around target in 2024. We are aware that the current spell of high inflation has a consequential impact on many citizens’ personal livelihoods in a time in which both economic and a broader sense of uncertainty have again taken hold. Let me reiterate: our commitment to medium-term price stability is unwavering. With inflation stubbornly above our target for so long, some concerns have been raised about the risk of “second-round effects”, which could make high inflation even more persistent. These effects describe a situation where high inflation feeds into higher wages, implying increased costs for businesses, which would lead to higher inflation still. Our current inflation projection accounts for some increase in wages building on historical regularities of pass-through from inflation to wages and further spillback mechanisms. And at present we are not yet observing stronger second-round effects than projected. At the same time, we are mindful that some ingredients for potential stronger effects are in place. Slowing growth and high inflation put pressure on households’ real disposable income that they may seek to recover through higher wages in an economy in which labour market shortages and other supply side bottlenecks are lingering. Thus, the interplay between inflation and wage growth – with an important role for inflation expectations - is something that we will carefully continue to monitor in the period ahead. Similarly, in the pursuit of our mandate, we diligently monitor whether the prevailing financing conditions remain consistent with inflation reaching our 2% objective in the medium term. The Russian invasion of Ukraine and the subsequent financial sanctions have clearly caused substantial volatility in financial markets. However, these factors have so far not caused severe strains in money markets or liquidity shortages in the euro area banking system. Shortly before the Russian invasion of Ukraine, ECB Banking Supervision published the results of the 2021 cycle of the Supervisory Review and Evaluation Process (SREP). The findings of that annual assessment indicate that significant institutions have maintained solid capital positions, with most banks going beyond the levels dictated by capital requirements and guidance. Of course, the 2021 SREP cycle did not envisage the current war in Ukraine nor the sanctions on Russian counterparts that followed. Yet, the SREP results do reflect the general resilience of Europe’s banking sector, which should help avoid disruptions in financing conditions as the economy and financial system are adjusting to the evolving circumstances. As regards Russia, the ECB continues to monitor direct and indirect channels of impact on European banks, but none have been disruptive so far.’

‘Let me now turn to how this assessment of the euro area economy outlook translates into the outlook for monetary policy. It is a well-established practice in monetary policy that in times of uncertainty prudent policy calls for gradualism, as was also alluded to in a speech last week by ECB President Christine Lagarde. This holds particularly true when we approach potential turning points in the monetary policy cycle. In determining the appropriate degree of gradualism, the Treaty gives us a compass – the principle of proportionality. A compass that points to price stability and - in line with our monetary policy strategy – has its needle moved by the evidence. Against this backdrop, already in December we announced our intention to end the net asset purchases conducted under our pandemic emergency purchase programme (PEPP), which in our recent meeting we confirmed we would do at the end of this month. Moreover, in light of the revised inflation outlook, we have assessed that net asset purchases under our other purchase programme can be discontinued in the third quarter if the incoming data confirm that the medium-term inflation outlook will not weaken after net asset purchases. This strengthens our policy optionality by removing obstacles for potential policy rate normalisation beyond the horizon of our asset purchases. Any adjustments to the key ECB interest rates will take place some time after the end of our net asset purchases and will be gradual and based on the incoming data. Both the timing and the pace will be proportionate to the evolution of the inflation outlook in relation to our price stability objective. If the evolution of the inflation outlook supported by incoming data allows a further normalisation of monetary policy, we stand ready to adjust our instruments accordingly. Meanwhile, we will continue to fully reinvest the maturing securities acquired in the context of our asset purchase programmes past the date on which we start raising the key ECB interest rates. Whenever we face renewed pandemic-related threats of market fragmentation that are a risk to price stability, the reinvestments that we undertake under the PEPP can be adjusted flexibly across time, asset classes and jurisdictions to counter those threats. Moreover, we can design and deploy new instruments to counter any threats to price stability that may emerge as we move along the path of policy normalisation.’