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

2 May 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 25 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):

26 April 2022

‘The persistence and intensity of inflationary pressures reflect the confluence of various demand and supply factors. Among the former, the relatively strong recovery in activity following the slump in 2020 and the changes in consumption patterns as a result of the pandemic and the measures to contain it stand out. Supply-side factors include higher energy prices, with strong tensions in the gas market, and disruptions in global supply chains. This context of high inflation at the global level has also been reflected in expectations of a normalisation of monetary policies and, consequently, a moderate tightening of private sector financing conditions. As at the global level, the repercussions of the war on the Spanish economy are highly uncertain. Spain's direct exposure to the countries in conflict is limited. But the aggression in Ukraine has altered the economic environment and represents, at a time when the recovery from the pandemic is incomplete, a new shock, which can be expected to have adverse consequences in the coming quarters on economic activity and inflationary pressures through various channels. Of these, probably the most important channel is the one that runs through the markets for raw materials, both energy and non-energy, and, within the latter, both foodstuffs and metals, of which Russia and Ukraine are major producers and exporters on a global scale. Spain's direct exposure to these imports is relatively small; for example, only 6% of total purchases of energy products from the rest of the world came from Russia in 2019. This percentage is significantly higher in countries such as Germany and Italy (17% and 22%, respectively). However, the war is affecting, in a context of high volatility, the cost of these goods on global markets regardless of their origin. In particular, the rise in the cost of energy goods has a significant impact on the cost of the household consumption basket and on the cost of production for companies. Moreover, it cannot be ruled out that the war may end up hampering the very supply of some of these goods, which would obviously have a major impact on prices and economic activity. The European authorities have 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. The rise in inflationary pressures reflected in the March figure is partly a reflection of the war-related increase in commodity prices, although it is also partly the result of the delayed effects of the acceleration in intermediate costs in previous months on the prices of other goods and services, and of the problems of shortages of certain products caused by the road freight transport strike.The impact of the increase in energy costs is very heterogeneous by group of agents. Among households, it has a greater impact on those with lower income levels. By productive branches, the impact is logically greater in those with higher energy consumption. A second channel, also very relevant, is the impact of the war on household and business confidence, given the extraordinary uncertainty about the duration and development of the war, which, in turn, introduces uncertainty about the evolution of these agents' incomes, which means that they tend to postpone their consumption and investment decisions. One indication of the magnitude of these effects is the sharp decline in the consumer confidence indicator in March (the largest decline in the historical series, which begins in July 1986). This decline suggests that increased uncertainty may have started to negatively affect household spending decisions. In turn, the results of the most recent edition of the Bank of Spain's Survey of Business Activity (EBAE) suggest that the war may have started to deteriorate non-financial corporations' expectations about their turnover and also about the duration of the problems in global supply chains, which is now expected to be longer. Third, the invasion of Ukraine will have an impact on our economy through the trade channel, the direct impact of which is assumed to be moderate, as bilateral flows with the countries at war are relatively small. In 2019, the last year before the pandemic, Spanish exports of goods to Russia and Ukraine accounted for only 1.6% and 0.3% of the total, respectively. Meanwhile, Russian tourism accounted for 2.2% of total expenditure by foreign tourists that year. However, the indirect effects on Spanish trade flows may be significant. The war will particularly affect Central and Eastern European countries, which are more exposed to Ukraine and Russia, and therefore to the growth of Spanish export markets. Moreover, the invasion is having a negative impact on the global supply chains of some production processes, with signs of a strengthening of bottlenecks, after the partial improvement experienced in the last quarter of 2021, although the confinements carried out in China to curb the pandemic have also contributed to this. In any case, the most recent indicators for export orders point to a slowdown in trade flows. It goes without saying that, in a context of such uncertainty, macroeconomic projections become even more complicated. The latest forecasts by the Bank of Spain, published on 5 April, corroborate that the gradual recovery in activity has been disrupted by the invasion of Ukraine, which has led to a downward revision of GDP growth forecasts and an upward revision of inflation compared with the previous forecast year, December 2021. These forecasts have been made on the basis of information, which is still partial, for the first quarter of this year. According to the available data, the recovery in activity had continued in the pre-war period, as indicated, for example, by the information from Social Security enrolment, even despite the effects of the spread of the omicron variant of the virus, which is probably related to the beneficial effects of the high vaccination rate achieved on the consequences of the disease. But the same Social Security enrolment data already show a certain slowdown in employment growth in March and the first weeks of April, following the invasion of Ukraine. The war has led, through the channels described above, to a reduction in the projection of output growth for 2022 of 0.9 pp, to 4.5 %, and of 1 pp in 2023, to 2.9 %. Specifically, in the case of the 2022 revision, according to the Bank's estimates, higher commodity prices, increased uncertainty and slower growth in global markets would lead to respective growth declines of 0.7 pp, 0.6 pp and 0.5 pp. These factors would more than offset other factors working in the opposite direction. Notable among these is the fact that GDP advanced more strongly in the second half of 2021 than anticipated in the December forecasting exercise, according to the latest published figures from the Quarterly National Accounts (QNA) 2 . And the impulse provided by the measures included in the National Plan of response to the economic and social consequences of the war in Ukraine, approved on 29 March by the Council of Ministers3 , which I will briefly mention below, is in the same direction. In any case, assuming that the duration of the war is limited, activity will continue to be supported by factors such as the expected improvement in the epidemiological situation, the use of NGEU funds and the still favourable financing conditions (albeit somewhat tighter than in previous quarters). As regards the outlook for inflation developments, in line with the paths of the relevant futures markets, upward pressures from the energy component are expected to peak in the second quarter of the year and to decelerate thereafter. The inflation projections are based on the assumption of a relatively moderate (albeit stronger than in the December forecasting exercise) pass-through of intermediate cost increases into final prices, in line with information from the EBAE, and a low magnitude of second-round effects, i.e. little feedback between price and wage inflationary pressures. Inflationary pressures will be partially dampened by the measures contained in the National Response Plan to the economic and social consequences of the war in Ukraine4 . Moreover, these projections do not yet include possible changes in electricity market prices currently being negotiated within the European Union. In this scenario, inflation would be 7.5% in 2022, falling to around 2% in 2023, mainly thanks to the moderation of the energy component. Core inflation would not start to decline until the end of 2022, once the upward pressures on business costs associated with energy prices and bottlenecks are corrected, so that it would pick up to 2.8% on average in 2022 as a whole, before moderating gradually over the remainder of the projection horizon. Compared with the December exercise, the inflation forecast for 2022 is revised substantially upwards, by 3.8 pp, owing, above all, to the recent surprises in its energy component. The balance of risks in this forecasting exercise is tilted to the downside for economic activity and to the upside for inflation. All this against a background of extraordinary uncertainty as a result of the war in Ukraine and its geopolitical implications. Activity and inflation will, in particular, be very sensitive to developments in energy and commodity markets, and to the hypothetical emergence of second-round effects between prices and wages and the path of household consumption and savings. By way of illustration, I will describe in some detail below the adverse repercussions for the Spanish economy of the emergence of second-round effects, which underlines the need for a policy response that anticipates these risks through an income pact.’

‘As for the monetary policy of the European Central Bank (ECB), given the context of high inflationary pressures observed recently, it has continued with the normalisation process initiated last December. Looking ahead, the Governing Council wished to make explicit its willingness to preserve various options open to it and to maintain the gradualness and flexibility of its decisions in the future. This is deemed necessary, in the current context of uncertainty, in order to be able to react to incoming data in order to fulfil the ECB's price stability mandate and to contribute to safeguarding financial stability. Indeed, the war in Ukraine adds to the upward dynamics of inflation in the short term, adding to pressures from rising energy prices, bottlenecks and normalisation of demand. The intensification and prolongation of these short-term inflationary pressures increase the likelihood of the emergence of second-round effects and thus of strengthening inflation dynamics over the medium term. However, the war is having a negative impact on economic growth, which could potentially become significant, particularly in the short term, and in a context in which euro area GDP is still below potential. Overall, upside risks to the inflation outlook have intensified, especially in the near term. Moreover, while various indicators of long-term inflation expectations from financial markets and expert surveys are around 2%, there are preliminary signs of revisions to these indicators above the target that require close monitoring. Thus, in line with the normalisation of monetary policy, net purchases under the pandemic emergency purchase programme (PEPP) ended on 31 March. Reinvestments of the principal of securities purchased under the PEPP will continue at least until the end of 2024 and, in the event of episodes of fragmentation in the debt markets related to the pandemic, reinvestments could be readjusted in a flexible manner. Moreover, at the Governing Council meeting on 14 April we considered that the latest available data reinforced the expectation that net purchases under the asset purchase programme (APP) should be completed in the third quarter of this year. For our part, we have signalled that the increase in interest rates will take place some time after the end of the APP's net purchases and will be gradual. Finally, the Governing Council of the ECB has signalled that we stand ready to adjust all our instruments in line with our mandate, and to act flexibly if necessary, to ensure that inflation stabilises at our 2% medium-term objective. The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to offset difficulties in the transmission of monetary policy and has made the Governing Council's efforts to achieve its objective more effective. Within the Governing Council's mandate, under conditions of stress, flexibility will remain an element of monetary policy when threats to the transmission of monetary policy jeopardise the achievement of price stability. In line with the communication of this process of monetary policy normalisation, there has been an advance in the timing of expectations of policy rate hikes since December. The prospect of a normalisation of the monetary policy stance has also been reflected in a pick-up in long-term interest rates in the euro area. In particular, the ten-year OIS rate, which approximates the euro area's risk-free rate, has risen by about 170 bp since the beginning of the year. rate, has risen by about 170 bp since the beginning of the year.’

25 April 2022

Before the war broke out, euro area GDP had returned to its pre-pandemic level by the end of 2021, although the Omicron variant had weakened growth in the final quarter of 2021 and this, together with the significant increase in energy prices and persistent supply bottlenecks, was also constraining economic growth in the first quarter of 2022. However, growth was expected to accelerate strongly in the second quarter of 2022, under the assumption of a progressive easing of COVID-related restrictions and a gradual resolution of supply bottlenecks. The terrible and tragic war in Ukraine has changed the circumstances drastically. The economic outlook has darkened worldwide, and uncertainty has increased greatly. Europe is particularly vulnerable to the consequences of the war, given its geographical proximity and heavy dependence on external energy sources. In fact, some economic impact is already visible. The conflict has caused the price of energy and other commodities to rise dramatically in international markets. In the euro area, the rise in energy prices and its rapid transmission to costs and prices is particularly damaging for both consumers and producers. Economic confidence has deteriorated, especially that of consumers, who expect a significant setback in their financial situation. The war has also introduced new supply chain difficulties in addition to those arising from the new COVID-related measures in Asia. As a result, some sectors continue to face shortages of inputs, which are likely to become more acute in the future. The economic situation will crucially depend on how the conflict evolves, on the impact of the current sanctions and on possible further measures. In the short term, however, the reopening of euro area economies after the latest wave of COVID-19 infections will continue to provide some support to economic activity and employment. In fact, the unemployment rate continued to fall in February, and stands well below its pre-pandemic levels, while jobs data point to high employment demand at the moment. Also, fiscal measures to compensate consumers and businesses for the rise in energy prices and the cushion provided by private savings accumulated during the pandemic will likely underpin consumption and economic activity. In any case, the war, potential further increases in energy costs and heightened concerns about supply bottlenecks have increased downside risks to the growth outlook. As regards the inflation outlook, the current extraordinarily high inflation levels are obviously a cause for concern. And even though our central scenario remains one of gradual convergence to the 2% target over the medium term, the war has intensified the upside risks to the inflation path, especially in the near term. The risks to the medium-term inflation outlook include above-target moves in inflation expectations, higher than anticipated wage rises and a durable worsening of supply-side conditions. However, the negative effect of the conflict and the associated uncertainty surrounding the euro area’s economic growth could reduce inflationary pressures in the medium term. In this respect, two important dimensions to monitor are wage formation and inflation expectations. For the moment, wage growth has remained muted, despite the high inflation environment and a strong labour market. But the longer inflation remains at high levels, the more likely that this will feed into wage negotiations and thus trigger second-round effects on inflation. As regards inflation expectations, different measures of medium-term and longer-term expectations currently stand at around 2%. For instance, in the latest ECB Survey of Professional Forecasters, inflation expectations for 2022 and 2023 were revised upward to 6% and 2.4%, respectively, but for 2024 they remained unchanged at 1.9%. Longer-term inflation expectations for 2026 stood at 2.1%, revised up from 2.0% in the previous survey. And according to the 5-year forward inflation-linked swap rate 5 years ahead, inflation compensation exceeded the 2% reference in March on average, reaching almost 2.4% in mid-April, although once controlling for inflation risk premia its level remains at 2%. In any case, initial signs of above-target revisions in those measures warrant close monitoring. Against this background of high inflation and increased upside risks to the inflation path, the decisions taken by the ECB Governing Council earlier this month represent a continuation of the process of policy normalisation initiated in December last year. Accordingly, net asset purchases under the pandemic emergency purchase programme (PEPP) were concluded in March. We then confirmed that net purchases under the asset purchase programme (APP) will amount to €40 billion in April, €30 billion in May and €20 billion in June. And the Governing Council judged that the incoming data has reinforced the expectation that net asset purchases under the APP should be concluded in the third quarter. Looking ahead, our monetary policy will depend on the incoming data and our evolving assessment of the outlook. This process is also characterised by flexibility and optionality, given the high uncertainty surrounding the economic outlook. As for the key ECB interest rates, any adjustments to our policy rates will take place “some time” after the end of the net purchases under the APP. The path for the key ECB 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. And, of course, we stand ready to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2% target over the medium term. The path of normalisation is also expected to be gradual. Indeed, provided inflation expectations remain anchored, in a highly uncertain scenario as the current one, including geopolitical tensions in Ukraine, the ECB should maintain a clear, gradual and predictable path for its policy. This gradualism is also justified by the fact that our estimates of the natural interest rate in the euro area remain very low, which should serve as an anchor as to the level around which our policy rates might stabilise in the longer run. Indeed, market interest rates have increased in response to the changing outlook for monetary policy, the macroeconomic environment and inflation dynamics in the last months. And analysts (as illustrated by the latest ECB survey of Monetary Analysts) and investors (as illustrated by interest rate forward curves, after controlling for positive risk-premia) are anticipating a further gradual approach to monetary policy normalisation in the euro area. Finally, the pandemic 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. Thus, 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. In short, the war in Ukraine is severely affecting the euro area and has notably increased uncertainty. The impact of the war on the economy will depend on how the conflict evolves, on the effect of current sanctions and on possible further measures. Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. Looking ahead, the calibration of our monetary policy will depend on the incoming data and our assessment of the macroeconomic outlook. In the current conditions of high uncertainty, we will maintain optionality, gradualism and flexibility in the conduct of monetary policy. We stand ready to take whatever action is needed to fulfil our mandate to maintain price stability and to contribute to safeguarding financial stability.’

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.’

Villeroy (Banque de France):

13 April 2022

‘We have just carried out a business survey of more than 8,000 entrepreneurs and SMEs in all territories, all sectors. They tell us that after a nice post-Covid recovery, our environment is now more uncertain. The first quarter should still record growth of around 0.25%, but we are seeing the first effects of the Ukraine shock. … The shock is much less brutal than the Covid shock of two years ago, but it could last longer and affect our growth and employment. First of all, there is certainly the rise in energy prices: it is however lower in France than in other countries, with a powerful “tariff shield” which leads to two points less inflation. But there are also supply difficulties, at their highest in industry and on the rise in construction: they lead to a sharp rise in uncertainty among business leaders.’

‘This inflation, which is too high at 4 or 5% - even if it is clearly lower than the European average - will remain for a certain number of months, depending on the evolution of the price of oil and gas. It should then decline in 2023 and return to 2% by 2024.’

‘We will update our scenarios in June. French growth seems to be holding up better than our neighbours, but we will undoubtedly have to go through more difficult economic times. The French economy is heading down a road that has become more slippery. Let us therefore be careful to avoid economic swerves: our economy needs stability.’

‘In this more fragile economic environment and in the face of this high debt, our country has assets that it is essential to keep. My duty is to recall two simple compasses; the first is to maintain the confidence of those who lend to France. Today, France borrows at only 0.5% more interest than Germany. If our country were led to spend too much and for that to borrow even more, it would inspire less confidence and this additional cost could increase rapidly. To give you an example: Italy, in 2018, raised doubts about its European commitment; it had seen in a few weeks the cost of all its new loans increase by 1.5%, for the public debt but also for individuals and companies.’

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.’

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.’

Kazāks (Latvijas Banka):

26 April 2022

‘A rate rise in July is possible and reasonable. Markets are pricing two or three 25 basis point steps by the end of the year. I have no reason to object to this, it's quite a reasonable view to take.’

‘Whether it happens in July or September is not dramatically different, but I think July would be a better option.’

Said the ECB should eventually raise interest rates to the neutral rate, which he said various estimates put at 1% to 1.5%.

‘Ending the Asset Purchases Programme in early July is appropriate. The APP has fulfilled its purpose so it’s not necessary anymore.’

‘I don't think [de-anchoring] has happened yet, but the risks are there. That's why I think a rate hike relatively soon is needed.’

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):

29 April 2022

‘Just look at the very large changes in the ECB’s monetary stance since, since December. So, December, you know, we took decisions which, you know, were, were not universally praised at the time, to, to have a big scaling-down of asset purchases, including through the ending, the announced end of the, of the PEPP purchases at the end of March. So, in terms of a step one, scaling down the, the monthly volume of purchases, a lot has already happened. Step two of, of not only going, ending the PEPP, but talking about concluding net purchases under the APP, you know, we’ve, we’ve signalled our strong expectation that this, this is coming up. And then after that sequence, it’s the issue about moving interest rates. And, you know, the market and for ourselves, it, it, you know, it, the story is not, you know, the issue about, you know, are we going to move away from, from -0.5% for, for the deposit rate. The big issue, which we do have to still be data-dependent about, is, is the scale and the timing of interest rate normalisation. And, you know, we’ve just talked about the high uncertainty. It’s recurrent everywhere that, that, that there are mixed dynamics in the euro area. In the near term, yes, inflation is very high, and that does carry its own risk of momentum. On the other hand, the high energy prices are eating into disposable incomes, it’s reducing consumption. The war, you know, has a scope, especially, you know, depending on how it goes, in terms of mapping into lower investment, lower consumption, through confidence effects and extra pressure on energy. So, I’m going to hold to this perspective that, that the, a lot remains data-dependent. But, but, but, but I would emphasise though, is, we’re, we’re, you know, I don’t think you’re hearing anyone saying that the, the current deposit rate of -0.5% is, is going to be, remain there indefinitely. It’s all about the, the, the, the prudent and robust and durable way of having normalisation.’

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.’

Lagarde (ECB):

24 April 2022

‘I believe that we share the same resolve [as the Fed], which is to tame inflation, which is to use all the tools that we have to do so, but we’re facing a different beast. When I look at my core inflation, which is inflation taking out the most volatile elements, such as energy and food, my core inflation is at 2.9%. Inflation in Europe is very high at the moment; 50% of that is related to energy prices. Pre-Ukraine war it was already climbing, but the Ukraine war has dramatically increased those prices. So, we have to use the tools and the sequence which is appropriate depending on the sources of inflation. If I raise interest rates today, it is not going to bring the price of energy down. So, we have embarked on that journey of gradually removing accommodative monetary policy, so we will be interrupting the purchases of assets in the course of the third quarter – high probability that we do so early in the third quarter – and then we will look at interest rates and how and by how much we hike them. But we have to be data-dependent, because of the sources of inflation that we have at the moment.’

‘It’s the trade-off that central bank governors face at the moment. We have to be guided by our mandate, by our objective, which is to restore price stability, which we have all defined as roughly 2%. So, that, that’s, that’s the mandate. But at the same time, we have to do in a sufficiently well-sequenced, well-calibrated, for us in Europe gradual way, so that we don’t induce recession. We currently are facing, you know, winds that reduce growth and increase inflation. So, we have to navigate between the two, guided by the mandate of price stability and bringing inflation down.’

22 April 2022

‘It makes our job a bit more complicated, because of the trade-off that we have between taming inflation and making sure that we deliver on our mandate of price stability, while at the same time being attentive to not put any kind of brake on growth, which is slowing down as a result of the circumstances. We were on a path to recovery, it was going nicely, and the war arrived on February 24th and from there on, you know, growth has been weakened, and inflation has been strengthened.’

‘We have to be attentive to the impact of the war on the economy and in particular the impact of the war on inflation. For the moment, there is an upside risk to inflation and a downside risk to growth, which means that inflation will be propped up by commodity prices, by energy prices, added to which consumers are going to see some of their disposable income eaten up by the price of energy. So, we have to pay attention to all that. But we are riveted by the single compass that we have to use, which is price stability, defined as 2% inflation, medium term. That’s what we have to look at.’

‘We’re not looking at tightening. We’re looking at normalising monetary policy. … No, it’s not [the same thing]. No, no, no, no, no, no, no, it’s not at all … no, because if you look at real rates, even if we were to hike interest rates, which we might very well do, okay, we would not be tightening, because of the inflation where it is. It would still be very accommodative. … So, we are normalising monetary policy. We are gradually removing quantitative easing. We stopped the emergency programme related to the pandemic. We are looking at putting an end to the net asset purchases during the course of the third quarter, somewhere in-between the 1st of July and the 30th of September, high probability that it will be early rather than late in the quarter. And then we will be looking sequentially at rates and what we do with rates.’

22 April 2022

‘…we are taking a triple hit if you will. One is trade, which is luckily relatively minor in a way. The second one which is major is commodities and the third one is confidence. And on these three accounts, it’s clearly going to lower and has lowered our growth and it will have impact on inflation that it will increase going forward. So, it’s a, it’s downside risk on growth, upside risk on inflation at a time when all of us were recovering pretty strongly after the the biggest waves of the pandemic. So, you know, we are in this sort of response mode in order to deliver on our mandate.’

‘You know, we started that journey which you described back in December because we are data dependent, we look at our projections, we look at survey, we look at consumers’ expectations very, very carefully. We monitor the risk of second round from price to wages to prices to see how anchored or de-anchored or re-anchored our inflation expectations are in in Europe and we decided back in December that we had to move towards stopping the special emergency purchase program that we had. We did so at the end of March. We decided later on February and March yet again reconfirmed that we would be reducing the net asset purchases which had been the traditional purchase program to support the impact of interest rates. And this is, you know, very likely to happen in the course of the third quarter with a high probability that it will be early in the quarter if numbers continue to be the way we have seen them…’

‘But we have to be data dependent and we are sequential as well. So we will stop net asset purchases in due course, as I said, third quarter high probability early in the quarter and then we will look at interest rates and sometime after the end of net asset purchases, we will look at increasing interest rates. It’s not fixed and set yet as to exactly when we do that, but the journey has been approved unanimously at our last monetary policy governing council meeting and we are on that path and we’re going to just carry on, step by step as we’ve agreed.’

‘You know, we look at inflation numbers, we look at inflation expectations, we look at wages, and we look at how we can best deliver on our mandate of price stability. If the situation continues as predicated at the moment, there is a strong likelihood that rates will be hiked before the end of the year. How much, how many times remains to be seen and will be data dependent.’

‘If you define stagflation as a prolonged period of recession and very high inflation, the answer [to the question of whether Europe is facing stagflation] is no on the basis of what we are seeing at the moment. So we are not seeing stagflation either in the baseline that we have or in the scenarios that we are considering, but there is a lot of uncertainty at the moment which will depend on the efficacy of our sanctions, the scope of our sanctions, any other measures that are taken down the road and how the war develops as well. So, it’s on the basis of current facts that I can say that pretty, you know affirmatively but we have to be attentive to what’s, what’s, what’s coming.’

‘You know, when we look at the tail risk at the moment and concentrate on China, there are some potential tail risks arising out of China. We have suffered the bottleneck period of the COVID. We know now from the institute study that there are about 12% of goods that are just pending waiting somewhere in the world to unload, to arrive at at ports and containers to be to be driven to destinations. 12%, it’s the third time that it’s at the highest level at the moment and there is no doubt that it is related somehow to the blockage and the lockdown that is imposed on on Shanghai because of the Chinese anti-COVID policies. I don’t think it’s only limited to Shanghai by the way, I think it goes beyond that and there are other centers of activity which are reduced, were activities reduced as a result of the COVID policy. So yes, it is it is an issue for the rest of the world. It is certainly an issue for China as well because when we look at the projection for growth that they have, it is certainly much lower than what they had expected expected and were hoping for and we heard, you know, 4.8% as opposed to 5.5 which before that was even 6%. So, domestically, the economy is also taking a hit as a result of this anti-COVID policies and you have to add to that, I think the real estate and housing sectors which are, as we saw in the last few months, also suffering so it’s not a rosy situation anywhere and it certainly doesn’t seem to be the case in China. So we are interrelated. We are suffering as a result of that.’

21 April 2022

‘Since our previous meeting in October 2021 global economic activity has continued to recover. The progress of vaccination campaigns and supportive economic policies have underpinned a solid global recovery in economic activity and trade, although this rebound has also led to disruptions in global production networks. However, the war in Ukraine is casting a shadow over the recovery while fuelling inflationary pressures. And the recent increases in coronavirus (COVID-19) infections in some parts of the world compound the risks of further disruptions to global supply chains. In this environment, the main objective of policymakers is to carefully calibrate fiscal, monetary and structural policies to the prevailing economic and financial challenges, in line with their mandates. Clear communication by major central banks on their monetary policy and the economic outlook remains important. Euro area output had returned to its pre-pandemic level by the end of 2021. But the growth momentum weakened in the final quarter of last year amid a new pandemic wave driven by the Omicron variant, the increase in energy prices and supply bottlenecks. These factors, along with the Russian invasion of Ukraine, also constrained economic growth in the first quarter of 2022. The war has led to rising uncertainty, further increases in energy costs and heightened concerns about supply bottlenecks, posing clear downside risks to economic activity. Despite this, the medium-term growth prospects should continue to benefit from solid underlying conditions – the economy is reopening, the labour market continues to improve, the high levels of savings accumulated during the pandemic can be used to partly cushion the energy price shock, and ample policy support remains in place. Inflation has increased markedly since the middle of 2021, reaching 7.5% in March according to the flash estimate. This increase is largely driven by energy prices, which have been strongly affected by the war in Ukraine. Food prices also increased due to elevated transport and production costs, notably the higher price of fertilisers which was also impacted by the war. Further upward pressure arises from supply bottlenecks and the recovery in demand as the economy reopens. The impact of these factors should fade over time, but in the short run inflationary risks are tilted to the upside. Inflation will be higher if the prices of energy and other commodities increase further and new supply bottlenecks arise. Over the medium-term, risks to the inflation outlook could arise if wages rise by more than anticipated, longer-term inflation expectations move above target or supply conditions durably worsen. At the same time, weaker demand could reduce pressure on prices. So far, however, wage growth has remained muted – despite a strong labour market – and inflation expectations in the euro area stand around our target, although initial signs of above-target revisions in those measures warrant close monitoring. We continue to carefully monitor risks to the inflation outlook. At its April meeting, the Governing Council judged that the incoming data since its last meeting reinforce its expectation that net asset purchases under its asset purchase programme (APP) should be concluded in the third quarter. Looking ahead, our monetary policy will depend on the incoming data and our evolving assessment of the outlook. In the current conditions of high uncertainty, we will maintain optionality, gradualism and flexibility in the conduct of monetary policy. We will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability. The war in Ukraine is also creating risks of regional spillovers that could adversely affect euro area financial markets. Against this backdrop, the Governing Council decided to extend the Eurosystem repo facility for central banks (EUREP) until 15 January 2023. EUREP will continue to complement the regular euro liquidity-providing arrangements for non-euro area central banks. Together, these form a set of backstop facilities to address possible euro liquidity needs in the event of market dysfunctions outside the euro area that could adversely affect the smooth transmission of the ECB’s monetary policy. Fiscal measures, including at EU level, will help shield the euro area from the impact of the Russian invasion of Ukraine. Targeting fiscal measures at the most vulnerable citizens and firms will help preserve the fiscal policy agility that is needed to respond to the evolving economic situation while containing the impact on government budgets and debt. The effective and timely implementation of the investment and reform plans under the Next Generation EU programme should help modernise our economies, enhance long-term growth and economic resilience, and support the green and digital transitions. Financial stress has so far been limited, as the euro area financial sector’s direct exposure to Russia and Ukraine is low. However, the war presents a number of challenges. Financial markets remain vulnerable to further repricing, as they are assessing the impact of the war and adjusting to changes in the global policy environment. Moreover, elevated commodity price volatility may result in hedging activity being scaled down and leave market participants more exposed to market risk. Beyond the immediate effects of the war, financial stability concerns centre around the economic and inflationary impacts through higher commodity and energy prices, disruptions to international commerce and weaker confidence. These concerns may trigger an unravelling of cyclical vulnerabilities that had built up in non-financial sectors prior to the invasion, including pockets of high corporate indebtedness and elevated residential property price valuations in some countries. While high uncertainty merits caution regarding any immediate macroprudential policy action, higher macroprudential capital buffers seem warranted to address cyclical vulnerabilities in some euro area countries. Authorities should stand ready to act, unless the macro-financial outlook deteriorates substantially. The euro area banking sector has strong liquidity and capital positions, but it is also facing new headwinds from the war. The sector benefits from a solid capital position, robust asset quality and high liquidity buffers. Bank profitability has recovered from the impact of the COVID-19 pandemic, with return on equity reaching the highest level since 2010 last year. However, it continues to face structural challenges such as cost pressures and the need to invest in digital transformation. The banking sector could be indirectly impacted by the war, for example through higher corporate and household credit risks. Banks are expected to reflect the direct and indirect impacts of the war and the revised macroeconomic projections in their capital and financial plans. They also need to improve their operational resilience and preparedness for a potential increase in cyber risks. And the reform agenda needs to be pursued, as better regulatory and institutional frameworks make banks more resilient and better able to support citizens and the wider economy under all possible scenarios.’

14 April 2022

‘Russia’s aggression towards Ukraine is causing enormous suffering. It is also affecting the economy, in Europe and beyond. The conflict and the associated uncertainty are weighing heavily on the confidence of businesses and consumers. Trade disruptions are leading to new shortages of materials and inputs. Surging energy and commodity prices are reducing demand and holding back production. How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures. At the same time, economic activity is still being supported by the reopening of the economy after the crisis phase of the pandemic. Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. Inflation pressures have intensified across many sectors. At today’s meeting we judged that the incoming data since our last meeting reinforce our expectation that net asset purchases under our asset purchase programme (APP) should be concluded in the third quarter. Looking ahead, our monetary policy will depend on the incoming data and our evolving assessment of the outlook. In the current conditions of high uncertainty, we will maintain optionality, gradualism and flexibility in the conduct of monetary policy. The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability. I will now outline in more detail how we see the economy and inflation developing, and will then explain our assessment of financial and monetary conditions. The euro area economy grew by 0.3% in the final quarter of 2021. It is estimated that growth remained weak during the first quarter of 2022, largely owing to pandemic-related restrictions. Several factors point to slow growth also in the period ahead. The war is already weighing on the confidence of businesses and consumers, including through the uncertainty it brings. With energy and commodity prices rising sharply, households are facing a higher cost of living and firms are confronted with higher production costs. The war has created new bottlenecks, while a new set of pandemic measures in Asia is contributing to supply chain difficulties. Some sectors face growing difficulties in sourcing their inputs, which is disrupting production. However, there are also offsetting factors underpinning the ongoing recovery, such as compensatory fiscal measures and the possibility for households to draw on savings they accumulated during the pandemic. Moreover, the reopening of those sectors most affected by the pandemic and a strong labour market with more people in jobs will continue to support incomes and spending. Fiscal and monetary policy support remains critical, especially in this difficult geopolitical situation. In addition, the successful implementation of the investment and reform plans under the Next Generation EU programme will accelerate the energy and green transitions. This should help enhance long-term growth and resilience in the euro area. Inflation increased to 7.5% in March, from 5.9% in February. Energy prices were driven higher after the outbreak of the war and now stand 45% above their level one year ago. They continue to be the main reason for the high rate of inflation. Market-based indicators suggest that energy prices will stay high in the near term but will then moderate to some extent. Food prices have also increased sharply. This is due to elevated transportation and production costs, notably the higher price of fertilisers, which are in part related to the war in Ukraine. Price rises have become more widespread. Energy costs are pushing up prices across many sectors. Supply bottlenecks and the normalisation of demand as the economy reopens also continue to put upward pressure on prices. Measures of underlying inflation have risen to levels above 2% in recent months. It is uncertain how persistent the rise in these indicators will be, given the role of temporary pandemic-related factors and the indirect effects of higher energy prices. The labour market continues to improve, with unemployment having fallen to a historical low of 6.8% in February. Job postings across many sectors still signal robust demand for labour, yet wage growth remains muted overall. Over time the return of the economy to full capacity should support faster growth in wages. While various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring. The downside risks to the growth outlook have increased substantially as a result of the war in Ukraine. While risks relating to the pandemic have declined, the war may have an even stronger effect on economic sentiment and could further worsen supply-side constraints. Persistently high energy costs, together with a loss of confidence, could drag down demand and restrain consumption and investment more than expected. The upside risks surrounding the inflation outlook have also intensified, especially in the near term. The risks to the medium-term inflation outlook include above-target moves in inflation expectations, higher than anticipated wage rises and a durable worsening of supply-side conditions. However, if demand were to weaken over the medium term, it would lower pressure on prices. Financial markets have been highly volatile since the war began and financial sanctions were imposed. Market interest rates have increased in response to the changing outlook for monetary policy, the macroeconomic environment and inflation dynamics. Bank funding costs have continued to increase. At the same time, so far there have been no severe strains in money markets, nor liquidity shortages in the euro area banking system. Although remaining at low levels, bank lending rates for firms and households have started to reflect the increase in market interest rates. Lending to households is holding up, especially for house purchases. Lending flows to firms have stabilised. Our most recent bank lending survey reports that credit standards for loans to firms and for housing loans tightened overall in the first quarter of the year, as lenders are becoming more concerned about the risks facing their customers in an uncertain environment. Credit standards are expected to tighten further in the coming months, as banks factor in the adverse economic impact of Russia’s aggression towards Ukraine and higher energy prices. Summing up, the war in Ukraine is severely affecting the euro area economy and has significantly increased uncertainty. The impact of the war on the economy will depend on how the conflict evolves, on the effect of current sanctions and on possible further measures. Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. We are very attentive to the current uncertainties and are closely monitoring the incoming data in relation to their implications for the medium-term inflation outlook. The calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook. We stand ready to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at our 2% target over the medium term.’

‘… I would call your attention to a particular sentence in the monetary policy statement (MPS), which reflects the evolution of the Governing Council assessment of the current situation five weeks after the last monetary policy Governing Council meeting that we had, which is a very short interval as opposed to other periods. It is the sentence that begins the second paragraph of the MPS, where we say: “At today's meeting we judged that the incoming data since our last meeting reinforce our expectation that net asset purchases under our Asset Purchase Programme (APP) should be concluded in the third quarter”. So there is a much stronger affirmation of our assessment of the data, which, as you rightly pointed out, had indeed changed since five weeks ago. Now, obviously, this meeting was not a projection exercise. It was an interim Governing Council monetary policy meeting, and we affirmed the net asset purchases' very likely conclusion in the third quarter, without being more specific, but being open-minded as to when in the quarter that is. It could be early; it could be late. The third quarter has three months, and I think the determination around the Governing Council table was to take stock of the projection exercise at the next monetary policy meeting to determine exactly the timing of such conclusion of the net asset purchases under the APP. On your second question about how many interest rate hikes are projected by markets, let me tell you that we are sticking to our sequence, and this is very much what we did on the occasion of this Governing Council meeting. The sequence that we have adhered to, that we have agreed, is to complete net asset purchases first, and some time after that decide interest rate hike and subsequent hikes. I remember last time around on the occasion of the last monetary policy press conference, I was asked specifically what was meant by the “some time after”. I repeat what I said at the time. “Some time after” is intended to serve our determination to have both optionality, gradualism and flexibility, which means that this “some time after” can be anywhere between a week to several months. That stands and remains true. So we will deal with interest rates when we get there.’

‘Of course, on the oil and gas front, an abrupt boycott would have significant impact. Staff monitors that very carefully. Any such risk, obviously, reinforces the determination of the Europeans to move towards cleaner energy, to move to non-fossil fuel in general, and to reduce dependency vis-à-vis Russia. But have we actually factored in exactly the net amount, the trade-off resulting from any such boycott? No. We simply know that, obviously, some countries within the euro area will be more affected than others, and we also note that the Europeans together under the leadership of the Commission are looking at ways to adopt joint approaches, joint policies, joint purchases. This certainly is, together with moving to a different energy mix, the right approach to take. The second part of your question dealt with the tightening of rates. I have commented on the bank lending survey, which indicates that there is and there was during the first quarter a certain tightening by a larger number of banks answering the surveys. All that being said, the volume of loans to households in particular still stands quite strongly. Lending to consumers – consumption loans – have increased. Corporate lending has stabilised for the moment. So even if there is tightening, particularly concerning the terms and conditions of those lending arrangements, in terms of both rate and volume we are not seeing yet the outcome of this tightening that you referred to. Equally true that in the bank lending survey respondents are indicating that they expect further tightening in the coming months, and clearly that is associated with the war in Ukraine, with the additional supply bottleneck issues that will affect corporates in particular, and the general confidence impact that the war has on both corporates and consumers.’

‘Let me, first of all – again, this seems like a re-reading exercise, but I think it matters, because those are parts of the sections of our monetary policy statement that were clear changes from the past and indicate the direction that we are taking. This is actually something that you will find in the conclusion of the monetary policy statement, which is in the penultimate line, and it says: “We stand ready to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at our 2% target over the medium term”. This is language that you know quite well, but the overall sentence is something that is worth taking notice of. Optionality, gradualism, flexibility are concepts that we have outlined before, so we are really very much in a normalisation process, and we are continuing along the path of that normalisation process. It has been the case in the last couple of years, and particularly two years ago, if you remember, that flexibility served us well. I think it's on the basis of that recognition of the value of flexibility, in particular in order to make sure that the monetary policy stance is properly transmitted and that unwarranted fragmentation is avoided, that we are recognising this and we are mentioning flexibility as one of the principles that we want to apply. Two years ago you would remember it was necessary, and we moved promptly. We can do exactly the same thing. If necessary, we move promptly, and as I have said in my ECB Watchers speech a few weeks back, we will design whatever additional instrument is appropriate in order to deliver the flexibility that we believe is useful. I would add as a footnote to that, that the reinvestment policy that we have decided for PEPP back in December, is actually coined with this flexibility possibility. So we have not only indicated that reinvestment would be extended until 2024, but we also said that, if necessary, we would apply flexibility in the reinvestment policy. So I think that really captures the philosophy that we have in relation to flexibility and the need to properly transmit the monetary policy stance throughout the whole of the euro area. You had a second question, on wages and the possible second-round effect. I think I have told you at the last press conference we had that we were particularly attentive to wages, and we continue being so, because that is a critically important component to assess inflation outlook in the medium term, and to help us determine our monetary policy stance and the need to move at a certain pace. We also look at inflation expectations very carefully. On the wages, we are looking at it very carefully, and what we are seeing are relatively muted, generally, wage increases. If you look at the latest numbers that are available it is January, and it points to a 1.6% increase. Now, this is looking backward, obviously, and we have to be particularly attentive to movements as they develop, and we know that the longer inflation numbers are at the high level where they are, the more likely it is that wages negotiations, salary entry levels, renegotiations of existing agreements will actually take place. So we had a good discussion on those issues at the Governing Council meeting. There are differences between countries. In some countries it seems that unions or employees and employers are managing to reach agreement which take into account the risk of redundancy and threat to the economy. In other countries there are much higher demands for wage increases and wage renegotiations. So we will continue to look at that extremely carefully and be attentive to potential second-round effects as a result of that.’

‘Do we have trust in the work that we do? Yes, we do. Do we get our forecasts and our projections perfectly right all the time? No, we don't. You know, I spent a few years of my life operating with other forecasters and top-notch projectionists who didn't always get it right either. But do we trust that we monitor all the data that we need to monitor, that we apply all the economic wisdom that we can, that we use as many possible models as are available, that we try to improve on the economic results that we produce? Yes, we do. Did we make a mistake, did we get it wrong in the past? Will we get it wrong in the future? Very likely. So we have to be a little bit humble in that respect. We have to be cognisant of the fact that when there is a war, when there are major developments that are not predicted, that are not part of past patterns, it is incredibly difficult to actually integrate that into the models that help us offer projections to European colleagues. The same is true for national central banks, by the way, and the same is true for many, many projectionists and for many forecasters. So we have that humility, and we recognise that we have to not only look at forecasting models, but also look outside the window and try to figure out what is happening and what is the likely impact. Looking at past history is not in and of itself sufficient. As I said, who knows what impact and development the war is going to have on our economies? On this issue of flexibility and the fragmentation issue, and the need to make sure that monetary policy is transmitted in an unimpaired fashion, we constantly try to improve on the toolbox. We constantly look at what works, what will help us provide the flexible, efficient and proportionate response to the situation, and this is what is going to continue to happen in the future. I am happy to repeat again the value that we give to flexibility, and the need to embed flexibility in order to make sure that we transmit monetary policy throughout the euro area, but this is what our work is cut out for.’

‘This is not me withdrawing the need to be humble in the face of what our projections can offer, but obviously, in deciding in particular next June - because that is going to be our next projection monetary policy meeting - in June we are going to look at our projections. As you will remember, back in March we had projections that included a baseline and a couple of scenario analyses as well. One was severe, one was adverse. I don't know exactly whether we are going to come up with a similar exercise with one baseline and two scenarios, or whether we are going to have one baseline, one scenario, or some sensitivity analysis in particular areas where we believe that we need to pay special attention. Wages is clearly one that comes to mind. Inflation expectation is another one. So we will use that, of course, because it is there, it has to be used, it is informative, but I think when I refer to humility I meant we cannot be exclusively and only rivetted to the projections produced by our models. We also have to look at actual data. We have to look at historical developments of similar situations, and have an element of judgement in our assessment of the situation. But what we see at the moment is certainly reinforcing our determination that in the medium-term our outlook for inflation is at around 2% and there is one other section that I would like to refer you to in the monetary policy statement. It's one that is just before the risk assessment which deals with inflation, where we say: “While various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring”. So we will be looking, of course, at our projection. We will be looking at actual data. We will be looking at historical experience. But we will also be looking very carefully at market and expert surveys, in particular in relation to inflation expectations, because the last thing that we want is to see inflation expectations at the risk of de-anchoring.’

‘I did not announce any kind of new instrument. I did refer very specifically to the last sentence of our conclusion, which says “incorporating flexibility if warranted”. Flexibility is a principle that we believe has served us well. That we need to continue to integrate in our monetary policy determination, if warranted, if required, and as I said, if necessary we can move very promptly, but I did not say that we were building a new instrument. We can certainly do that, and we can do it in short order, and are capable of being operational, as we have demonstrated between 12 and 18 March 2020, for instance. You asked me about the – essentially, what you said is, given the numbers that we are facing, given the situation, why did you not accelerate more? It gives me a chance to remind all of us that we are in a process, and that process started back in December. In December we announced that we were putting an end to PEPP, that we had a policy of reinvestment of PEPP that would extend to 2024, that we would apply flexibility. In February I communicated that we were going to accelerate a bit, and March certainly was a strong signal of what we were considering in terms of terminating our net asset purchases under the APP, and I think that we are being a little bit more specific now in terms of what we see and the likelihood of this happening in Q3 at any point in time. So we are normalising. We have a sequence that we have identified. We have numbers that have been flagged for purchases in those next few months, and we have now an ending point which is a quarter at possibly a point in time during the quarter when we put an end to net asset purchases. As to your question on spread, clearly, we need to make sure that our monetary policy stance is transmitted throughout the entire euro area, and this was the tool that we built with PEPP back in March 2020. The first part of the birth certificate of PEPP was antifragmentation; the second part was monetary policy stance, and we were delivering that product in short order. It has proven very efficient, and I think it is learning from this and recognising that flexibility is important that we will continue to deliver our monetary policy going forward.’

‘We are on a journey, and clearly, as I said, we started the monetary policy normalisation journey back in December, reconfirmed in February, clearly indicated in March, and we are restating this determination on the occasion of this monetary policy meeting. We have, as I said, added a few particular attributes to the decision that will be made in June when we have the next projection round, which is when we can take stock and actually assess exactly the timing of the conclusion of our net asset purchases, which will then trigger, some time after the end of the net asset purchases, interest rate hikes. So the journey has begun. It is moving along as predicted. We want to have both flexibility and move gradually and keep all the options open. We have to be mindful of the fact that not only do we see very high inflation rates, clearly, in some countries much higher than in others, but on average 7.5% is a very high number. We are also seeing a medium-term outlook for inflation gradually moving back to closer to our target, to 2%, and possibly from above, rather than from under. These will be better advanced and better documented at our June monetary policy meeting, but we are on that journey.’

‘First of all, you give me a chance to actually, yet again, clarify that what is happening in the economy of the euro area is very different from what is happening in the economy of the United States. Whether you look at employment, whether you look at wages, whether you look at actually the general attributes and instruments of the monetary policy at the moment in the United States, our economies do not compare, and if anything, I believe that this is likely to be accentuated by the fact that the euro area is probably going to be more exposed and will suffer more consequences as a result of the war by Russia against Ukraine. The United States will not bear as much the brunt of the consequences from an economic point of view, I would suspect. Comparing our respective monetary policies is comparing apples and oranges. We are not applying policies to the same economic situations at all. When I talk about normalisation of monetary policy I think of the kind of instruments that we are using, I think about the rates that we have in place, I think about the use of our balance sheet, and I think it is very much in that order that we will be looking at normalisation of monetary policy. It is a bit premature, because as we did during the Governing Council today, we looked at the short-term, what limited updates and numbers we have, and what qualification of our stance there should be as a result in terms of signalling what we will do next during the third quarter of 2022. Quantitative tightening is something that comes clearly at a later stage in that journey, and we are not there yet. The sequence that we have adopted, which is embedded in our strategy, which is very familiar to you, is net asset purchases have to conclude first, before we decide on whether we hike interest rates and by how much, and then we will look at balance sheets, but for the moment we are more thinking about the reinvestment policies that we have agreed, both in relation to the APP and the PEPP portfolios.’

‘In relation to flexibility, I think I have been very clear to indicate that we believe that flexibility is helpful. We have seen it being very operative back two years ago. It is now specifically mentioned as something that will be incorporated if warranted. So it is totally premature at this point in time to indicate when any such flexibility will be deployed. The purpose of the flexibility is to make sure that monetary policy is properly transmitted throughout the whole of the euro area. So if and when it becomes necessary we will know what to do, as I said, if necessary, and promptly, and it will be operational. On your other question, do we believe that ending net asset purchases will reduce the price of oil? No. Who would, in their right mind, think so? But it is also, obviously, the case that we have to be attentive to the inflation shock, to the impact that it has on wages, to the consequences that it could have on inflation expectations. And for all these reasons we believe that in sequence it is necessary, given the financing conditions by the way as well, that we put an end to net asset purchases. This is a very high probability, let's put it that way, because we have not decided it as specifically as that, but the wording of our second paragraph in our monetary policy statement is sufficiently clear to indicate that at this point in time we believe that there is a very high probability that it will happen and that it could happen any time during the third quarter. It is for those reasons that we believe that it is our duty, in order to ensure that inflation stabilises at 2%. Based on the scenarios of last March, you are right that in 2024, which is not necessarily the medium-term but the end of our projection, it moves between around 2% and a little below 2%, but I think that our forward guidance will be determining and helping us determine at the June projection meeting, if we decide to terminate net asset purchases, what exactly will be the policy going forward in terms of rates.’

‘To the risk of repeating myself, the specific role of flexibility will depend on the concrete circumstances that we face. We decided in December that in the event of renewed market fragmentation related to the pandemic, reinvestment under PEPP can be adjusted flexibly over time, over asset classes, over jurisdictions. I think those same principles would apply to the flexibility that we would want to develop and deploy as applied to other sets of circumstances. We can design and we can deploy new instruments to secure monetary policy transmission as we move along the path of policy normalisation. We have shown that on many occasions in the past. Staff is extremely good at, not only thinking on their feet, but also providing proposals in short order, and I know that they will be able to do so. This is what flexibility will be about. It is in situations that demonstrate unwarranted and exogenous causes, that impair monetary policy transmission, that will lead us to use those flexibility aspects of instruments or programmes that staff will be working on. On your second issue concerning FX and exchange rate, this is not a matter that we have discussed, but as you know, we are always attentive. Not on the occasion of this Governing Council, but this is obviously a matter that we are attentive to, because it does have an impact on inflation, and inflation is, obviously, the key of all our concerns, given its magnitude and its potential impact on second-round effects and inflation expectations, and in view of our mandate, which is to maintain price stability and to deliver inflation at target.’

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.’

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.’

Visco (Banca d’Italia):

28 April 2022

‘Well, the first thing that we have to say is that we don’t target exchange rates. But obviously there are consequences of the changes in the exchange rate of the euro in terms of imported inflation. And the issue here is whether these may lead to further increases in inflation across the road. And I think that for the time being, both we don’t see adjustments in wages extremely fast, nor do we see a de-anchoring of inflation expectations, but we have to monitor this very carefully, given the extremely uncertain developments in terms also of the war and the effects of the war on prices and the availability of energy in some of the euro area countries like mine. I think we have to be careful, we have to be open and we have also to be prudent.’

‘Well, first of all, we have decided really to stop, end our asset purchases, the programme that we have had for QE for a number of times … by the third quarter of this year. This means that we will reduce to 20 billion the monthly purchases in June, and then we will see. My reading is that this is not an issue of size; it’s an issue of signal, the signal we are going to give. It is very likely that we may end … in June our purchases, and then the issue is what to do with rates. We said that they would be adjusted “some time after” the end of the purchasing programme. Now, this “some time” has to be defined; we have to look at developments. It may be during the third quarter, it may be at the end of the year, and it has to be gradual. As we said, there are three main conditions that we are looking for. The first is gradualism, the second is optionality, and the third, we have to guarantee smooth functioning of the financial markets, that this flexibility is necessary. Now, the increase obviously in prices due to the cost-pushes are very different from what we have observed in the United States. The United States is clearly developing a reaction to a substantial demand pressure. Here we have a cost-push. Production costs are increasing. They may increase also because of the exchange rate developments, so we have to look at them. But we are not targeting them.’

22 April 2022

‘The shocking events in Ukraine are having huge, negative impacts on the world economy, which had just started to recover from the upheavals of the Covid-19 pandemic. It will take time to assess the war’s human, moral, and economic cost. The background paper for the Development Committee confirms our fears, presenting updated assessments of the immediate economic and social impact, the manifold medium- and long-term effects, and the acute risks for the poor and most vulnerable. Shortages of key staples, extraordinary increases in energy and food prices, mounting trade costs, and disruptions in supply chains are already putting developing countries—especially the poorest—under enormous pressures.’

‘Already on the rise before the pandemic, debt vulnerabilities in emerging and developing economies are reaching alarmingly elevated levels. The slowing in global growth following the COVID-19 shock has increased the risk of countries falling into debt distress. The war in Ukraine may only aggravate macroeconomic fragilities with the shock on food prices, as well as – and also as a consequence of – the rise in the costs of energy and fertilizers.’

31 March 2022

‘The Russian invasion of Ukraine, aside from the suffering, violence and destruction it has already wrought, is sure to inflict deep societal and economic wounds. It is proving to be a dramatic disruption to the process of international economic and financial integration which, if not speedily resolved in a peaceful way, could have severe repercussions on Europe’s energy supply, on inflation, on domestic demand and on international trade. And, not least, on the time line for achieving energy transition. The Governing Council of the European Central Bank (ECB) is closely monitoring the evolving situation, aware of the problems in ensuring at such a difficult time that the financial market functions properly and monetary policy impulses are transmitted in an orderly fashion, and stands ready to implement the sanctions decided by the European Union and the international community.’

‘As decided at its 10 March meeting, net purchases will rise to €40 billion in April, will then be cut back to €30 billion in May and then go back to €20 billion in June. The calibration of net purchases for the third quarter will be guided by the evolving assessment of the medium-term inflation outlook. The principal payments from maturing securities will be reinvested for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. Any adjustments to the key ECB interest rates will take place some time after the end of the net purchases under the APP and will be gradual.’

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.’

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.’

Holzmann (Austrian National Bank):

29 April 2022

‘I don’t think so [that it is too late for the ECB to think about hiking rates], because the ECB has already acted. Two purchase programmes have already been ended, the one in March and the other presumably in July. The interest rate hikes that are now being discussed and will probably be deliberated are a step that follows the Fed, but the Fed has much larger inflation pressure than the ECB has. … I belong to the group that is for quick action [to hike rates]. That means in the summer, maybe additionally in the fall and if need be in December. But … one has to be very careful. On the one hand it’s about making a contribution to fighting inflation … and on the other hand it’s about not throttling now the upturn or the business cycle, which would occur with too large an increase. Because one thing has to be clear: inflation won’t be able to be fought by the ECB alone. Inflation is imported from abroad and the ECB can do very little about that.’

‘As far as energy prices are concerned, the hope is that if they do not increase in the coming year, then the basis effects … operate and the … inflation subsides again. That’s what we’re expecting, and we hope and expect also that the decline of the inflation … occurs already this year, probably already at the end of this half of the year.’

‘… it is important to see that currently the deposit facility rate is at -0.5%, in contrast to which what we call the equilibrium interest rate is probably at 1 to 1.5 for Europe. This value will certainly not be reached in this year, probably next year under certain circumstances. That means an increase will take place, but it will not be gigantic, but rather will be moderate and take the data into account.’

28 April 2022

'When do we start raising [rates]? Well, here is always the problem, the worry, is it too soon? It’s a little characterized by what was at the beginning of the 2010s ... when interest rates were already increased and then had to be reduced again because it was too soon. ... If you are too soon, there is a risk that you will slow down the upswing. If you're too late, what happens is that inflation expectations then come unanchored, and then you have to really go all out to get them back under control. And this point, that's where we are right now. Probably the most interesting and difficult monetary policy meeting will take place in Frankfurt this July. The question here is, are we finally going to stop buying via this smaller program as well? Are we going to raise interest rates now, by what amount and at what speed?'

'The greatest danger we’re concerned about is that inflation expectations are no longer so firm at 2%, but when inflation has been 7, 8 and more percent for some time, even if it comes down, the markets, financial markets, can say to themselves, “I don't know whether the ECB will manage to get back down to 2%. I'm a trade unionist, I'm an entrepreneur, so I expect higher inflation.' And once that happens, that inflation expectations are unanchored, it's very difficult...'

'Some of the purchase programs are already over, one is still there and is scheduled to end in July. But these purchase programs always take up a lot of room in the balance sheet of the ECB, the Austrian National Bank. And there's the question of when we start paying back the whole thing, because if ... there's a new, big need, then we have to be prepared.'

'Now we're almost out of the pandemic.’

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.’

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.’

Rehn (Bank of Finland):

15 April 2022

‘There are a number of reasons, however, why 2022 will not be a rerun of 1974. Firstly, the European economy rests on significantly stronger foundations than in the 1970s. The single currency, the euro, removes any need for EU Member States to engage in competitive devaluation, which so rocked exchange rates and national economies in the 1970s. Banks today also have considerably more robust buffers than they did back then, and more robust, too, than before the 2007–2009 financial crisis. This has enhanced the resilience of the financial system. Secondly, fossil fuels now account for a lower share in energy production within the EU – even so, this is still too high. This reduces the impact of rising energy prices on the economy, although fossil dependency has unfortunately hindered progress on EU oil and gas sanctions against a warring Russia. Other broad changes have also occurred in production within advanced economies. The oil intensity of the global economy in the ‘70s was about 3.5 times greater than today. According to researchers from Columbia University, the same amount of goods and services can now be produced using less than half the amount of oil compared with the early 1970s. What’s more, motor vehicles now consume about 40% less fuel than in the ‘70s, despite being larger. Thirdly, and largely as a consequence of the factors above, the shock to the European real economy in the early 1970s was much more severe: economic growth collapsed by as much as 8 percentage points in 1973–1975. The European Central Bank (ECB) predicts growth will fall by 2 percentage points in the period 2021–2024. The difference between these figures is substantial, at 6 percentage points. The upshot of all this, in my view, is that we are not now witnessing the start of a classic ‘70s all-out stagflation. Instead, yes, we are seeing stagflation-like trends emerging, and so the risk that stagflationary developments will gather momentum must be taken seriously. Last but not least, following the lessons learned from the 1970s, the notion of central bank independence has become the prevailing doctrine and practice. The ECB stands ready, and has the tools, to calm excessive inflation and bring it to the 2% target over the medium term. The critical question in monetary policy right now is indeed how to continue normalisation – the process of dismantling the powerful stimulus of the past couple of years – without the euro area’s growth stalling and unemployment escalating, especially when Russia’s war in Ukraine is creating such great uncertainty over the future. The ECB’s response is to continue the gradual normalisation of monetary policy that it began back in December. Net purchases under the asset purchase programmes will be concluded in the third quarter of this year, and a decision on the first interest rate hike will be taken some time after that. My own assessment now is that the key ECB interest rates will most probably be at zero by the end of the year. Normalisation back to positive territory in policy rates will continue beyond that, too, on a gradual and consistent basis, and by maintaining optionality. All this is, of course, on the assumption that Russia’s war in Ukraine does not escalate or become more murderous, the consequences of which would likely push Europe’s economy into recession as well – although in that scenario this could be among the least of the problems. Unfortunately, given the circumstances set in motion on 24 February, this prospect cannot be excluded.’

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.’

de Guindos (ECB):

01 May 2022

Whether interest rates rise in July ‘will depend on the data and the new macroeconomic projections in June. In April the ECB’s Governing Council decided that asset purchases will end in the third quarter. In my opinion, there’s no reason why this shouldn’t happen in July. Rates will rise after that. Exactly how long after has not been decided. It could be months, weeks or days. July is possible, but that’s not to say it’s likely.’

‘We are driven by data, not by markets. Markets can sometimes be wrong. Within the Governing Council we haven’t discussed any predetermined path for rate rises.’

‘These comments [that the ECB is moving too slowly] stem from the comparison with the United States, but the situation in Europe is different. There are two main factors that will determine interest rates. On the one hand, you have the evolution of second-round effects – in other words, wage increases that are incompatible with price stability. And on the other hand, you have inflation expectations, which we should monitor to make sure they don’t rise above our target of 2% over the medium term. So far, we haven’t seen wage increases that would put this target at risk, but we have to be very attentive because this is a delayed indicator.’

‘The invasion of Ukraine will increase inflationary pressures and reduce economic growth. The fact that the prices of raw materials and energy have increased in the way they have implies, in practice, a tax on workers and companies, because these imported production factors are becoming more expensive. And, ultimately, this implies a decline in living standards. On the risk of recession – in June we will have new projections. What we are already seeing is a significant weakening of growth. Even so, in 2022 growth will be positive. And if we stick to the technical definition of a recession – two consecutive quarters of negative growth – we currently don’t see it.’

On whether one quarter of negative growth is possible: ‘Certainly not two.’

On a German decision to cut off Russian gas completely: ‘One can always imagine worse scenarios. In the March projections with three scenarios: one baseline, one adverse and one that we call severe, we did not see a recession, not even in the severe scenario. Let´s wait for the June projections.’

‘Nominal rates for public debt have increased all over the world, but risk premia are still relatively stable. The risk of fragmentation has not materialised, but it’s something we are monitoring. We currently don’t see any tensions in this respect, and the situation is in no way comparable to 2011 and 2012.’

‘The Spanish economy has two strengths. First, the financial system is healthy, following the restructuring of the banking sector. This allowed banks to continue lending to firms and households under favourable conditions, even during the pandemic. And second, the Spanish economy is competitive, as the balance of payments of its current account remains in surplus. This has been the case since 2013, even though it was previously inconceivable.’

‘Again, there are two [weakness in Spain]. The first is the fiscal situation. The debt-to-GDP ratio is close to 120% and the structural deficit is nearing 5%. In addition, both headline and underlying inflation in Spain are back above the European average. And as Banco de España has warned, corporate margins are starting to be significantly affected, as the profitability of Spanish firms is falling because of the rising costs of energy and commodities. This factor has to be carefully considered.’

‘My recommendation – and this is not only for Spain, but for all countries with a weaker fiscal profile – would be to present credible budget plans to Brussels. Plans that set out a prudent and sensible process of fiscal consolidation. With these levels of inflation, interest rates are not going to be as low as they have been in recent years, and governments need to prepare for this. The key, also from the markets’ perspective, is to have credible proposals.’

‘There is one figure that is particularly indicative. During the pandemic, in 2020 and 2021, the ECB bought €120 billion of Spanish debt in the secondary market each year. This is equivalent to Spain’s total net issuance. European support, including via the Next Generation EU fund adopted by the European Council, has been crucial, especially for an economy like Spain’s. It was the Spanish economy that suffered the largest decline in 2020 and, despite strong growth of 5.1% in 2021, it was below the European average. And unlike the rest of Europe, income levels have not recovered to pre-pandemic levels.’

‘Pension indexation is a social policy decision and it is not my place to question it. It’s a respectable decision, but it is also clear that it will have consequences for the sustainability of the system. So, such a decision needs to be accompanied by measures that ensure the system remains sustainable over the medium term.’

‘The European and Spanish economies will face a complex situation, with high inflation, a downward trend in growth and smaller company margins. This will have an impact on investment and employment. In such a situation, where difficult decisions will have to be taken, it will be important to have the greatest possible social and political support for economic policy.’

‘Not all countries are in the same situation. The public sector can play a role in cushioning the impact of the war on businesses and households. But this can also increase the budget deficit.’

‘We are talking about temporary and selective measures that should be targeted at the most vulnerable sectors. If the measures are well designed, fiscal policy can help to lessen the impact of an external supply shock like the current one preventing those negative effects for inflation over the medium term. The pandemic affected lots of companies that are now being hit by a second shock. As I said, Spanish companies are seeing significant cuts to their margins.’

28 April 2022

‘As documented in the Annual Report, in the course of 2021, the euro area economy began to rebound from the pandemic emergency and by the end of the year had moved onto a firmer path of recovery. The euro area economy grew by 0.3% in the final quarter of 2021, which puts GDP growth in 2021 at 5.4%. This is the highest annual rise since the early 1970s but reflects a recovery from the large contraction in 2020. However, the Russian invasion of Ukraine has since cast a dark shadow over our continent. The ongoing war is first and foremost a human tragedy causing enormous suffering. But it is also affecting the economy, in Europe and beyond. Economic activity is expected to continue to grow this year, albeit at a slower pace than was expected at the start of the year. With pandemic-related restrictions still weighing on economic activity, euro area growth is likely to have been weak in the first quarter of this year. Following an upswing in the course of 2021, inflation reached a multi-decade high of 7.4% in March, up from 5.9% in February. The war has amplified the impact on consumer energy prices, which have further increased since the start of the conflict and are now 44% higher than one year ago. This surge in energy prices is reducing demand and raising production costs. The war is also weighing heavily on business and consumer confidence and has created new bottlenecks. These bottlenecks are exacerbated by additional supply chain difficulties stemming from new pandemic measures in Asia. These developments point to slower growth in the period ahead. There are also offsetting factors supporting euro area growth though, such as the strong labour market and the momentum coming from the re-opening of some sectors. Regarding the inflation outlook, price increases will most likely remain high over the coming months, mainly because of the sharp rise in energy costs. Over the medium term most survey and market-based measures of inflation expectations indicate inflation rates around our two per cent target. Inflation expectations have been rising in recent months though and initial signs of above-target revisions in those measures warrant close monitoring. There are many factors complicating the outlook for growth and inflation, and it is clear that uncertainty is high. In this environment, our monetary policy is guided by the principles of optionality, gradualism and flexibility. At its April meeting, the Governing Council judged that the incoming data since its previous meeting reinforced its expectation that net asset purchases under the asset purchase programme (APP) will be concluded in the third quarter. Looking ahead, our monetary policy will be data-dependent and reflect the Governing Council’s evolving assessment of the outlook. This data dependence is fully in line with the principle of optionality. Changes to our key interest rates will follow "some time after" the end of our net purchases and be gradual. Moreover, within our mandate and under stressed conditions, we will deploy flexibility to ensure that monetary policy is transmitted smoothly across the euro area, as we did to good effect during the height of the pandemic. We stand ready to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at our two per cent target over the medium term. The combination of fiscal and monetary policy support remains critical, especially in this challenging geopolitical situation. The fiscal support measures adopted so far in response to the war have helped somewhat, by partly compensating households for higher energy prices through both indirect tax reductions and transfers. Looking forward, efforts should be made to increasingly target measures on vulnerable households to keep public finances in check, while at the same time setting the right incentives for reducing the use of fossil energy and dependence on Russian energy. Moreover, a successful implementation of the investment and reform plans under the Next Generation EU programme would accelerate the energy and green transitions, enhancing long-term growth and resilience.’

21 April 2022

‘Before the invasion of Ukraine, the economy was recovering. Our prediction was for growth of a little more than 4% this year, and an inflation rate that was clearly on the rise. We had underestimated inflation for a period of time. And now there’s the impact of the war. The consequences for inflation are quite clear. Inflation is accelerating because of energy prices, commodity prices and supply bottlenecks. But simultaneously we’re seeing a reduction in growth through a deterioration of trade. The message is crystal clear in this respect – we’ll see higher inflation and lower growth. That should be reflected in our June outlook.’

Whether we reach a situation of stagflation ‘depends on the definition of stagflation. If we define it as negative growth year-on-year with very high inflation, then even in the severe scenario, we do not see stagflation.’

‘A technical recession – two quarters in a row of negative growth –, is not currently part of our projections. We’ll have an update in June. There is a clear deterioration in the economic environment. But that was included in our severe scenario. The growth rate of the European economy will be very low in the first half of the year. But I don’t believe it will go into negative territory in this first half.’

‘There is a lot of uncertainty now. You can always imagine worse scenarios [than the severe case of the ECB’s March projections], but we have to be realistic. We do not see negative growth year-on-year, but inflation is going to be high for the rest of the year. We believe we are getting closer to the peak. Inflation will start to decline in the second half of the year. But even so, it will be above 4% in the final quarter. We also need to acknowledge that the level of uncertainty is huge. There are a lot of variables that we cannot control, that are exogenous factors that could affect the evolution of the economy for better or for worse.’

‘We will have our projections and different scenarios in June. If you look at survey and market-based inflation expectations, they are around 2% in the medium term. Some slightly above that, some very close to it. What’s clear is that in the medium term, inflation will be much closer to our definition of price stability.’

‘We were clear [at last week’s meeting] that we are going to end the APP in the third quarter of this year. Whether it happens at the start or the end is essentially fine-tuning monetary policy and in my view it’s not such a determinant factor per se. Having said that, at the moment I see no reason why we should not discontinue our APP programme in July.’

On whether a rate increase is possible in July: ‘Theoretically everything is possible. But we need to keep in mind that we have now clearly delinked the end of the APP to the first rate hike, so a rate hike doesn’t need to come automatically once the APP ends. We can have some time in between and we are data-dependent. My opinion is that the programme should end in July and for the first rate hike we will have to see our projections, the different scenarios and, only then, decide. And nothing has been decided so far.’

On a July lift-off: ‘It will depend on the data we see in June. From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide.’

‘Our rate-hike cycle will depend on the data. We will act depending on the evolution of inflation. We don’t face any restrictions in that respect. Inflation expectations and second-round effects are the main factors to look at when setting monetary policy. Two-thirds of the inflation we are suffering now is due to energy prices, so it’s imported inflation. Monetary policy can do very little to deal with this kind of inflation. The main risk is that this type of inflation starts to be more and more persistent and gives rise to second-round effects. We need to monitor this very, very closely. The longer inflation remains high, the higher the possibility of having wage indexation clauses in the collective bargaining process. We have not seen much in terms of wage increases so far in Europe. But if we start to observe a de-anchoring of inflation expectations and second-round effects, then this is going to be a key element for the future of monetary policy. The Governing Council looks at these data at every meeting.’

On the neutral policy rate: ‘It’s very difficult to gauge unobservable variables. That’s true for potential growth, output gaps and also the natural rate of interest. The natural rate has been declining over the last two decades owing to structural factors such as demographics, globalisation and digitalisation. But the world is now changing. I cannot give you a figure, I don’t believe anyone can. But I think that the natural rate now is clearly on the rise.One of the consequences of this terrible war is that the dividend of peace we’ve benefited from over these years is possibly fading away. Governments may want to spend on other things, like the military and defence. That will change fiscal policy and it is not trivial in terms of potential growth in the medium term.’

‘Fragmentation risks aren’t a new concern, and we addressed them when we integrated flexibility into the pandemic emergency purchase programme (PEPP). Fragmentation undermines the proper transmission of monetary policy. At the same time, any decision taken to limit fragmentation should not interfere with our monetary policy stance. We conduct monetary policy to maintain price stability. Mixing monetary policy with addressing fragmentation would be a mistake, and the Governing Council is aware of that. We’d like to avoid fragmentation that is not idiosyncratic, that is exogenous. We have some instruments to address this kind of problem. So far, in the Governing Council, we have not discussed any new anti-fragmentation programme in detail. The main source of potential fragmentation has to do with divergences of countries’ fiscal profiles and potential growth. Monetary policy can do something, but to minimise the potential risk of fragmentation fiscal sustainability in the long term and structural reforms that enhance productivity and competitiveness are needed.’

‘The nature of the APP is different from the PEPP. That was quite clear from the very beginning. The APP is designed to deliver price stability, not to deal with fragmentation. The PEPP, on the other hand, has a certain flexibility embedded in it. So you have one instrument to adjust the monetary policy stance and another one to respond to exogenous fragmentation. The latter should not interfere with the monetary policy stance. Sequencing is not relevant here.’

‘The consequences of the war in terms of financial stability have been much more contained than the situation we had at the beginning of the pandemic. In terms of liquidity, in terms of market tension, it’s not comparable. We have seen some signs of stress in commodity derivatives´ markets, but so far all obligations have been honoured. And in terms of liquidity facilities, our counterparties are banks. We have a very clear framework with respect to central bank liquidity facilities.’

‘Before the invasion of Ukraine there was a deterioration in public debt ratios in the euro area because of the pandemic, which on average rose by almost 20 percentage points of GDP. But in economics, as in life in general, it’s not only the average that matters and not all countries are in an identical situation. Fiscal policy to address the consequences of the invasion must be different from what we saw during the pandemic. It has a role to play for sure, but it needs to be much more targeted and selective.’

‘This [funding investments in energy independence or military spending jointly] is a political decision. We are in a change of paradigm. The geopolitical situation has changed and governments are taking decisions in that respect. They will increase military expenditure and try to accelerate the energy transition to reduce dependence on Russia. I have always been in favour of a centralised fiscal capacity. It could make sense now, but it is for the European Council to make a decision about that.’

‘We have not seen fragmentation in financial markets so far. We have seen a little widening of spreads for Italy, Spain or Portugal. But this is not fragmentation like we had in 2010-2012. It’s totally different. And that’s despite the fact that we’re normalising monetary policy. We’ve seen some upward moves mostly at the end of the yield curve, but fragmentation has been contained.’

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.’

Wunsch (National Bank of Belgium):

12 April 2022

‘Even before the outbreak of the Russian-Ukrainian conflict, inflation had already rebounded strongly in the wake of the economic recovery following the pandemic. The extremely rapid recovery in demand was met with disruptions on the supply side, leading to higher prices. Added to this are so-called base effects: inflation compares prices today to those of a year ago and, as some prices collapsed during the lockdowns, rates inflation rates give a distorted picture of recent price dynamics. With much of the inflation being of foreign origin, the result is an impoverishment of our economy, which rapid growth and robust job creation have fortunately managed to mitigate somewhat. The war changed everything: not only does it harm the economy's supply (higher energy prices, scarcity of the raw materials that we import), but it also slows down demand. In summary, like other forecasters, we anticipate rising inflation and falling growth. As the starting situation was very good, we do not expect a recession or an economic slowdown, but the risk of a downturn does exist.’

‘Policy makers must take these developments into account. Monetary policy must keep inflation under control in the euro area. This monetary policy is decided jointly in Frankfurt. I sit there as a governor in a personal capacity, and the positions I take are based on the situation in the euro area, not in Belgium. As the current inflation surge is mainly caused outside the euro area, there is not much that monetary policy can do. Nevertheless, we expect inflation in the Eurozone to stabilise around the 2% target, which is why the support provided by monetary policy should be gradually withdrawn. The higher inflation outlook in the US means that tightening will be faster there than in the euro area.’

Vasle (Banka Slovenije):

22 April 2022

‘This time the regular spring meeting is marked by Russian military aggression and its consequences for our economies. The consequences of the conflict are reaching global proportions; they were first reflected in higher energy and food prices. However, they are also increasingly reflected in economic trends, where the countries of the European Union are most exposed. Due to the shock brought to the economy by the conflict, economic growth will be lower than previously expected, but still solid, and according to current estimates, the impact on inflation will be even higher. Here, the consequences of the conflict are mainly reflected in the additional acceleration of rising energy prices, which began to strengthen at the end of the pandemic, and higher food prices. ... The Bank of Slovenia also understands the continuation of the process of normalization of monetary policy as an important part of the response to the situation, to which we and our members of the Governing Council have committed ourselves in recent months. In order to ensure that the effects of rising energy and food prices are not passed on to other groups in the future and that inflation persists at higher levels, the Bank of Slovenia advocates accelerating the planned steps in the future.’

15 April 2022

‘After some favourable shifts as we moved into this year, the Russian military aggression and the consequent sanctions imposed have worsened the economic outlook in the euro area. While the high-frequency indicators of economic activity in March showed no shrinkage of economic activity, the situation in Ukraine has already brought about a pronounced deterioration in sentiment among households and companies. The indicators of consumer confidence have thus fallen to levels that were recorded during the first wave of the pandemic in Europe. Alongside the deterioration in sentiment and the consequent decline in demand, in the future economic activity could be negatively impacted by uncertainties over the supply of key energy products and the effect of the war on the availability of raw materials. Supply chain problems are indeed tightened up by the measures in Asia related to the pandemic. Slovenia saw the economy continue to perform well in the early part of this year, following last year’s extremely high economic growth. According to currently available data, the increase in economic activity in the first quarter has continued, although the growth was lower than in the previous quarter. The outbreak of the Russian military aggression in February brought a sharp increase in the risk of a longer period of high inflation in the euro area. The rate passed 2.0% in July of last year, and due to the additional increase in the prices of energy, raw materials and food reached 7.5% in March of this year. Inflation is becoming increasingly broad-based, and this is reflected in the growth of core inflation, while concern is growing over the elevated inflation expectations. Following a tightening of the financing conditions in the financial markets in light of the Russian military aggression, in recent weeks these conditions have eased once again. The prices of shares have grown and made up for a sizable part of the losses this year, while the premiums in the yields on bonds of more risk-prone countries of the euro area and private sector bonds have fallen, and once again approached the levels before the military invasion. Interest rates on bank loans in the euro area also remain at historically low levels, both for companies and households. Given such trends the ECB Governing Council approved the continued gradual normalisation of monetary policy. At yesterday’s meeting we took the view that the latest data and trends are reinforcing our expectation that we will be ending the net buying of securities under the APP in the third quarter of this year. In conditions of high uncertainty we would underline that in the future we will continue to maintain various options regarding steps, flexibility and a gradual approach in our decision-making. The members of the Governing Council stand ready to adjust all our instruments, as appropriate, to ensure that inflation stabilises at its 2% target over 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.’

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.’

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.’

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].’

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.’