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

16 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 May 9 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):

14 May 2022

‘The interest rate tool, the problem with it is that it is asymmetric in the sense that, I mean, we know that there is a lower bound, okay, for the interest rate. … Why there is a lower bound? Because of course by reducing the interest rate, we might create more problems than we try to … avoid, okay, because of course for example in the case of the banks, they cannot translate, they usually don’t translate this into, into the interest rate deposits, and then the markups of the banks decline, and this might create also problems in the transmission of monetary policy. But, but now we are in a completely now different situation, no? Interest rates have already increased, long-term interest rates have already increased, market interest rates have already increased, but even short-term interest rates have increased. And of course … this is an instrument that it is very effective. Just to give you one example, if I compare the Euribor rate, the Euribor rate is very important. … This has increased in the course of this year 2022 from close to -0.5 to around 0.2. This means that all the mortgages that are renovated this month or the next month or the following months, the payments made by households are higher. And of course this is an element that it is very relevant for the transmission of monetary policy. So, I mean, there is … asymmetry and this asymmetry was particularly relevant in the last 10 years, and this is why we had to jump in with other instruments, in particular asset purchases. But in the, in the moment in which we are now of course this is less relevant.’

‘I think there is a general agreement in Spain that monetary policy has absolutely been crucial to fight against the consequences of the pandemic, and this is full agreement on, on this. And I think there is also significant agreement on, which in a context which is completely different, which is this one, on which inflation has increased in the short run, but also in the medium run. So we are now basically with medium-term projections for inflation, which are at 2%. And this is a novelty, this is a good novelty, I would say, because in the past, we’ve been for many, many years fighting against very low inflation. Then it’s also … that monetary policy has to normalise in this, in this context. And we have already started this normalisation process. And we are doing it in a very gradual manner.’

‘On the position that I have on the current monetary policy decisions, I think we are converging to, to a kind of, of consensus… I mean, we have inflation in the medium term now well anchored at 2%. This is a novelty as compared to the situation that we have lived during the last 10 years. This means, and this is in a context on which we have an extraordinary monetary policy stimulus. So, I think if you combine all these things, and also, by the way, very compatible with all the information that we’ve given to markets in terms of forward guidance for when interest rates might hike, etc., I think there is a clear, a clear case for normalising monetary policy. We’ve already done, started this normalisation with the end of PEPP in the first quarter. Now we will end, most likely this will be the decision in our meeting in June for ending the APP in July, and then we will start to discuss and maybe soon increase rates. And this is fully compatible with the framework that we have, with the fact that we are observing inflation anchored at 2%, and that we therefore can and should normalise policy in that context.’

‘It’s true that, I mean, there’s always a, a worry looking at history of course when the Fed has normalised its monetary policy, sometimes it has created some turbulence, some tensions in emerging markets. It’s true that this time it’s not happening, okay, and probably this is true also by the fact that many emerging markets have done also their work in the last years in terms of creating buffers, having good frameworks for monetary policy, etc. But the risk is there.’

‘Very often it is over-emphasised, the lack of consensus within the Council. Of course, we enter the room probably with different views, but then after the discussion – that’s always been my, my case, at least – … I have the perception that we convince each other and we, we reach an agreement, which doesn’t mean that you are completely convinced. And this is why in public statements there might be slight differences. But if you look at the statements of Governing Council members … since our last meeting, I think most of them or all of them are converging to one idea of when we are going to finish, ending our APP and when we might increase rates for … the first time. So I wouldn’t overemphasise these … differences, because I don’t think they are playing a significant role. I think the consensus is there and the consensus in my view will … remain.’

10 May 2022

‘The Russian invasion of Ukraine has created a situation of geopolitical tension whose intensity and duration are uncertain. The main ways in which the conflict could significantly affect the economy are twofold: first, the rise in energy and other commodity prices - with their accelerating effect on inflation and penalising effect on economic activity; second, the negative impact of the war on world trade, on business and household confidence and on financial uncertainty. In fact, these factors have led to a downward revision of the economic outlook for 2022 and 2023 published by the Bank of Spain, as well as a significant upward revision of the inflation projections for 2022. From the banking sector's perspective, direct exposures to Russia and Ukraine are very small, but the effects can be significant. Moreover, it should not be forgotten that the development of the war may have an impact on the sector's operational risks, given the potential increase in cyber attacks.’

‘High debt levels also entail greater sensitivity of public finances to interest rate movements. However, the low levels of interest rates in recent years have led to a continued decline in the interest burden as a percentage of GDP, while the lengthening of the average maturity of debt limits the short-term impact of increases in issuance costs. In a scenario consistent with the latest projections in which interest rates rise gradually, the debt burden as a percentage of GDP would stabilise. On this scenario, an additional 100 bp increase in both short- and long-term interest rates, all other things being equal, would lead to an increase in interest payments of four-tenths of a percentage point of GDP in 2024.’

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.’

Villeroy (Banque de France):

16 May 2022

‘In this uncertain situation, our first duty as a central bank is to provide appropriate monetary policy. The consensus in our Governing Council is now clearly emerging, as summed up by Christine Lagarde in her speech last Wednesday: to fight an inflation which is not only higher but broader, we now have to normalise our monetary policy. I won’t add my precise calendar prediction to the many existing ones, but expect a decisive June meeting, and an active summer. The pace of the further steps will take into account actual activity and inflation data with some optionality and gradualism, but we should at least move towards the neutral rate. And let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation. A euro that is too weak would go against our price stability objective.’

11 May 2022

‘We have known since February that the shock of the war in Ukraine was a negative shock for the French economy, with less growth, more inflation, and much more uncertainty. What we see this morning with this survey, which was carried out by the men and women of the Banque de France, among about 8,500 entrepreneurs, is that the uncertainties are beginning to diminish. And so I bring a more precise picture. To put it in a nutshell, I believe that activity and employment are resisting, but that inflation is rising sharply, and this is the number one concern of the French.’

‘Let's be clear, there are still a lot of uncertainties, and it's not easy for company directors, the bosses of SMEs, to adapt to this environment, in particular to their supply difficulties, which are very real. But in terms of activity, there is a certain resilience in the French economy, which means that we have a forecast for the second quarter of growth, which is moderate, but positive, at plus 0.2%. ... It's not brilliant, but after a shock like this, it's resilient.’

‘I said moderate growth and not sluggish growth, it remains positive. What's going on with inflation? There are major supply difficulties in industry and in construction: two thirds of industrial companies and half of construction companies report supply difficulties, which is unprecedented, and as a result, more than half of these companies have increased their prices at least in April. It is very rare to have more than half of the companies in industry and construction increase their prices in a single month. The French can see it, the result is an inflation of around 5%. And they feel it in their purchases, and it's not just prices at the pump, it's also food, a certain number of goods...’

‘This is where I want to try to be precise, on how long this higher inflation will last, and above all, how we fight inflation, because it is our responsibility as a central bank. When we look ahead, this high inflation should last for another year and start to fall at the beginning of next year, depending on energy prices. Obviously, we have to go beyond this shock. What is very important is that inflation should come back to around 2%, which is its good level, by 2024, in the next two years.’

‘We are not out of the tube, but we have warning signs. What I want to say is that this is not only our forecast, it is our commitment, with Christine Lagarde and the European Central Bank. This involves very fine, fairly complex adjustments, which is what we call monetary policy, but which aim to bring down inflation without penalising activity too much. What does that mean in the coming period? Money is going to be a little less easy; interest rates are going to rise but very gradually. They are exceptionally favourable today, they will remain favourable. But the European Central Bank, the Banque de France, will do what is necessary, and I want to say this very forcefully, to bring inflation back to around 2% in the next two years.’

‘It must be said ... this [lack of monetary policy aggressiveness in Europe] is for a reason that is favourable to Europe, because inflation is much higher in the United States, particularly inflation excluding energy. But what I want to say this morning is that we have a duty to act - because it is our mission -, we have the will to do so, - I think I am very clear -, and we have the capacity to do so. There are effective ways of fighting inflation, and we are going to use them. … But we have the will and the ability.’

‘I'm not going to comment on the timing, let's say that from the summer onwards I think the European Central Bank will gradually raise interest rates.’

10 May 2022

‘[M]onetary policy and its relationship with fiscal policy are often subject to two suspicions. Firstly, accommodative monetary policy is believed to be responsible for the rise in public debt. This is not true: the unconventional policies conducted over the past decade to support inflation (and activity), which was weak at the time, have merely had the effect of reducing the cost of debt. Several countries, not only Germany, have, on the contrary, taken advantage of this decade to bring down their debt. And unfortunately we have to acknowledge that in France, government spending was already systematically higher than revenues long before the low interest rates and government securities purchases. The second suspicion is that because of this high public debt, monetary policy is now unable to raise interest rates sufficiently to combat renewed inflation. This is also untrue: the independence of the European Central Bank and of each national central bank, starting with the Banque de France, is notably designed to prevent any risk of "fiscal domination". Our Governing Council will do whatever it takes to fulfil our primary price stability mandate; have no doubt about that. It is therefore particularly important for the fiscal authorities to ensure debt sustainability in a context of rising interest rates.’

‘Particularly during the Covid-19 crisis, monetary and fiscal policies, while remaining independent, were aligned and mutually reinforcing: as long as inflation remained weak, key rates remained low, reducing the costs of an expansionary fiscal policy which itself supported activity and ultimately inflation. Clearly, this economic context has changed since last autumn: faced with rapidly rising inflation, including inflation excluding energy and food (core inflation in the euro area was up by 3.5% in April), we must normalise monetary policy. In addition, financial markets have incorporated a risk premium in the face of this return of inflation: incidentally, this now greatly undermines a popular belief that inflation lowers the debt and its burden. Rates have therefore already risen significantly (the 10-year OAT climbed from 0.1% a year ago, in early May 2021, to 1.6% today) and should continue to do so, particularly in the short-term segment. Any rate increase is gradually passed on to the debt issued or reissued, at a pace of about 15% of the debt outstanding per year in France. According to our estimates, each 1% rise in interest rates will lead to a 1 point of GDP increase in the annual interest burden after 10 years, and a 5½ point of GDP increase in debt compared to a situation without rate increases. Each 1% rise in interest rates therefore represents an additional annual cost of close to EUR 40 billion each year, i.e. almost the equivalent of the current defence budget. It would therefore be irresponsible to build our future on the already outdated bet of a zero or very low cost debt. A higher deficit today clearly implies less room for manoeuvre and action tomorrow in favour of ecology, health and education.’

06 May 2022

‘Europe is facing an historic turning point with the Russian aggression against the democratic state of Ukraine. The economic consequences of this war are maximal in Russia, with a GDP fall of -8.5% expected this year, but also sizeable in Europe: more inflation, less growth, and above all more uncertainty. That said, we shouldn’t at this stage rush to the stagflation conclusion: the carryover in growth for the euro area in 2022 is already 2.1 % at the end of Q1, after an actual growth rate of 5.4% in 2021. Unemployment is at a historically low level at 6.8% in March. Admittedly, these are rough waters that monetary policy is currently navigating. Some allege an “impossible dilemma” between fighting excessive inflation and escaping recession. I don’t think so. There are arguments in principle against the dilemma: legally, our mandate clearly prioritises price stability; politically, our fellow citizens care first and foremost about inflation and its impact on purchasing power; and economically, entrenched inflation would mean less confidence, higher risk premia, and greater price distortion, hence less long-term growth. But today, I will discuss from the operational standpoint about the journey toward normalization of our monetary policy. This journey is delicate, but I am confident that we can successfully manage it. We have already clarified its first part. At our Governing Council meeting under Christine Lagarde’s leadership in December last year, we agreed to phase out net purchases under the Pandemic Emergency Purchase Program (PEPP), which has now smoothly ended. At our March and April meetings we decided to wind-down the monthly net purchases under the APP, and to end them in the third quarter. What I want to do now is to take a broader view of the journey. Let me share some personal reflections about a possible roadmap to help us arrive at the right destination. They can be summarized into three rules of travel. (I) This journey is a fully warranted policy normalization, but not a tightening so far. (II) The pace and the length of the journey will be guided by an active use of optionality and gradualism. (III) The journey should prevent unwarranted fragmentation among travellers. Let me elaborate on each of these.’

‘By now, it is clear that our monetary policy cannot simply look through the ongoing supply side shocks. This would have been the textbook response if the shocks were purely transitory but the original energy price shock has propagated: inflation is not only higher, it’s much broader. Food price inflation has accelerated. Core inflation in the euro area climbed to 3.5% in April, still far below the US core inflation rate of 6.5% in March, but well above our 2% target. The ECB is highly vigilant about second-round effects and wage developments, knowing that at times they can move quite abruptly. We also monitor inflation expectations closely, not only from market participants but also from households and firms. There are signs – including in BDF business surveys – that these expectations are becoming less and less anchored at 2%. Against this backdrop, we need to carefully watch exchange rate developments. We don’t have an exchange rate target, but the level of the euro matters significantly for imported inflation. A euro that is too weak would go against our price stability objective. I want to stress one further argument in favour of normalisation: even if inflation returns progressively to around 2% by 2024 – which is our forecast and remains my view – the present monetary accommodation will no longer be warranted. Strong unconventional measures – such as net asset purchases, or negative interest rates – were necessary when inflation was “too low for too long”. As it comes back to our target, which will be good news, this exceptional support is no longer warranted.’

‘While policy normalisation is appropriate, and already under way, words matter in central banking and in economic life as it is about avoiding excessive slowdown. We are still far away from monetary tightening, as real interest rates will remain significantly negative and below the neutral rate for some time. The neutral rate is a reference point, at which inflation (and economic growth) does not accelerate further, nor slow down. Using a metaphor, it is the moment when, while driving your car, you lift your foot from the accelerator pedal as you approach the desired speed. Only when you actively push on the brakes would the action be considered as monetary tightening. Raising our interest rates from the exceptionally low level where they are now is reducing accommodation, or pursuing normalisation, not a monetary tightening. Obviously, the natural rate of interest cannot be precisely observed: I will come back to this debate for both the US and Europe. Let me add one element on the side of “normalisation”: we, and rightly so in the euro area, will maintain a significant size of our balance sheet through our policy of full reinvestment, for PEPP until at least the end of 2024. Here again, is a significant difference with the “quantitative tightening” that the Fed for instance will start next month by shrinking actively its balance sheet. I expect that discussion of balance sheet normalisation will only start once our journey toward policy normalisation is well advanced and the runoff will be quite mechanical.’

‘Let me now be more specific about the pace and the possible end of the journey. Christine Lagarde has strongly advocated “optionality”, and so have I. It means acting in due time, according to the latest real data in a very uncertain period. Not being precommitted is an absolute imperative: avoid too “long” forward guidance, favour agility. But optionality doesn’t mean inaction, or adopting a wait and see attitude. And I think the time has come for further clarity and action on the start of the journey. First, in the preannounced order of our sequencing, we will stop net asset purchases, and decide in our June meeting precisely when in Q3. I have seen much – perhaps too much – speculation, predictions, statements on that end date. Let me simply stress that seen from today the case for continuing to press the accelerator and adding further net purchases after June is not obvious. Then will come a more important decision on the timing of our first interest rate increase, what we refer to as lift off. This decision is now fully separate from that of ending net asset purchases: I advocated some months ago dropping the “shortly before” and the automatic link, and we indeed decided in March that the first hike would come “some time after”. How much is some time? We will decide it in June or later, but let me share two reflections: The three conditions of our forward guidance on interest rates are, according to my personal judgment, fulfilled, even if they provide a prerequisite for the lift-off without implying necessarily a mechanical and immediate decision. The most important condition, consistent with what I said about normalisation and not simply looking through the energy shock, is the third one: that “realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term”. Well, here we are. By all measures, underlying inflation is clearly above 2% at present. There have also been many comments about the precise month of the liftoff. While I wouldn’t preclude the next few Governing Council meetings, I would rather set a marker a bit further down the road: barring unforeseen new shocks, I would think it reasonable to have entered positive territory by the end of this year. As the most obvious next step, rate increases towards zero may have dampened effects, as bank margins and profitability might increase and improve the ability of banks to provide credit, although the evidence here is far from clear-cut. As we raise the DFR – which is at present our key rate –, the level of MRO rate – presently at zero – and MLF rate will have to be increased at some stage, to preserve a smooth functioning of the interbank market. As the start of the journey is becoming clearer, the attention is currently shifting more towards its end. The IMF interestingly suggested in its latest WEO that “Central banks should communicate clearly their perspective on the post-pandemic neutral rate […] giving markets some clarity on the likely endpoint for rate hikes”. True, our current forward guidance does not provide information on the path of nominal rates post lift-off. The notion of gradualism, introduced in the March meeting, fills this gap to some extent, as it rules out too abrupt rate hikes. There are two traditional and strong arguments for gradualism: first, avoiding the economic and financial instability created by ‘stop and go’ policies; second, dealing with uncertainty – in convergence with the other principle of optionality, or with the famous Brainard principle of 1967. That said, research by the Banque de France shows that gradualism shouldn’t mean excessive caution or inertia: if, in the case of persistent shocks, the central bank reacts too cautiously, inflation expectations are likely to increase, putting higher upward pressure on inflation. The bottom line is that the pace of normalization will have to be calibrated in order to reduce the uncertainty on future inflation. To calibrate the normalisation of policy rates we need to assess the monetary policy stance appropriately. Firstly, what is the correct horizon of real interest rates to measure the stance? Current levels of headline inflation are very high, leading to deeply negative ex post short-term real interest rates. Larry Summers has noted that this goes against established rules to stabilise inflation. However, if we look at longer term implied real rates, there is less reason to be alarmed. While current inflation is quite high, inflation is expected to recede back to 2% over the medium term at the same time as policy rates are expected to increase. As I mentioned earlier, the level of the neutral rate cannot be precisely determined ex ante. However, current estimates of real neutral rates point to levels between -1% and 0% in the euro area, and between 0 and +1% in the US. xiii Such natural real rate gap can be largely explained through less dynamic demographics and potential growth in the euro area compared to the US. Given an inflation target of 2% on both sides of the Atlantic, this suggests a nominal short-term neutral rate possibly between 1% and 2% in the euro area and between 2% and 3% in the US. These values seem indeed consistent with financial market-based interest rate expectations, for short-term rates or nominal terminal rates of about 1.5% in the euro area and 2.5% in the US, as proxied for the OIS with a maturity of one year in 9 years. But we will have to be pragmatic along the way: when short-term nominal rates in the euro area approach such a range, we will then have to judge whether or not this is sufficient according to the inflation outlook at that time. If this seems compatible with a stabilised inflation outlook of 2% over the medium term, then we can say that we are close to the end our normalisation journey. If not, we would have to pass over this neutral rate zone, which means that a tightening of the stance would then - and only then- be necessary. The speed of convergence towards this neutral zone could also depend on the degree of economic slack. Unlike the US, which is currently in a situation of excess demand, it might justify a slower journey in the euro area.’

‘Let me now come to our specificity as a Monetary Union, and elaborate on a third principle put forward by our Governing Council: flexibility. While monetary policy normalisation requires an appropriate calibration of nominal interest rates to reach the right stance, equally important in the euro area is ensuring an even and smooth transmission across jurisdictions and asset classes. In a widely remarked speech in Jackson Hole in 2010, JeanClaude Trichet set out the idea of a “separation principle” xiv: “The monetary policy stance is always designed to deliver price stability in a medium and longer term perspective. The non-standard measures have a clear purpose: ensuring that the standard measures themselves are transmitted as effectively as possible despite the otherwise abnormal functioning of some markets.” This separation was afterwards less relevant in an environment of “too low inflation for too long”, in which non-standard measures contributed importantly to providing monetary policy stance to close the inflation gap. Indeed, the PEPP and TLTRO-III had both stance and transmission effects. But here we are again, close to a separation principle. During the normalisation phase, we are prepared to confront two possible transmission perils. First, liquidity shortfalls in the banking sector in some jurisdictions can be addressed any time by longer-term refinancing operations; this is why I propose new LTROs. During the normalisation period, the remuneration of such a liquidity backstop should be designed at “normal” prices, indexed on MRO, to protect transmission only, without undesired interference with the desired stance. Second, unwarranted market fragmentation in public or private bond markets (or specific asset classes such as commercial paper in March 2020) could happen. I stress here the “unwarranted “; at its December 2021 meeting, the Governing Council has taken a strong and clearly defined commitment: “Under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability “. As regards all the lasting consequences of the pandemic, we are ready to be flexible in PEPP reinvestments, or even resume its targeted net purchases if necessary. But our commitment against unwarranted fragmentation is broader, as Christine Lagarde strongly said in the April press conference: “We need to continue to integrate flexibility in our monetary policy determination, if warranted, and if necessary we can move very promptly”. To be determined in our commitment, we don’t need to be specific about technicalities: the precise design of a new instrument, or the conditions which would trigger appropriate interventions. But we can at any time draw the positive lessons from the PEPP flexibility efficiently used in 2020. Everybody should be aware that we have in our toolbox this contingent backstop: preventing fragmentation belongs to succeeding in normalisation. In order to avoid any influence on the stance, an option worth considering would be to sterilize flexible asset purchases, that is to absorb the liquidity injected through adequate (liquidity) off-setting operations, as it is was practiced under the Securities Markets Program (SMP) until June 2014. Other innovative design options could include selling a particular asset sometime after its purchase, once the market stress episode has disappeared. The key mechanism behind this strategy is an asymmetric flow effect between purchases and sales: the central bank can buy bonds during a market stress episode and sell them more gradually over time once market conditions normalise, with no long-term implication for the overall balance sheet size and thus for the stance. This would further underline the differential impact that the flow of purchases versus the size of the overall balance sheet have for monetary policy transmission and stance. Regarding the stock, let me reiterate the point that we should maintain the size of our balance sheet for an extended period of time: this will ensure through reinvestments a significant presence of the Eurosystem in markets, and also contribute to prevent fragmentation or too brutal adjustments in the term premium. Note however that the coexistence of a large balance sheet – and hence significant excess liquidity – and positive ECB rates will raise new technical issues about banks’ reserve remuneration. I have no doubt we’ll solve them in due time.’

‘Let me conclude. While the first part of the journey towards policy normalisation, namely the exit from asset purchase programs, is almost concluded, it is time to provide a possible roadmap on the next part of the journey, including the possible endpoint. By the way, I spoke today about travellers, not about birds. I never believed in the ornithological taxonomy, still less today: describing our discussion as “the hawks taking control”, or “the doves resisting” is a bit of intellectual laziness. It’s about a new and challenging situation faced by 25 independent and open-minded Council members, whose views are presently significantly converging. “When facts change, I change my mind”, Keynes rightly said. In this regard, we are all Keynesian! And I am confident that the three travel rules I proposed today, beyond their technical content, will enable us to fulfil our commitment towards our fellow citizens. Let me say it for the wider public of 340 million Europeans: you can trust us, your central bank, to ensure price stability and bring inflation back firmly and durably to 2%. We have the duty to act, the will to act, and – decisively – the capacity to act.’

04 May 2022

‘There is an undeniable inflation hump today that our fellow citizens are feeling. It is less strong in France than in the European average or in the United States. We are in an inflation that is around 4.5%. It's still too much, but it's less because the "tariff shield" on the price of electricity and gas is powerful. The weight of nuclear power also reduces our sensitivity to oil and gas prices. Inflation should return by 2024 to below 2% in France. This is very important for the confidence of our fellow citizens in their currency. A good currency is one whose value is preserved.’

‘Business bankruptcies [in France] had fallen in 2020 to an all-time low, much lower than in a normal year. We are back at a level that is still much lower than 2019. There is no sign of concern about business failures. It is necessary to compare to "normal" years, and not to exceptionally low years.’

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.’

Nagel (Bundesbank):

14 May 2022

‘The narrative of the Eurosystem is that we agreed in March to first reduce these famous net purchases and then in June – the meeting is coming soon – then, depending on the data, to agree again on how to proceed with the net purchases. If the data remain as they are now, then for now it is likely that we will end the net purchases. ... There are already many voices, including myself, who would then say that the first rate hike could then be made in July. And then you certainly have to look further to see how, how, so to speak, how quickly further interest rate hikes could follow. Of course, that also depends very much on how inflation develops and how the topic should develop that has been on our minds so painfully since February 24th. There are many factors that come into play. The financial markets, we always look at how the financial markets see us, i.e. what they are pricing in. They are already seeing three to four rate hikes by the end of the year. ... We have a very clear mandate in the Eurosystem, and that's price stability. We want to be relatively close to our inflation target of 2% in the medium term. Of course we also have to take financial stability factors into account to a certain extent, of course. We have also repeatedly had a discussion, in our jargon we call it fragmentation, to what extent the capital markets, financial markets, are impacted by interest rates in other countries. From today's perspective, I can see that we don't have a problem there yet, but ... I have to keep an eye on the Eurosystem, that's my understanding, and we will approach that responsibly.’

11 May 2022

‘The longer the war in Ukraine lasts, the more death and suffering it will bring. At the same time, the economic consequences of the conflict are threatening to become more and more severe.’

‘A complete halt to Russian energy deliveries would pose a particular challenge to the European economy. Last year, Russia was the most important supplier of crude oil and natural gas for Germany as well as for the European Union. A delivery stop could substantially dampen the output of energy-intensive industries. Furthermore, Germany and the euro area are net energy importers. Therefore, the sharp rise in energy prices is causing us to lose purchasing power relative to the rest of the world. This is costing us growth. One key factor for a sustained economic recovery will be the behaviour of private consumption. On the one hand, it could be supported by household savings. During the pandemic, households reduced their consumption because goods or services were simply not available. Overall, they have built up a huge amount of “involuntary” savings, which could now be partly spent. According to our updated estimate, these savings in Germany could have peaked at about 180 billion euros in the first quarter of this year. In addition, governments are taking action to cushion the impact of energy price increases with support measures, not least for those most affected. On the other hand, high inflation is not only eroding households’ purchasing power. High inflation and the uncertainties related to the war are also weighing on their confidence. Surveys show that consumer sentiment has deteriorated considerably. Households could be putting off purchases for precautionary reasons. The Russian attack on Ukraine has added new layers of risk. When the attack began, Germany and the euro area expected a strong recovery from the pandemic crisis. In our baseline scenario, the impact of the war will depress economic growth. Yet it is unlikely to derail the recovery. Nonetheless, in the present situation of extraordinary uncertainty, more adverse scenarios also have to be considered. In our latest Monthly Report, we published a macroeconomic simulation exercise. The study suggests that an escalation of the war in Ukraine – including a full, immediate stop to Russian energy deliveries – could cause the German economy to contract by up to 2% this year. However, even if the scenario itself were taken for granted, this outcome would still be subject to high uncertainty. And it appears that the past weeks have been used to reduce Germany’s dependence on energy imports from Russia, which may dampen the impact of an embargo.’

‘While Russia’s invasion of Ukraine is substantially dampening European growth prospects, it is additionally driving up already soaring inflation rates. Mainly due to the rise in energy prices, inflation rates in the euro area have climbed to unprecedented levels. Additionally, underlying price pressures have also strengthened considerably. In the euro area, the inflation rate stood at 7.5% in April. In Germany, the rate as measured by the Harmonised Index of Consumer Prices even amounted to 7.8%. The last time German inflation rates were similarly high was in the early 1980s. In line with soaring energy commodity prices, higher transport costs and supply bottlenecks, import and producer prices have picked up sharply as well. This feeds through to consumer prices. Here not only heating oil, gas or fuels have become more expensive but also food and other goods. Services inflation also proved very dynamic as services were particularly affected by the measures to contain the pandemic. Overall, price rises have become more widespread, and there is still considerable price pressure from upstream stages in the pipeline. Similar to other forecasters, households do not believe that the inflation wave will soon subside. According to the March survey of the European Commission, consumers’ inflation expectations jumped to a record level. In April, they dropped somewhat but remained exceptionally high. The Bundesbank’s online survey also shows that households have been adjusting their 12-months-ahead price expectations for a few months now and especially in March. Minister Lindner in his speech on the Tax Relief Act, or Steuerentlastungsgesetz, said that one of the coalition’s intended objectives was to dampen peoples’ perceptions of inflation, or “perceived inflation”, as this was one way to prevent dangerous wage-price spirals. I can assure you that the ECB Governing Council is taking warning signs of possible second-round effects very seriously. True, various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%. But initial signs of above-target revisions in those measures have to be monitored closely. We are worried about the high rate of inflation in the euro area, which has repeatedly surprised professional forecasters. The Bundesbank is now expecting the inflation rate in Germany to reach close to 7% in 2022. The longer the high inflation figures persist, the greater the risk of second-round effects becomes. Monetary policy has to act before medium- to long-term inflation expectations show clear signs of de-anchoring. Acting too late would necessitate a stronger reaction to rein in inflation.’

‘Since December, the ECB Governing Council has started to normalise monetary policy. Against the background of the current inflation dynamics, increasing calls for a quick end to the highly accommodative stance are understandable. However, it is important to proceed in a reliable, systematic manner especially in times of extraordinary uncertainty. Our actions will be data-driven and step-by-step, as I have already emphasised at other occasions. The Governing Council expects APP net purchases to be concluded in the summer. From today’s vantage point, they could be wrapped up at the end of June. In my view, that should be followed by a timely initial rate hike, which could be in July. This sequencing makes sense because continuing net purchases and simultaneously hiking key ECB interest rates would send a contradictory signal: Such a policy would increase short-term rates and at the same time push down medium- to long-term interest rates. Furthermore, asset purchases are exceptional measures associated with particular risks and difficulties. Therefore, they should be first in line when it comes to reducing the very expansionary stance. It remains to be seen how many rate hikes there will be by the end of the year. In any case, the exit from the very accommodative monetary policy should be swift and smooth. Swift enough to affect the price path and to prevent second-round effects and a de-anchoring of inflation expectations. Yet at the same time smooth enough so that households, corporates and financial markets can cope with it. For central banks, the challenge will be to sustain the recovery while containing the upward pressure on inflation in the medium term. In my view, negative interest rates will relatively soon be history in the euro area. They no longer fit the changed environment. Fiscal policy, too, faces challenges in terms of mitigating the distributional implications of rising energy and commodity prices. These challenges won’t become smaller, as the recovery is slowing and fiscal buffers have already been used to mitigate the economic fallout from the COVID-19 crisis. During the pandemic, monetary and fiscal policy acted in concert. Now their interplay could change. The goal of the Eurosystem’s monetary policy is crystal clear: price stability in the medium term. Although higher financing costs might be an additional challenge for governments, the Eurosystem must not hesitate to do what is necessary to fulfil its mandate. And governments and financial markets alike have to prepare for rising interest rates. Market participants as well as everybody else can rely on us to do our job of preserving the value of our money!’

10 May 2022

‘The Russian invasion of Ukraine has added to the pre-existing price pressures, both directly and indirectly. As far as the direct effects on price dynamics are concerned, the war is first of all putting more upward pressure on energy prices. Oil and gas prices have reached exceptionally high levels and could rise even further. This will also drive up inflation indirectly by raising the energy input costs of other products. The prices of several other commodities are being affected as well: nickel, palladium, noble gases, fertilisers and food products, in particular grain, have become, at least in the meantime, notably more expensive. Furthermore, the war and the related sanctions are again distorting various supply chains, as both Russia and Ukraine produce a number of goods needed in the retail trade and at upstream stages of production. In February already, disruptions to Ukrainian supplies of cable harnesses for motor vehicles led to production stoppages at many car plants in Germany, including Volkswagen’s factory in Wolfsburg. Another critical good is neon gas. Before the war, Ukraine was producing more than half of the global supply of this noble gas, which is a key ingredient for making microchips. Shortly after the start of military hostilities, production came to a halt. In particular, Ingas, one of Ukraine’s two neon producers, is located in the city of Mariupol, which has been occupied and heavily destroyed by Russian troops. This production stoppage might impose significant constraints on the worldwide output of microchips. Additional distortions of supply chains are being caused by airspace closures, blocked seaports, shipping avoiding the Black Sea, and a lack of truck drivers. All these factors are adding to the upward pressure on inflation that already existed due to pandemic effects. However, the Russian aggression could also affect price dynamics through a change in economic activity. Before the war, our experts had been expecting to see a notable economic recovery in spring. The Russian aggression, however, clouded the economic outlook in Germany. As the war continues, there is a significant risk of a further escalation, which would entail larger direct and indirect effects on inflation. Tougher economic sanctions, e.g. including a complete embargo of Russian energy exports to Europe, have become increasingly likely. These would cause another spike in energy commodity prices and weigh on the economic outlook, at least in the short term. The Bundesbank recently published a model-based scenario analysis estimating the effects of an immediate stoppage of energy imports from Russia on the German economy. In this scenario, the German economy might even slide into recession, with real output contracting by up to 2% in 2022. This could exert a degree of disinflationary pressure. Nevertheless, on balance, the inflationary factors of sanctions such as an energy embargo would clearly prevail, at least in the short term. It goes without saying that this scenario is subject to considerable uncertainty. Most recent reports suggest that Germany’s dependence on energy imports from Russia has already been reduced markedly. Bearing this in mind, the outcome of an embargo could also be less severe. The war in Ukraine is still dragging on, and there is no sign of it ending any time soon. Nor can we rule out a further escalation of the conflict. All in all, inflation risks are clearly tilted to the upside.’

‘When looking at the medium term, three questions warrant our particular attention. First, how widespread are the price increases? Second, how are wages responding to the increases in prices? And third, will inflation expectations remain well anchored? Regarding the first question, we are indeed seeing more and more items increase in price by more than 2% in Germany. In March, more than half of the 12 sub-indices of the German CPI recorded growth rates of 4% or more. Core inflation excluding energy and food increased from 3.4% in March to 3.9% in April. This is disturbing evidence that the increase in inflation is gaining momentum. Turning to the second question, there are no clear signs as yet that the movement in prices is feeding into wages in Germany. However, major rounds of wage negotiations in Germany are not scheduled until the second half of the year. The trade union of the iron and steel industry (IG Metall), for example, is pushing for a wage increase of 8.2% in this round. This means that wage dynamics may accelerate notably. And as for the third question regarding medium-term inflation expectations, we are seeing dynamics that are concerning. Recent results from the “Bundesbank Online Panel Households” survey indicate that individuals in Germany have adjusted their five-year ahead inflation expectations strongly upwards, from 3.4% in February 2021 to 4.5% in February 2022, and to 4.8% in March. Similarly, in our corporate survey, the “Bundesbank Online Panel Firms”, survey participants revised their five-year ahead inflation expectations upwards, from 3.4% in January 2022 to 4.5% in April. All this suggests that higher inflation rates will prevail in the near future and that inflation expectations could become less anchored.’

‘But what about the inflation prospects for longer time horizons? Is it possible that the era of low inflation is now over and that we are currently experiencing a structural break? Will higher inflation rates be our constant companion for decades to come? Certain determinants may influence price dynamics in the long run, namely demographics, deglobalisation and decarbonisation. Let us take a closer look at them, one at a time. The UK economists Charles Goodhart and Manoj Pradhan reason in their book “The Great Demographic Reversal” that the disinflationary forces of the last decades may not persist into the future. In particular, Goodhart and Pradhan argue that since the beginning of the 1970s there has been a combination of demographic and globalisation factors that have induced a positive labour supply shock putting downward pressure on worldwide inflation. … However, nowadays these factors are petering out. In particular, China’s downward pressure on worldwide prices is weakening, since its working-age population is now shrinking while the share of retired persons is on the rise. At the same time, Goodhart and Pradhan argue that the increasing labour market participation of young populations like those in India or Africa will not be enough to offset the demographic trends in developed countries. Furthermore, Goodhart and Pradhan point to population ageing in most advanced countries as another complicating factor. In particular, an ageing population is prone to conditions like dementia, which unlike cancer and heart disease does not necessarily lead to lower longevity but requires a lot of human resources for eldercare. Therefore, demand for low-skilled labour in advanced countries is expected to grow. This could result in more upward pressure on wages as well. Goodhart and Pradhan reasoned at the onset of the pandemic that the surge in inflation that would follow the pandemic would be more than a “temporary blip” and would mark “the dividing line” between the disinflationary forces of the last decades and the new regime. Up to now, there is no clear evidence to suggest that their conclusion is wrong. The economic impact of the Russian invasion of Ukraine is in part similar to that of the pandemic. Looking at the international supply chains, we are again experiencing a massive supply shock, which might reinforce the tendencies sparked by the pandemic. Furthermore, both shocks – the pandemic and the war in Ukraine – are fostering deglobalisation tendencies and therefore directly undermining one of the major forces that Goodhart and Pradhan see behind the disinflationary pressure of the past. … There is another important factor that could push inflation higher in the future. And that factor could be strengthened by the Russian aggression against Ukraine. I am talking about the green transformation of our economies. This process of “decarbonisation”, as it is known, which gained urgency as this new geopolitical event unfolded. In particular, our economies’ dependence on fossil energy is increasingly becoming an issue not only for climate policy but also for national security. In general, carbon pricing is considered the most efficient way to reduce carbon emissions. Higher carbon prices have an impact on carbon emissions, but also on consumer prices. At least during the transformation period, they would make energy more expensive and drive up the production costs of goods. Furthermore, the necessary, accelerated transition to renewable energies inevitably implies new and costly capital investment, while existing capital stock has to be written off more quickly than expected. One specific aspect of this is investment in the carbon industry. According to the International Energy Agency, investment in oil and gas supplies has been reduced sizeably since 2015, in part because of uncertainty about climate-related policy measures. This low investment would suffice to meet demand only if there are strict climate policies to reduce carbon-related emissions to net zero by 2050. Under currently implemented climate policies, however, projected demand is higher than supply. During the transition phase, the decarbonisation of our economies may thus add to inflationary pressures. We do not know exactly to what extent. But even in the case of an orderly transition, the euro area could temporarily experience significant price pressures. The Network of Central Banks and Supervisors for Greening the Financial System estimates that climate policy measures could increase annual inflation rates in the period up until 2030 by between 0.3 pp and 1.1 pp, relative to a scenario without climate change and without climate policies. These numbers are the outcome of an orderly transition. In alternative scenarios, figures could be much higher. To sum up: The war in Ukraine is unlikely to bring about major new inflation dynamics on its own. But it may clearly accelerate pre-existing tendencies in both the short and the long run, as exemplified in energy markets and international trade.’

‘How should monetary policy respond to these developments? Clearly, the Eurosystem must ensure that the current elevated inflation does not become entrenched and persist at an excessively high level over the medium term. The ECB Governing Council decided in March to reduce purchases under the APP asset purchase programme more quickly than previously intended – from €40 billion in April to €20 billion in June. Incoming data since this decision reinforce our expectation that net asset purchases should end in the third quarter. Looking ahead, our monetary policy will depend on the incoming data and our evolving assessment of the outlook. Adjustments to the key ECB interest rates will take place “some time after the end of net purchases under the APP”. However, given the high level of uncertainty, adjustments should be gradual. In my view, we must stay alert with respect to upside risks to price stability over the medium term. There is less and less of a concern that a premature monetary policy normalisation could plunge the economy back into the low inflation setting of the previous years. Instead, I see that the risk of acting too late is increasing notably. Given the extraordinarily high uncertainty surrounding the future path of inflation, we should not delay the exit from the very accommodative monetary policy, since a less expansionary monetary policy stance provides the most flexibility. In the current situation, it is therefore more important than ever that central banks act in time. Their action should be foreseeable, gradual, and data-dependent. This way, debtors can better cope with an increase in interest rates, and accordingly, risk premia are expected to rise to a limited extent. As inflation in the euro area continues to run high, we need to act. I expect the net purchases under the APP to be discontinued at the end of June. And if both the incoming data and our new projection confirm this view in June, I will advocate a first step normalising ECB interest rates in July. As central banks consider how to bring inflation back down to target, it is worth recalling the conditions under which the last, most prominent disinflation episode – the Volcker disinflation at the end of the 1970s – played out. Over the course of this policy, nominal interest rates in the US rose above 20%. Of course, at that time the situation was different in many respects. Debt ratios were much lower than they are today, for both public and private debt. Inflation had already been higher in the 1960s and early 1970s. And arguably, before this episode, the Fed may have been less independent and less focused on inflation than it is today. There is one lesson I would draw from this: Delaying a monetary policy turnaround is a risky strategy. The more inflationary pressures spread, the greater the need for a very strong and abrupt interest rate hike. And there are downsides to this: First, a very strong and abrupt interest rate hike may place excessive strain on firms and households. Second, a very abrupt change in the monetary policy stance could lead to vulnerabilities in the financial system and provoke significant market turbulence. And third, in an environment of high government debt ratios, the more abrupt the rate changes, the more governments may push against a tightening of policy on a necessary scale, putting the independence of central banks at risk.’

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.’

Lane (ECB):

05 May 2022

‘There are three main analytical challenges in assessing the economic and inflation outlook for the euro area. First, the pandemic remains a first-order driving force. Over the winter, pandemic restrictions still limited economic activity in the euro area. While these restrictions are currently being lifted and case numbers are declining, the current set of restrictions in China is contributing to a further wave of bottleneck pressures in global supply chains and limiting domestic demand in a major region of the world economy. At the same time, the re-opening of the European economy and the prospects for a more normal summer tourist season are set to provide significant momentum in the coming months, especially for services sectors and tourist-intensive countries. Second, the significant jump in energy prices since the summer of 2021 represents a major macroeconomic shock. In particular, since oil and gas are primarily imported into the euro area, this constitutes a major adverse terms of trade shock, reducing the aggregate real income of the euro area. In addition to the adverse implications of lower real income for consumption and investment, a persistent increase in energy prices may reduce aggregate supply capacity by making it uneconomic to operate energy-intensive production technologies at full capacity in some industries. This concern applies especially to the tradables sector to the extent that there has also been an increase in the relative price of energy in Europe compared to other parts of the world. In terms of inflation dynamics, even if a rise in energy prices is ultimately a level effect, a protracted phase of temporarily-high inflation runs the risk of affecting medium-term inflation dynamics through a re-setting of inflation expectations. Third, the Russian invasion of Ukraine is a watershed for Europe. The economic impact of the war is operating through several mechanisms including: the amplification of the energy shock; a new set of bottlenecks; and downward revisions in consumer and business confidence. Moreover, the war constitutes a significant source of uncertainty, which is acting as a further drag on economic activity.’

‘Although the easing of pandemic-related restrictions in Europe will provide an important source of momentum in the coming months (especially for the services sector), the pandemic is still contributing to global bottlenecks, while the energy shock and the war will continue to exert an adverse impact on domestic activity.’

‘Chart 3 shows a range of Purchasing Managers’ Index (PMI) confidence indicators. The left panel shows the assessment of the current situation in manufacturing and services. The re-opening of the economy is supporting the continuing improvement in the services sector. Although the manufacturing indicator edged down in March, it remained broadly stable in April, so that the overall profile has so far been resilient to the outbreak of the war. However, in the middle panel, we see that this resilience did not hold for export orders, which have declined more than total orders, since the war and the Covid wave in China are already affecting the external sector. The right panel shows the expectations component, which fell abruptly for manufacturing in particular but has remained in expansionary territory. This can be interpreted as an expectation of a slowdown in growth but not a recession. Turning to the labour market, Chart 4 reinforces the message of Chart 2: the recovery in the labour market has been asymmetric, with public sector employment above the pre-pandemic level, employment in industry and construction only now reaching the pre-pandemic level and employment in services still below the pre-pandemic level. As indicated in the right panel of Chart 4, the distance to the pre-pandemic level is larger for the intensive margin (hours worked per employee) than for the extensive margin (numbers employed). At an aggregate level, the ongoing reduction in the unemployment rate and the recovery in the labour force participation rate underline the overall improvement in the labour market. At the same time, the downward revision in the expected output path as a result of the war and high energy prices will have implications for the future evolution of the labour market. In terms of the impact of the war on the labour market, Adrjan and Lydon (2022) highlight a striking pattern in online job postings: since late February, the growth rate of job postings — in the twenty-one European countries with an Indeed job site — has on average fallen eight percentage points relative to their immediate pre-war trend. Of course, this aggregate shift should be interpreted in the context of the significant positive trend in recent months and take into account the different dynamics across countries.’

‘Chart 5 shows the change in the price level over the year from April 2021 to April 2022. Energy prices have increased by about 40%. This increase in the relative price of energy is far higher than the individual spikes experienced in the 1970s. It is also four times larger than the energy price spikes previously observed over the last two decades since the creation of the euro (Chart 6). Chart 5 shows as well that the other main categories also have seen above-target inflation rates over the last year, especially the food category. In understanding the factors driving price increases across sectors, it is important to bear in mind that the rise in energy prices puts upward pressure on costs across all sectors, given the importance of energy as a production input in the food, manufacturing, construction and services sectors. Bottlenecks are also generating temporary upward pressure on costs, even if the eventual resolution of these bottlenecks should reverse these cost pressures in the future. In addition, the lifting of pandemic restrictions can be expected to generate temporary price pressures in re-opening sectors, in view of the recovery in demand for newly-unrestricted services and initial supply and labour market constraints in these sectors. These themes are illustrated in Chart 7. The left panel suggests that about one percentage point in the current inflation rate for non-energy industrial goods can be attributed to the indirect impact of elevated energy costs and the contribution of bottlenecks. To the extent that the increase in energy costs is ultimately a level effect and bottlenecks eventually are resolved, this suggests that there is a temporary component in the current rate of goods inflation. The right panel shows that services inflation is currently most intense in the contact-intensive sectors that are currently re-opening, which also suggests that the completion of the re-opening process can alleviate services inflation. Still, these adjustment processes (the absorption of higher energy costs across all sectors of the economy, the impact of bottlenecks and the post-pandemic re-establishment of those sectors most affected by the pandemic) may still have some distance to run, as is also suggested by indicators of rising costs in the earlier stages of production before goods and services reach consumers. In addition, the process of adjustment in nominal wages adds a further dimension to near-inflation dynamics, both due to the overall recovery in the labour market and the adverse impact of unexpected inflation over recent months on real wages. Furthermore, even after the adjustment to these shocks has been completed, it is important to assess whether this phase of high inflation might permanently re-set inflation expectations and thereby also affect longer-term inflation dynamics. Chart 8 shows developments in nominal wages, including the information embedded in an experimental forward-looking wage tracker developed by ECB staff. This forward-looking tracker is based on the information for wage trends in 2022 and 2023 embedded in already-finalised wage settlements. The overall tracker indicates only sideways movement in aggregate wage growth at around an annual two percent rate. However, if we focus just on the wage agreements that have been concluded since the start of 2022, these indicate higher wage growth at around 3% in 2022 and 2.5 per cent in 2023. The front-loaded nature of recent wage settlements (with 2022 increases larger than 2023 increases) suggests that wage-setters understand that there is a temporary component to the currently high inflation rate. In assessing wage developments, it is also relevant that, under typical conditions and allowing for labour productivity growth at about 1%, nominal wage growth at 3% is consistent with the 2% inflation target. Although so far only a relatively small number of wage contracts have been renegotiated since inflation started to increase strongly in the second half of 2021, the outcomes from the latest wage settlements might provide a helpful guide to the likely outcomes of upcoming negotiations and contribute to a more accurate assessment of realised progress in underlying inflation. Chart 9 shows the expected momentum in inflation dynamics, as captured by the April 2022 median results from the Survey of Monetary Analysts. The left panel shows the headline HICP, while the right panel shows the core HICPX indicator. Compared to the 6% inflation realised over Q2 2021 to Q1 2022, the coming twelve months (Q2 2022 to Q1 2023) are projected to see cumulative headline inflation at 3.7%. In the subsequent two years (Q2 2023 to Q1 2025), inflation per year is projected to be slightly below 2%. In essence, Chart 9 indicates that one more year of inflation momentum above target is expected by market analysts before returning to the target level. In relation to HICPX, the next twelve months are projected to see cumulative core inflation at 2.3%, while core inflation over Q2 2023 to Q1 2025 is expected to average 1.9% per year. In terms of the evolution of longer-term inflation expectations, Charts 10-12 present a range of indicators. In relation to the Survey of Professional Forecasters, Chart 10 conveys two messages. First, over the course of 2021, there was a significant re-anchoring of longer-term inflation expectations at our 2% target: the distribution in the Q1 2021 survey was similar to the prevailing pattern for an extended period before the pandemic with the modal expectation at around 1.6%, whereas the distributions in the Q1 2022 and Q2 2022 surveys show the modal expectation at 2.0% and a significant rightward shift in the mass of the distribution. Second, there is also a visible difference between the Q1 2022 and Q2 2022 survey: the right tail of the distribution has expanded, with more forecasters expecting long-term inflation above 2.5%, significantly higher than the target level. A similar message is conveyed by market measures of inflation compensation, as shown in Chart 11. The left panel of Chart 11 shows that the estimated “true” (that is, corrected for risk premia) longer-term inflation expectations of market participations re-anchored over the course of 2021 at around 2%, after an extended period substantially below the target. In terms of inflation risk, there has been a significant shift from an inflation risk discount until mid-2021 to an increasing inflation risk premium in recent months. Chart 12 shows the three-year-ahead inflation expectations from the Consumer Expectations Survey. The left panel shows that there has been a marked shift in the March results – having been quite stable at around 2%, the median expectation moved up to 2.9%. In particular, there was a shift in the proportion of participants reporting expected inflation rates above 4%. In line with the literature on household inflation expectations, the most important signal is conveyed by the shift in the distribution of beliefs about future inflation more than the precise level of expected inflation. Taken together, Charts 10-12 indicate that there has been a substantial and widespread shift in longer-term inflation expectations since early 2021, largely in the direction of re-anchoring expected inflation at the 2% target. This suggests that the euro area is unlikely to revert to the persistent below-target inflation trend that was so entrenched before the pandemic. At the same time, the most recent signals from surveys and market-based measures also suggest that the right tail of the distribution is expanding, which warrants close monitoring.’

‘In recent years, the monetary stance of the ECB has been determined by a combination of policy measures: the low level of the key policy rates, rate forward guidance, asset purchases and targeted lending operations. The period of very low interest rates for banks in the targeted lending programme (TLTRO III) is scheduled to end next month. Moreover, as shown in Chart 13, there has been a very substantial decline in the rate of asset purchases in recent months and the Governing Council expects to end net purchases under the asset purchase programme (APP) in the third quarter. Furthermore, as shown in Chart 14, there has been a remarkable shift in the yield curve during the initial months of 2022. In part, this reflects the re-pricing of risk premia in the current highly-uncertain environment. In part, it reflects the anticipation of market participants that the rate forward guidance criteria of the ECB are closer to being fulfilled and that the medium-term inflation outlook will call for a normalisation of policy rates over time. In thinking about the normalisation process, gradualism is an important consideration. In particular, while the normalisation process should ultimately result in policy rates reaching the level that maintains inflation at two percent on a durable basis, the timeline to complete this normalisation process is intrinsically uncertain for two basic reasons. First, it is important to take the time to observe the impact of shifts in financing conditions on inflation dynamics. There is a wide range of estimates of the impact of higher interest rates on activity levels and inflation pressures. In particular, it is likely that there are significant interaction effects between shifts in financing conditions and other macroeconomic forces. Accordingly, the feedback loop between various steps in the policy normalisation process and inflation dynamics needs to be incorporated into the monetary policy decision process. In particular, moving along the normalisation path, both the benchmark market interest rates and the lending margins will adjust. Whereas the elasticity of benchmark rates to the gradual reduction and eventual termination of net purchases can be estimated reasonably precisely building on past experience, the reaction of the loan pricing policies of banks (and the re-setting of the terms and conditions of lending agreements) to the policy normalisation is not very well forecastable and depends on a number of factors. In turn, the impact of higher interest rates and a tightening of credit conditions on economic activity and on the formation of inflation expectations are also subject to considerable uncertainty. Second, high uncertainty about the economic impact of the war in Ukraine, the energy shock and the post-pandemic recovery suggests that it is unlikely that the economy will quickly settle into a new steady-state equilibrium. It follows that cyclical factors are likely to be important for the course of monetary policy, in addition to the underlying normalisation process. For these reasons, the calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook. Our over-riding commitment is that 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. 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.’

Lagarde (ECB):

11 May 2022

‘In less than a year, the economic landscape has changed markedly. The unusually fast rebound in demand was met with a surprisingly sluggish recovery in supply, as production took time to come back online after lockdowns. This caused shortages and supply chain disruptions, which have translated into surging energy, food and industrial goods inflation. In addition, the Russia-Ukraine war has exacerbated all the main drivers of inflation, while also – as a classic supply shock – increasing economic uncertainty and clouding the growth outlook. This has even further complicated the situation facing monetary policy since, in the near term, inflation and growth are moving in opposite directions. The ECB’s initial response was governed by our new monetary policy strategy, which calls for patience and persistence when exiting a long period of too-low inflation. But since December of last year, we have started moving down the path of gradual policy normalisation. Why? To begin with, the medium-term inflation outlook is changing. Measures of underlying inflation, including those that capture persistence, are nearly all above 2%. Inflation expectations are also at, or above, 2%, according to a range of measures. And our inflation projections are increasingly pointing towards inflation being on target over the medium term. In parallel, the war is likely to accelerate two ongoing structural changes which, during the transition they entail, could lead to further negative supply shocks and cost pressures. First, as I argued recently, the war may prove to be a tipping point, causing geopolitics to become more important for the structure of global supply chains. This will not necessarily imply deglobalisation – international firms will still face strong incentives to organise production where costs are lowest – but it might restrict the perimeter in which they can do so. Second, the war is likely to speed up the green transition as a means of reducing dependence on hostile actors. Indeed, the paths to achieving energy security and climate security now point firmly in the same direction. This is likely to keep up pressure not only on fossil fuel prices but also on demand for some of the metals and minerals that are already in short supply. In this context, it looks increasingly unlikely that the disinflationary dynamics of the past decade will return. As a result, it is appropriate for policy to return to more normal settings. At the same time, we do not have excess aggregate demand in the euro area – consumption and investment are both still below their pre-crisis levels – and the war is creating a challenge for monetary policy by tempering growth rates and pushing up inflation further. In such an environment, commitment and flexibility will be key. With inflation likely to remain high for some time, actions that demonstrate our commitment to price stability will be critical to anchor inflation expectations and contain second-round effects. This will help ensure that inflation returns to 2% once the various supply shocks have passed. In addition, the ECB has consistently emphasised the optionality in its monetary policy, which creates space for us to respond to inflation surprises in a timely and efficient way. At the same time, faced with uncertainty about growth, gradualism and flexibility will remain important: gradualism concerning the pace of monetary policy adjustment; and flexibility to ensure the smooth transmission of monetary policy as needed. The Governing Council’s decisions in April reflect these characteristics, while also providing a clearly defined sequence of events for the normalisation process. First, we will end net purchases under the asset purchase programme. Judging by the incoming data, my expectation is that they should be concluded early in the third quarter. The first rate hike, informed by the ECB’s forward guidance on the interest rates, will take place some time after the end of net asset purchases. We have not yet precisely defined the notion of “some time”, but I have been very clear that this could mean a period of only a few weeks. After the first rate hike, the normalisation process will be gradual.’

07 May 2022

‘The war in Ukraine is first and foremost a human tragedy. And it has economic consequences beyond Ukraine. It is weighing on growth and boosting inflation. However, the coronavirus (COVID-19) pandemic also continues to weigh on growth with the recent resurgence of infections in China and the effects of new lockdowns on economic activity. At the same time, economic activity is still being supported by the reopening of the economy following the crisis phase of the pandemic, notably in the services sector. … We have the preliminary figures for economic growth in the first quarter of 2022, which are slightly lower than those for the fourth quarter of 2021. And the latest inflation reading showed that energy costs, which have risen following the invasion of Ukraine but also following the recovery from the pandemic, were 38% higher in April than a year ago. But it is important to take a comprehensive view of these data and to look ahead at our projection horizon.’

‘It is still too early to tell [whether the more severe scenario from March will materialise]. As always, our staff projections are produced at the Eurosystem level in June and December. Our teams are working intensively on these projections. We will have this information at our Governing Council meeting on 9 June, when we take a decision on the path of monetary policy.’

‘Stagflation is not currently our baseline. Although the unusual degree of uncertainty could mean a combined slowdown in growth amid high inflation, the current situation cannot be compared to that of the 1970s. At that time the decline in economic growth following the first oil shock was considerable – 8 percentage points – and inflation was higher than today. Moreover, back then wage increases in response to inflation fuelled the price growth. We are not seeing that today.’

‘The task of the European Central Bank is to maintain price stability in the euro area. There are proposals at the EU level for common initiatives to prevent energy prices from increasing disproportionately. But these are initiatives that need to be considered at the level of governments: a central bank has little to say or contribute on this matter.’

‘We have a clearly defined sequence of events. First, we will have to end net purchases under the asset purchase programme. Judging by the incoming data, my expectation is that net asset purchases should be concluded early in the third quarter. Adjustments to the key ECB interest rates will take place some time after the end of net purchases and will be gradual. The first rate increase will be determined by the ECB Governing Council, informed by the forward guidance it has decided, and by its strategic commitment to stabilise inflation at 2% over the medium term.’

‘Rather than giving you a series of dates and figures [on the hiking cycle], I will focus here on three general principles that will guide us to price stability over the medium term: optionality to allow us to respond to different scenarios in an uncertain context, gradualism to allow us to act prudently, and flexibility to ensure that our monetary policy decisions are transmitted evenly to all parts of the euro area.’

‘The euro area is certainly more robust today than it was ten years ago. Its construction has been strengthened in many areas, such as banking supervision and the progress towards banking union. The pandemic also led to a common fiscal response by European countries, which showed solidarity during the pandemic as well as when Russia invaded Ukraine.’

‘Even though the credit risk outlook for banks is likely to deteriorate owing to the indirect effects of Russia’s war against Ukraine, and because the full financial impact of COVID-19 hasn’t yet fully materialised, the banking sector is well prepared, thanks to its strong capital and liquidity position. Core capital ratios are at almost the highest level since the establishment of banking union, and banks also have ample liquidity buffers reaching levels far above regulatory minimums. Banks’ asset quality and profitability also improved during 2021, with return on equity reaching the highest level in five years. The non-performing loan ratio continued to decline to a level slightly above 2% at the end of2021.’

‘As the guardian of the euro, there are no limits to our commitment to our mandate and to the single currency. We have proven this time and again when we have faced crises that have threatened the integrity of our monetary union and, therefore, price stability. Our unprecedented response to the pandemic is only the latest example.’

06 May 2022

‘The European Central Bank (ECB) acknowledges that the outlook for euro area activity and inflation has become very uncertain following the Russian invasion of Ukraine and now depends crucially on how the conflict evolves, on the impact of current sanctions, and on possible further measures. Initial estimates of the war in Ukraine’s impact on inflation were made in the context of our March 2022 ECB staff macroeconomic projections, including outcomes for more severe scenarios. The ECB recognises that upside risks surrounding the inflation outlook have intensified and is monitoring developments closely. The further increase in headline inflation to 7.5% in April is clear evidence of the substantial short-term upward inflationary pressure on energy and food prices, which is partly due to the impact of the war. Eurosystem staff are currently working on a full update of the projections, including an assessment of the war’s implications for the medium-term inflation outlook for the euro area economy, which will be published in June. At its April meeting the Governing Council of the ECB judged that the data that had become available since its previous meeting reinforced its expectation that net asset purchases under its asset purchase programme (APP) should be concluded in the third quarter. As regards the key ECB interest rates, any adjustments will take place some time after the end of the net purchases under the APP and will be gradual. The path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilise inflation at 2% over the medium term. Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. Looking ahead, the ECB’s monetary policy will depend on the incoming data and the Governing Council’s evolving assessment of the outlook. In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy. It will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.’

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.’

Schnabel (ECB):

11 May 2022

‘There are two competing views on the impact of globalisation on domestic inflation. One view is that the global component of inflation by and large reflects price swings in energy and commodity markets. Globalisation may affect underlying inflation, but these effects are judged to be economically small. The alternative view is that global economic slack matters for domestic underlying inflation and that globalisation may have lowered the sensitivity of inflation to domestic slack, that is the slope of the Phillips curve. Although the strength of such global factors may differ across economies, a failure to properly account for them may result in significant forecasting errors. This is the “globalisation of inflation” hypothesis. In my remarks today, I will argue that the pandemic, and more recently Russia’s invasion of Ukraine, are providing tangible evidence in favour of the second hypothesis. Large global excess savings and exceptionally strong global excess demand for many internationally traded goods and commodities have contributed to raising the pricing power of firms across advanced economies. This has fed into underlying price pressures even in countries where domestic slack remains present. In the euro area, the strong surge in selling prices has mitigated the impact of the adverse terms-of-trade shock from higher commodity prices and has boosted corporate profits in sectors most heavily exposed to global demand. As a result, euro area firms have recently been as much exporters of inflation – through higher export prices – as they have been importers. The extent and persistence of future underlying price pressures will depend on two things: the degree to which firms will be able to continue passing higher input costs on to consumers, and whether higher profits will translate into higher wages. The fact that inflation is, to a considerable extent, driven by global factors does not mean that monetary policy can or should remain on the sidelines. On the contrary, persistent global shocks imply that the firm anchoring of inflation expectations has become more important than ever. And as risks are growing that current high inflation is becoming entrenched in expectations, the urgency for monetary policy to take action to protect price stability has increased in recent weeks.’

‘In April, inflation in the euro area is expected to have increased to a new record high of 7.5%, causing significant concern among firms and households. A large part of the rise in inflation reflects the exceptional surge in energy prices. Over the past 12 months, energy accounted, on average, for around half of total headline inflation. Because the euro area is a net importer of energy, this surge in inflation is often referred to as “imported inflation” – in other words, inflation over which monetary policy has no, or very little, control. In this context, comparisons are often made with the United States, where energy is making a smaller contribution to headline inflation, suggesting that price pressures are predominately a result of domestic forces. And indeed, there is currently a large gap between the euro area and the United States when looking at measures of inflation that exclude energy and food. For at least three reasons, however, such comparisons should be treated with caution. First, even if we exclude the impact of energy and food, inflation in the euro area is currently at levels never seen before in the history of the single currency. The prices of goods and services other than energy and food are currently increasing at an annual rate of 3.5%, more than twice as much as the pre-pandemic historical average. So, most people in the euro area are seeing a marked increase in their cost of living across the board. It gives them little comfort that inflation in other countries may be even higher. Second, differences between the euro area and the United States have already existed previously. Over the ten years preceding the pandemic, inflation excluding food and energy was, on average, about 50% higher in the United States than in the euro area. So, inflation in the United States started from a visibly higher level. The rising gulf in this measure seems to suggest that these differences have been growing sharply over the past two years. However, year-on-year differences have largely been driven by a few months of extreme outliers, mainly in the spring of 2021. Since then, the differences in month-on-month changes in inflation excluding energy and food have broadly returned to their pre-pandemic pattern. The third, and perhaps most important, issue is that exclusion-based measures may not be the most appropriate yardstick for comparing underlying inflation trends across economies. When we look at measures other than simple exclusion-based indices, underlying price dynamics in the euro area look more similar to those in the United States. Trimmed-mean inflation, for example, is an alternative measure for gauging underlying price pressures. Rather than excluding certain products, like energy and food, it extracts the slow-moving component of inflation by cutting off items at the extreme tails of monthly price changes. This measure suggests that underlying price pressures are accelerating at a fairly similar pace on both sides of the Atlantic. If anything, trimmed-mean inflation has grown at a faster pace in the euro area since late 2020. One reason for this similarity is that, in the United States, inflation has been driven by a relatively small number of items with very high inflation rates. The increase in prices for used cars and trucks alone, for example, accounted for around half of the increase in US CPI inflation excluding food and energy between January and July 2021, and still accounts for around one-third today. Put differently, used vehicles are doing to US inflation what energy is doing to inflation in the euro area. Once we strip away these very volatile items, underlying price pressures look more similar, pointing to a significant degree of global price synchronisation. This can also be seen when looking at the evolution of financial market expectations. About a year ago, investors were pricing in a long-term inflation outlook in the euro area that was significantly different from that in the United States. A widely used measure of longerterm marketbased inflation expectations, the expected average inflation rate over a fiveyear period starting in five years’ time as priced by financial markets, was about a full percentage point lower in the euro area. Last week, the difference was just 20 basis points, a fraction of the pre-pandemic average, suggesting that future expected inflation trends are also assessed to be broadly similar despite the prevailing differences in the relative importance of the current drivers of underlying price pressures, including wage growth.’

‘Global price synchronisation is not a new phenomenon. Analysis by ECB staff shows that not only headline, but also core inflation was highly correlated across economies already before the pandemic. These correlations were sometimes not easy to detect simply because, contrary to headline inflation, underlying price pressures are often moving through the global economy at varying speeds, as it takes time for changes in supply and demand in one country to affect prices elsewhere. Of course, such correlations say little about the ultimate source of the shock, and hence the appropriate policy response. In an integrated global economy, inflation may co-move across economies for two reasons: either because of common shocks that hit all countries simultaneously, even if not symmetrically, such as the oil shocks of the 1970s, or because of idiosyncratic or regional shocks, such as the Asian financial crisis of 1997 or the euro area sovereign debt crisis of 2012, that are large enough to affect output and prices worldwide. Today, we are seeing both forces at work.’

‘The common shock relates to the impact of the pandemic on global household wealth and firms’ pricing power. Strict lockdowns across virtually all countries allowed households around the world to accumulate huge amounts of involuntary excess savings. In the United States, these amount to about USD 2.7 trillion, or 16.9% of annual disposable income in 2019. In the euro area, this figure is € 900 billion, or 12.4% of annual disposable income in 2019. To a considerable extent, these savings stem from the forceful fiscal policy response to the crisis. In the euro area, for example, furlough schemes have helped keep many people in employment, protecting labour incomes, while US households benefited from generous stimulus cheques. Although excess savings are distributed unequally both across and within economies, they have visibly boosted corporate pricing power by generating an environment in which consumers worldwide are both more willing and more able to tolerate price increases. This can be seen in two ways. One is through the particularly strong price dynamics in contact-intensive services industries. Restaurants, cinemas and other service providers are increasing their prices as economies reopen. In the euro area, these sectors are currently the main drivers of services price inflation, which is at its highest level in 20 years. These catch-up effects are not happening simultaneously across economies, as social contact restrictions are being removed at different speeds. But they are happening in most advanced economies because fiscal policy has succeeded in protecting household incomes, thereby bolstering pent-up demand. The second way we can see the increase in corporate pricing power relates to the extent to which rising commodity prices are passed through to final consumer prices. The years preceding the pandemic were a strong reminder of the state-contingent nature of corporate pricing. There is abundant empirical evidence suggesting that the pass-through of input costs is generally weak in the face of adverse supply shocks, such as rising energy costs, and strong in response to a favourable demand shock. So, for firms to be able to raise their prices in the way they are doing it today, they need to be operating in a market environment in which demand is strong and hence pricing power is high.’

‘This brings me to the idiosyncratic component of current global price synchronisation, which relates to how consumers in different countries are spending large fiscal transfers and excess savings and how this is spilling over to other economies. To see this, it is useful to look at durable consumer goods, such as computers, furniture or bicycles. Many of these products are standardised and sold in global markets. In the euro area, consumption of these goods rebounded after the first lockdown in 2020 but has remained below pre-pandemic levels. In the United States, by contrast, consumption of durable consumer goods was up by more than 25% in the first quarter of 2022 compared with the 2019 average. Many of these goods, however, were not produced in the United States but were imported from abroad. US import volumes of durable goods are currently up by more than 50% relative to 2019 – an unprecedented pace of expansion. In annual terms, imports of durable goods in 2021 grew roughly eight times as fast as the average observed over the five years before the pandemic. The strong surge in demand from outside the euro area contributed to world demand exceeding world supply. This had implications for the scarcity of intermediate inputs, such as semiconductor chips. According to research by Deutsche Bank, in 2021 global sales of semiconductor chips reached a record high. The optimisation of global value chains led to the production of many critical inputs becoming highly concentrated in certain geographical areas. In 2020, for example, Taiwan and South Korea accounted for more than 80% of total global foundry revenues. As this concentration substantially limits the scope for flexibly expanding production, the costs of such inputs become fully dependent on global demand, pushing up the prices of durable consumer goods across the globe, also in economies, such as the euro area, where demand has remained more subdued. These global price pressures, in turn, have reinforced domestic price pressures stemming from the reopening of our economies and high pent-up demand.’

‘There are two important welfare implications from this. The first is that the euro area is suffering less from the current negative terms-of-trade shock than one would think at first sight. A decomposition of the euro area GDP deflator shows that the contribution from the terms of trade – at least for the period before Russia’s invasion of Ukraine – has been surprisingly small so far despite the sharp increase in energy prices. The reason is that, in an environment of buoyant global demand, euro area firms have so far been able to measurably increase their export prices, thereby recovering a good part of the transfer of income that resulted from the surge in energy and other commodity prices. The second, and related, implication is that many firms have been able to expand their unit profits in an environment of global excess demand despite rising energy prices. The resilience of profits is particularly evident in those sectors most heavily exposed to global conditions, such as the industry and agricultural sector. Evidence from financial markets paints a similar picture. Reported earnings of EURO STOXX firms are at an all-time high, and analyst expectations see them further improving over the next 12 to 18 months. As always, these data conceal significant heterogeneity at firm and country level. While large, export-orientated firms are probably benefitting the most, many smaller firms, in particular in contact-intensive services, will see their profits recover only gradually. But these data do imply that, on average, profits have recently been a key contributor to total domestic inflation, above their historical contribution. To put it more provocatively, many euro area firms, though by no means all, have gained from the recent surge in inflation. The fortunes of businesses and households have diverged outside of the euro area, too, with corporate profits in many advanced economies surging over the past few quarters. Poorer households are often hit particularly hard – not only do they suffer from historically high inflation reducing their real incomes, they also do not benefit from higher profits through stock holdings or other types of participation.’

‘What firms will do with these profits, and how they will evolve in the future, will shape the path of the economy and hence the course of action for monetary policy. Two scenarios could lead to persistent underlying price pressures. In the first scenario, firms are able to maintain high profit margins over some time. At first glance, this scenario looks rather unlikely. The war is visibly slowing economic growth worldwide. Consumer confidence is collapsing, and energy and material costs are rising further in response to Russia’s invasion of Ukraine. The latest survey evidence suggests, however, that firms still seem in a position to shield their profit margins. In April, more firms than ever, across all economic sectors, said they intended to raise selling prices over the next few months. One factor that is continuing to support firms’ pricing power is the persistence of the current shock: global excess demand can be expected to decline only gradually. On the supply side, global value chains remain under immense pressure as strict lockdowns in China restrict access to many intermediate and final consumer goods. The war is adding to supply bottlenecks. For example, shortages in Europe’s transport sector may become more severe because many Ukrainian and Russian drivers are no longer available to work. On the demand side, fiscal policy is providing tangible support to protect the incomes of those most affected by the rise in energy prices, reinforced by continued employment growth and large remaining excess savings. As such, underlying price pressures can be expected to persist for as long as global supply and demand imbalances do not improve visibly. The second scenario is that higher profits give rise to higher wages. So far, workers are bearing the brunt of the inflationary shock, as nominal wage growth has remained muted. Yet only a relatively small number of wage contracts have been renegotiated since inflation started to increase strongly in the second half of 2021. The strength of the wage channel depends on the relative bargaining power of labour. And that bargaining power is arguably strengthening. Labour market conditions in the euro area continue to tighten. In March, the euro area unemployment rate and the unemployment to vacancies ratio – a broader measure of labour market slack – both fell to new record lows. And surveys show that businesses have continued creating jobs at a steady pace in the two months following Russia’s invasion of Ukraine. As a result, the share of companies in the euro area reporting labour as a factor limiting production is now higher than ever before. Such a tight labour market at a time when firms are still adding jobs at a considerable pace is usually a good predictor of strong future wage growth. Indeed, in those sectors where labour market conditions are tightest, such as the information and communication sector, compensation per hour was already expanding at an annual rate of nearly 4% in the final quarter of 2021. In both scenarios, therefore, underling price pressures are likely to remain elevated, meaning that inflation could stay at painfully high levels for a considerable period of time, with a risk that it might fall back towards our target of 2% at a slower pace than previously envisaged.’

‘Monetary policy therefore needs to take action to preserve price stability. Already today, risks are rising that current high inflation is becoming entrenched in expectations. In financial markets, investors are demanding a higher compensation for the risk of medium-term inflation turning out higher than our 2% target. Similarly, our latest consumer expectations survey shows that median expectations for inflation three years ahead, which were firmly anchored at our 2% target throughout the pandemic, increased to 3% in March. And among euro area firms, our most recent survey on firms’ access to finance shows that expected inflation is becoming an important factor in determining future selling prices. All this implies that we have to underline more forcefully our determination and commitment to protect our primary mandate. If our commitment were to be questioned, it would become significantly costlier to bring inflation back to our target. Keeping inflation expectations anchored does not necessarily require monetary policy to suppress domestic demand. The impact of the war on real incomes and confidence and the tightening in global financial conditions are already dampening excess demand. Instead, for monetary policy to remain credible in the current environment, it must not be an inflationary source itself. Although nominal interest rates have been rising, monetary policy is still contributing to stimulating the economy. We are still conducting net asset purchases and our main policy rate is still negative. Real interest rates, whether deflated by financial market expectations or surveys, remain deeply in negative territory, close to historical lows. Surveys corroborate this view. Despite rising nominal interest rates, financing costs have become less important for firms’ pricing decisions. It is therefore time to put an end to the measures that were activated to fight low inflation. We now need to act to counter the risk of a de-anchoring of inflation expectations, in line with our pledge to proceed in a data-dependent manner.’

‘Let me conclude with some key takeaways. First, global slack matters. Before the pandemic, the integration of many large emerging market economies into global value chains led to an unprecedented rise in global production capacity, weighing on inflation. Today, global demand is exceeding global supply, putting persistent upward pressure on prices in countries all over the world. Second, whether or not oil shocks feed into core inflation depends on the macroeconomic environment. For these to turn from relative price shocks into price level shocks, one needs an environment of excess demand, and hence strong corporate pricing power. In this situation, which is the one we are facing today, a strong pass-through of higher input costs to export prices can alleviate the negative terms-of-trade shock. Third, changes in global capacity utilisation can have important implications not only for the distribution of income across economies but also within them. Over the past year, many firms could expand their profits, often implying that consumers, rather than shareholders, have borne the brunt of the inflationary shock. Finally, the globalisation of inflation does not imply that monetary policy can remain on the sidelines. Conditions in domestic product and labour markets, which monetary policy can influence directly, are still the key drivers of a significant share of overall inflation. It rather means that the importance of keeping inflation expectations firmly anchored at our target has increased. Large and persistent global shocks can destabilise inflation expectations even if the main source of expansion or contraction stems from abroad. In the 2010s, global shocks were largely disinflationary, contributing to the secular decline in long-term inflation expectations. Today, global conditions give rise to the risk of a de-anchoring of inflation expectations to the upside. By responding swiftly and decisively to these risks, monetary policy can secure price stability over the medium term, thereby avoiding the much higher economic cost of acting too late.’

03 May 2022

‘It’s true that the current high inflation is mainly driven by energy prices. But energy is not the only factor. Initial estimates show that inflation in the euro area stood at 7.5% in April, slightly higher than in the previous month, despite a moderation in energy price inflation. Core inflation, which excludes energy and food, climbed strongly to 3.5%. So, we are seeing that inflationary pressures are becoming more broad-based.’

‘What matters most is to help people on low incomes in a targeted manner so that they can make ends meet. And it’s vital not to create wrong incentives. It makes little sense, for example, to promote energy consumption through price subsidies.’

‘The euro has mainly lost value against the US dollar. Through the higher cost of imports, this has effects on inflation, which we are closely monitoring. But we do not target the exchange rate.’

‘At present I don’t see such a spiral whereby rising wages create rising prices and vice versa. However, the data are backward-looking and we need to pursue a forward-looking monetary policy. So we can’t afford to wait until a wage-price spiral has already set in before responding. … There can be no doubt that we will see higher wage demands if inflation remains so high over a prolonged period. We need to prevent high inflation from becoming entrenched in expectations. Talking is no longer enough, we need to act.’

‘In March we already discontinued net asset purchases under the pandemic emergency purchase programme (PEPP). Judging by current data – and it all depends on the data – I believe that we will be able to end net purchases under our regular asset purchase programme, or APP, at the end of June.’

‘From today’s perspective, a rate increase in July is possible in my view. We of course have to wait and see how the data evolve up to the time of the decision. The first interest rate hike will in any case not take place until after the end of net asset purchases; we have committed to that.’

‘We will decide on that [interest rate hikes] from meeting to meeting, on the basis of the incoming data. We are starting from an extremely low level. Real interest rates are still deeply negative and close to their historical lows. That means that even after the first increases, interest rates will remain at levels that continue supporting the economy. We are still quite far off from a neutral interest rate, that is the point as of which the economy is slowed. … This interest rate is not directly observable and can only be estimated. We haven’t yet had a detailed discussion on it in the ECB’s Governing Council. Nonetheless, some estimates show that it is well on the positive side.’

‘The lowering of interest rates below zero was uncharted territory, making it essential to move cautiously. This reasoning does not apply when moving in the opposite direction.’

‘Inflation proved to be more persistent than was previously expected. But let’s recall that, since September, the macroeconomic environment has repeatedly shifted. Initially, many thought that, with vaccinations, we had largely overcome the pandemic. Then the Omicron variant gave cause for concern. As people realised that this variant was milder, the situation eased again. And then came the terrible war in Ukraine.’

‘The Governing Council is showing great unity overall. Naturally there are differing opinions and you can assume that the full range of meaningful monetary policy arguments are raised and discussed in our meetings. It is to our President Christine Lagarde’s great credit that we again and again find a consensual approach.’

‘The war clearly weighs on economic growth. As things stand today, I’m not expecting a stagflationary outcome; rather, I continue to see positive growth.’

‘My previous answer also applies here [to concerns about the impact of higher interest rates on indebted countries]. Our mandate is price stability and this alone determines our policy. Besides, many countries have taken on debts at very low interest rates and at the same time increased average maturities. So a rate hike would only have a gradual effect on countries’ average borrowing costs. … What matters most of all is economic growth. That is why it is so important that euro area countries use the financial resources provided by the European recovery plan wisely to achieve a sustainable growth path.’

‘We will decisively counter any sudden jumps in yields that have no fundamental justification. We will prevent euro area fragmentation driven by speculation. We already have a programme available for this as we can flexibly reinvest maturing securities under the PEPP. … We have shown in the past, for example during the European sovereign debt crisis and the pandemic, that we can create tailor-made instruments very quickly. We will do what is necessary and will design the programmes – and possible conditions for their use – so that they match the respective situation.’

‘It is premature to discuss this [QT]. We will continue reinvesting maturing bonds for an extended period of time past the date when we start raising our key interest rates. But, in principle, it makes sense to gradually reduce bond portfolios at some point in the future. We know that asset purchases have a strong influence on house prices, which are already elevated. And they influence the term structure of interest rates. A financial system that relies on bank-based financing is better off in an environment in which the spread between short and long-term rates is not too narrow.’

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.’

Knot (Dutch National Bank):

11 May 2022

‘Turning to current challenges, Russia’s invasion of Ukraine has profoundly changed the global economic and financial market backdrop. The near-term growth outlook has deteriorated, challenging the prospects for a sustained and broad-based recovery from COVID-19. At the same time, inflation has returned, and with it the prospects of tighter global financing conditions. The global financial system has absorbed the initial shock of the invasion without major adverse impacts on financial stability. Key funding markets have been functioning in an orderly manner. Notwithstanding bouts of high market volatility and large commodity price swings, no major financial institution has shown signs of distress. Market confidence has been buoyed by the recent experience of the pandemic, with the bold international policy response and the demonstrated resilience of the core of the global financial system, thanks to the G20’s post-2008 crisis reforms. Yet, global financial stability cannot be taken for granted. There is no room for complacency given the highly uncertain and rapidly evolving situation. Additionally, the past few weeks have surfaced a number of vulnerabilities that may crystallise in the face of further shocks. The first relates to commodity markets. We have seen in March that very volatile commodity prices may give rise to financial strains – through large margin calls, leveraged positions and concentrated exposures. Such strains, by impairing the financing of the supply of key energy, base metal and food commodities, may have a disproportionately large macroeconomic impact. There may also be spill-over effects onto the broader financial system. The second, related issue is undetected leverage. We have seen that certain banks, particularly prime brokers, seem to be prepared to take large positions without having sufficient visibility into the total leverage of their counterparties. I see similarities to the leverage taken on by Archegos prior to its collapse. This raises questions about transparency and the risk management capabilities of lenders. Such questions are particularly discomforting in an environment of high debt levels globally, and the prospect of tighter financing conditions. Finally, there is cyber risk. Despite the apparent absence of a successful attack with systemic implications so far, we must not forget that cyber attacks remain a major vulnerability.’

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):

13 May 2022

‘As inflation has been higher than we had expected a couple of months ago, I think three hikes this year will be possible.’ That ‘would allow us to move into 2023 with an already positive deposit rate.’

‘We can use the information we have by the end of the year to determine with what speed we have to move from there and beyond. If the inflation rate moves towards 3 or below 3%, this would allow a smoother increase. If it remains at 5%, then ... we may need to move faster beyond the 1.5% equilibrium interest rate next year.’

‘[I]t's very important to start with the hiking as soon as possible.’

‘In June, we'll have the latest data and forecasts available. That's the moment when we can reflect on what the outlook is for the next three years or so. This should allow us to make a decision in June for July.’

‘I was always in favour of using the [natural] interest rate. It's flexible, but it gives the financial market a good orientation [and] still allows us to deviate from it as new information comes to the table without putting all decisions into question.’

‘Looking at the economic development, I don't see a recession now. Definitely the war in Ukraine has weakened the outlook ... will not get the great upswing we had foreseen from the first quarter onwards. But that’s not a recession yet.’

‘[G]iven where interest rates are in real terms, we're not stepping on the brake, but we are merely taking some pressure off the gas pedal.’

‘The U.S. has currently a higher inflation rate than the euro area. But perhaps more importantly, in the U.S. core inflation is much higher than in Europe, and there's more pressure in the labour market than in Europe. In the U.S., there was a great need to act.’

‘Whether or to what extent the details [about a tool to keep spreads under control] become public, I don't know. We haven't talked about it. But financial markets should know that we might have it and it would be used if needed.’

07 May 2022

‘I think it would be appropriate to take at least two or even three [interest rate] steps. These could be smaller ones, like 0.25 percentage point each. If this were to happen by December, it would have the effect that by 2023 the deposit rates for banks, which are now minus 0.5%, would be in positive territory. You'll still be quite a bit away from the natural nominal interest rate. So there is still a long way to go. But it would be a good signal to the public.’

‘The ECB will certainly have to include this [the Fed’s tightening] in its decision in July. Because this interest rate hike confirms the announced course of the Fed. This increases the interest rate differential to Europe, which in turn means that the pressure on the euro exchange rate has increased further.’

‘I would not say [the ECB is] too late. But perhaps action could have been taken earlier. The U.S. is about half a year earlier in the economic cycle. In this respect, it is fitting that the ECB is acting later. Perhaps the Fed was also a little late.’

‘The ECB does not pursue an exchange rate target. But we are watching it closely and taking it into account in our decisions. We will probably not be able to compensate for the difference we have now by raising interest rates, but at least the gap will in all likelihood not increase significantly.’

‘We are looking closely at wage settlements. And that does not worry us for the time being. But the danger is always there in principle. If it came to that, we would have to raise interest rates more strongly to avoid possible second-round effects. That could affect the real economy, but at the moment that is not yet the case.’

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.’

Centeno (Banco de Portugal):

13 May 2022

‘When the post-pandemic economic recovery was starting to be a given, Russia's invasion of Ukraine created an economic, social and geopolitical framework of unpredictability. As a result, the European economy is simultaneously facing two large and unprecedented exogenous shocks, which condition economic growth prospects and introduce inflationary pressures. While inflation is expected to remain high through 2022, there is no structural reason why it should not converge towards the medium-term objective as imbalances are gradually resolved and uncertainty dissipated. For the time being, there are no structuring signs of de-anchoring. However, the balance of risks around inflation projections is skewed upwards due to the possibility of a longer conflict and the imposition of additional economic sanctions on Russia, namely on energy imports. A possible de-anchoring of inflation expectations and the second-round effects originating in wage pressures constitute additional risks that require close and continuous monitoring. As I have been saying, the normalization of monetary policy is both necessary and desirable. But the conditions for doing it and the way in which it will be carried out deserve our attention. Patience and gradualism in monetary policy are necessary and must be proportionate to the shocks we face. Monetary policy must not overreact, in a sign of unwarranted nervousness that would create instability and fragmentation. An untimely reaction will also penalize economic growth. In a recent survey of business leaders around the world, the biggest fear raised about the ECB's monetary policy was that there could be an overreaction that would penalize the economic recovery. The costs of aggressive monetary policy or even too rapid normalization outweigh the benefits. A reaction that is too strong, through a rapid and sharp rise in interest rates, can have destabilizing effects or even trigger a recession when the euro area has barely recovered from the previous crisis. On the other hand, the absence of a reaction, or the perception that there is not a sufficiently vigorous response, may require an aggressive tightening of monetary policy further ahead to control inflation, with increased costs in terms of activity and employment. To complicate the analysis, it is also conceivable that the absence of a reaction, or a very slow normalization, favors expectations of low inflation in the long term, as it reinforces the idea that the monetary regime remains one of relatively low interest rates. and low inflation. Currently, the definition of optimal monetary policy is conditioned by the succession and magnitude of recent shocks. Gone are the days of autopilot. In any case, the high degree of uncertainty advises a gradual response based on data on the evolution of the economy now and in the future. In other words, maintaining optionality in monetary policy decisions is crucial at the moment. Central banks are aware of the risks and, therefore, have adopted a gradual response based on the information that becomes available. In the case of the euro area, the end of net asset purchases should occur during the third quarter of this year and “some time later” the ECB should raise interest rates. At the moment it is anticipated that all this could happen in the first weeks of the third quarter, but that is not the most important debate right now. The focus should be on the process, on its duration, on its magnitude. Because the truth is that normalization has already started from the moment net purchases started to decrease, still in 2021 and continuing in 2022.’

11 May 2022

‘Whereas Covid was always interpreted, and I think rightly so, as a temporary impact in our economies, the challenges we face today are much more structural in nature.’

‘So today this energy … shock that is being reflected in prices. … In statistical terms we call this a positive duration dependence: the longer the shock, the more likely it is to spread through contagion all other items in our consumption basket and so in our inflation indicators. And this makes not conflicting, but a much more difficult task for … monetary and fiscal policy to … play together, because they should not, in my opinion, eliminate the signals that prices give to economic agents to direct their decisions. But we are facing with very high inflation, and we need to move.’

‘The best word for me is always from a policy perspective to, to provide stability. We are the big suppliers of patience in our economies. We always need to take that very seriously. So, the gradualism also plays a role there, to act on a predictable way. And I think that’s the more natural place for monetary policy right now. We are going to enter, we actually entered already into a process of normalisation of policy. Again, that must be predictable. Moving our decisions around … does not operate in a single step. It is a sequence of steps that has a duration, that has a magnitude. All that must be predictable to economic agents, because we are not here to provide surprises to anyone, and that’s contradictory with this idea of being gradual and patient. So, I think that’s the natural place for monetary policy these days.’

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.’

Rehn (Bank of Finland):

09 May 2022

‘We are seeing signs of second-round effects. It’s important that we send a signal that these higher inflation expectations we are currently witnessing will not become entrenched.’

It’s ‘reasonable that we will rather sooner, in my view in July, start raising rates in line with our normalization of monetary policy. And would expect that when autumn comes, we would be at zero.’

What ‘we would have in our toolbox in reserve’ is ‘a kind of instrument that would help to counter possible unwarranted fragmentation of financial conditions in Europe.’

He’d make ‘the case for outlining certain principles of an instrument without creating yet a legal instrument, because we don’t know the precise nature of the crisis.’

‘We are seeing some stagflation tendencies.’

06 May 2022

‘As far as the European economy is concerned, we have already downgraded our growth forecasts because of these factors. On the other hand, the European economy is still growing. The recovery is on, employment is improving, and we are seeing that there is plenty of fiscal and monetary accommodation that is supporting the economy still.’

‘I wouldn’t paint such a devil [as recession] on the wall. I think this year the Eurozone is going to grow in the scale of 2% according to the current estimates. We are taking hit from Russia’s war in the Ukraine, both through the trade channel and through the energy dependency channel. But at the same time, there is a strong, quite strong recovery behind this, from the pandemic, and the European economy is still, still growing. And we are seeing that we have challenges concerning inflation, which is higher than forecast previously, and we have to make sure that these inflation expectations will not, these high inflation expectations will not become entrenched in Europe.’

‘It is quite likely that it [an embargo on Russian oil] will affect this year and next year. On the other hand, I see that we have to show unity, we have to have European unity. We need Western unity to support Ukraine and do what we can to stop Russian aggression and war in Ukraine. That’s why there are more important things than the economy.’

‘We have conflicting pressures in monetary policy. We are almost in between a rock and a hard place, so that on one hand we have to ensure that the recovery will continue. On the other hand, we have to avoid, we have to prevent high inflation expectations being entrenched and being reflected in the labour market and wage negotiations. In other words, we have to avoid that we will face second-round effects. So therefore, in my view, we should move relatively quickly to zero and continue our gradual process of normalisation of monetary policy as we have, as we have done. Of course, all this on the condition that Russian war in Ukraine will not substantially escalate and intensify, which could, could derail all the forecasts and, and the economic recovery. Then we would have other, even bigger problems in Europe and in the world.’

05 May 2022

‘I think it would be justified to increase the deposit rate by 0.25 percentage points in July and to zero when the autumn comes. After that, the normalization of monetary policy could continue gradually and proactively.’

‘This [rising inflation] affects people’s psychology, that is, inflation expectations, which are important to keep stable. Next year looks challenging and, in the worst case scenario, the euro area could be in danger of recession, so there is no need to delay the normalization of monetary policy.’

‘Wage increases in the United States have averaged 6%. In the euro area, the recovery continues, but the labour market has not recovered as fast and wage increases have been just over 2%. The Eurozone economy is also suffering more from the Russian invasion war than the US economy, which means lower wage pressures in the Eurozone. The need to raise interest rates would also be lower.’

05 May 2022

‘In the big picture of the global economy, the economic impact of Russia's invasion will depend crucially on how long and wide it becomes. The war will increase uncertainty about future developments and drive up energy and commodity prices, and hence consumer prices. War also exacerbates production bottlenecks through shortages of many minerals, metals, grains and fertilisers. All in all, the war has only exacerbated the problems the pandemic has caused for the global economy. Prior to the outbreak of the war, the euro area economy had recovered better from the corona crisis. Russia's war of aggression is undermining growth prospects in the euro area, but this effect is made more proportional by the fact that Russia accounts for less than 2% of the world economy. The European Union and China each account for 18% of the world economy, and the United States 24%. In March, the European Central Bank estimated that the euro area economy would increase by more than 2% this year. My own estimate is that the ECB assessment will soon have to be updated in the weaker direction. I assume that a larger slice of the growth figures will have to be cut, especially because of higher energy prices and production bottlenecks than previously estimated. The price development of energy and raw materials has accelerated euro area inflation to 6-7 % this year. Currently, the rise in energy prices alone explains at least half of the total inflation. Critical in the medium term is whether the rise in energy prices affects inflation expectations, wages, and corporate pricing behaviour. Energy inflation and production gaps alone do not lead to permanent acceleration of inflation unless resulting in large multiplier effects, ie the spiral of prices and wages. Unlike the United States, in the euro area, wage inflation has so far been moderate, although there are already some signs of its acceleration in the first months of the early part of the year.’

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):

11 May 2022

‘Clearly there was an understanding that … we need to normalise the policy at some point, it’s just that this point has arrived much sooner than any of us imagined a year ago. And in terms of specific wording of the decision or in the strategy, there was also, also what we call the forward guidance indicating that one of … the specific criteria for starting an increase in interest rates which basically refers to the inflation being close to 2% in the foreseeable future, which I think pretty much … now we have met and also starting with the normalisation of the policy, which already has indeed taken place to some extent. This will certainly continue. I think we’re not too far from ending asset purchases and also starting an increase in the interest rates.’

‘Of course, there are risks involved in normalising the policy. Certainly, we should also realise that there are and were risks involved with having very low interest rates and very accommodative monetary policy for a long time, and that relates to asset prices and real estate markets, possible bubbles in the lending market and so on. But of course, we need to be … careful as we go about normalising the policy. … We need to be gradual, as it has been also described by President Lagarde earlier this morning. So, this is the role that we have ahead of us. We need to manage the risks, but we also have to normalise the policy indeed given the current outlook for inflation.’

11 May 2022

‘We could even discuss if we should end purchases a few weeks earlier. The real issue is interest rate increases and we shouldn’t have much of a delay there either.’

‘The recent data confirm that the monetary policy stance is not appropriate given where inflation is and given inflation expectations.’

‘I’m not sure we should be deciding on interest rate hikes then [in June]. But perhaps we could indicate our expectation for interest rates. From my perspective, we could focus the following meeting on interest rates.’

‘Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year. For the time being, 25 basis points would be an appropriate increment.’

‘When it comes to specifying how such a tool [to counter spread-widening] would work, I’m not sure we can do that in advance. It needs to be designed specifically to the nature of the situation at hand.’

04 May 2022

‘In recent months, however, the trend has clearly been that the rise in prices, as in Estonia and in the euro area as a whole, has been higher than for some time. ... What this means for the central bank, of course, is that it is our job to respond to rising prices.’

Said this is likely to mean interest rates are raised earlier than previously estimated, immediately after net asset purchases end.

‘It seems to me, that in light of the news of the latest price increase, it would be appropriate to do so at the beginning of the third quarter, perhaps already in July.’

de Guindos (ECB):

13 May 2022

Second-round effects are ‘the fundamental thing’.

‘Most people still think that we are going to achieve it [price stability], and this has a lot to do with salary evolution: if it is very upward and this inflation , which has a clear temporary component, becomes more and more permanent, then we will have a problem.’

Net asset purchases will end ‘surely in July’.

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% 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% 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.’

Wunsch (National Bank of Belgium):

21 April 2022

‘Without any really bad news coming from that front [the war], hiking by the end of this year to zero or slightly positive territory for me would be a no brainer.’

‘It’s going to of course depend on data. If we have another inflation surprise, it’s [ending asset purchases at the end of 2Q and hiking rates as early as July] certainly a scenario that I would consider.’

‘There are of course situations where if the shock is very big on the real economy, we would feel more comfortable looking through the inflation development.’ But ‘we’re still in a situation where we’re supportive in terms of monetary policy. Real rates are today very, very negative. So the beginning of the normalisation process should be relatively independent of the real economy.’

‘We’re still talking about normalisation, but I wouldn’t exclude that at some point, if we have second-round effects, wages going up, that monetary policy would have to become restrictive. What’s priced in by the markets today to me is on the low side of what might be required to get inflation under control.’

Vasle (Banka Slovenije):

11 May 2022

‘Now, the roots of inflations or the main contributors of inflation has also changed during this period. Whereas in 2021 we were still seeing inflation as induced by some one, one-off factors some then described as a temporary, temporary influences, now the situation is different. And yes, I can agree with you that … at the start of the process of slowly increasing inflation, there were reasons mostly related to the pandemic crisis… But at the beginning of this year, we realised that these one-off factors started to move forward to other prices, and now we are faced with a situation where there are basically many, many different groups of goods and services which are growing at more than 2%. That’s one thing. We are also faced with additional pipeline pressures. We know that there are some input prices which are growing very fast and there is a high probability that they will be translated or passed through to other prices. So, this is one factor. Then the second thing which is behind inflation are changed expectations. During the past months we saw a significant change in our expectations and the expectations of the … citizens, of expectations of the professional forecasters, also expectations of firms. And that are all factors which are influencing inflation, and now I very much agree with what was presented by the BIS, that we are in a different regime of inflation at the moment as compared to what we saw last year. So, the roots are much more, much more, the causes are much more deeply rooted and that’s the situation at the moment.’

11 May 2022

‘After long period of low inflation, in some instances worryingly low, we are now faced with increasing price pressures. What started as a one-off shock, a side result of the pandemic and successful coping with it, is now becoming a more broad-based phenomenon. And when the circumstances change, the policy response must follow. That is why we have already started with the process of normalisation of our policies. And here, drawing from my personal experience

- of past inflation episodes in Slovenia and other countries in this part of Europe,

- on how a shock can transform in a more widespread phenomenon,

- and how difficult it is to steer inflation expectations and dynamics,

I will remain supportive to further action. Even faster one, to avoid inflation to become more widespread.’

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):

12 May 2022

‘…if this terrible war continues and sanctions are extended to energy imports, the European Union, which is a large net energy importer from Russia and shares borders with Ukraine, may face acute economic and financial stability risks, which are not yet incorporated into our models.’

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.’

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):

05 May 2022

‘The war is dominating economic developments. Global shocks that have emerged on the way out of the pandemic – surging energy prices and supply bottlenecks – have been exacerbated by the invasion of Ukraine. Tensions have become persistent and more acute: inflation is rising while economic activity is showing signs of slowing. This makes the choices facing the European Central Bank more complicated, as a monetary tightening aimed at containing inflation would end up hampering growth that is already weakening. … The European economy is de facto stagnating. Growth in the first quarter was 0.2%, and would have essentially been zero without what may have partly been one-off spikes in growth in certain countries. The major economies are suffering – GDP growth has slowed in Spain, halted in France and contracted in Italy. In Germany growth momentum is low and has been weakening since the end of February, which is the point when everything changed.’

‘And we should not lose sight of the fact that inflation is being fuelled by international factors that are reducing purchasing power and weakening consumer demand and investment. Monetary policy has only limited room to affect this imported inflation. The drivers of inflation are global, not European.’

‘The exchange rate is determined by the market. Moreover, the shocks we are facing are so large that a few percentage points of appreciation in the exchange rate would have limited impact. Not to mention that a strong euro would weigh on foreign demand, squeezing growth further.’

‘First of all, we need to gain a comprehensive understanding. At present, we do not have the hard data necessary to accurately assess the war’s impact on demand and growth. We are talking about potentially large effects: the reduction in euro area income due to increased import prices amounts to 3.5% of GDP, or about €450 billion. The evolution of GDP in the first quarter reflects only partially the impact of the war. We have to wait for the second quarter figures to get a clear picture. Our monetary policy is data driven, and we cannot make decisions before we have seen the figures. … We must be prudent, recognising what we can do, but also what we cannot do. We can and must prevent high inflation from becoming entrenched in the economy, which would lead to price increases that we saw as temporary becoming a structural and permanent phenomenon. We would react decisively, for example, if we observed a deterioration in inflation expectations or wage increases that were inconsistent with our 2% inflation target over the medium term. There is no clear evidence that this is happening, but we cannot ignore the risk that it might.’

‘We cannot tame inflation on our own without causing high costs for the economy. We need to act on multiple fronts, not just through monetary policy.’

‘The international community has a duty to work to stop the war and to end the atrocities taking place in Ukraine. But supporting Ukraine and doing all we can so that the war ends quickly is also the best way to quickly reduce inflation. Peace would ease tensions in international markets (oil, gas and food) that are driving up inflation. … We all hope that the war will be brought to a swift end through diplomatic means, to stop any more lives from being lost. But if that does not happen, I think we should help the Ukrainians in the way they best see fit, including helping them to defend themselves. And we should support their economy. … It’s not just about weapons. There is diplomacy and there is economic support. For instance, there is the issue of food exports: the destruction of infrastructure and freight capacity in Ukraine will have an impact on the world’s supply of wheat and grain. We need to assist Ukrainians with logistics, and help preserve their capacity to export in spite of the Russian maritime blockade and increasing damage to key transport infrastructure. We are already doing this: the EU has suspended all duties on imports from Ukraine and is facilitating the use of EU infrastructure to deliver Ukrainian exports to third countries. But we can do more and achieve important results, for them and for ourselves.’

‘The pandemic and the war have opened our eyes to the risks, and not just the benefits, of relocating production sites in areas far away from where we are. The South of Italy is safer and more competitive than other parts of the world. Particularly if this relocation can be realised in the context of a European project aimed at stimulating the creation of regional value chains.’

‘With medium-term actual and expected inflation around 2% we can gradually reduce the level of monetary accommodation, providing less stimulus to the economy than in the past. Under current circumstances, negative rates and net asset purchases may no longer be necessary.’

‘It does not make much of a difference whether it [a decision by the ECB] is two or three months earlier or later. What matters is the signal, the direction of travel. And that is what we have indicated: in the next few weeks we will decide when in the third quarter net bond purchases will end. We will then decide about rates and could decide to bring negative rates to an end. But it would be imprudent to act without having first seen the hard numbers on GDP for the second quarter and to discuss further measures without a full understanding of how the economy could develop over the following months. Discussing how many times we will act in the future, and when, is a futile exercise. Our decisions depend on data: on the pandemic, the war in Ukraine, the global economy – especially China and the United States – and on how all these factors will impact on inflation, demand and production. The uncertainty and the risks we face are enormous, and no one can reasonably envisage what will happen between now and the end of the year.’

‘We are now in a delicate phase, and we should be concerned about any source of economic imbalance. The task of the central bank is to prevent inflation in the medium term from being inconsistent with the 2% target. There could be an economic cost to pay: we must reduce it to a minimum in order to safeguard employment and growth.’

‘The lesson of the sovereign debt crisis is that in a Union with a single monetary policy and a fragmented fiscal policy at national level, monetary tightening can cause highly undesirable effects if growth is unsatisfactory. We must prevent monetary adjustment from being accompanied by financial fragmentation. Even more so if fragmentation results from factors like the pandemic or the war that are independent of policies adopted by individual Member States. Faced with financial fragmentation that would impede the transmission of monetary policy, we should intervene decisively. The OMT reflects a different phase with different European policies. The success of our pandemic emergency purchase programme (PEPP) and the Next Generation EU programme clearly show that there are other possibilities that involve flexibility and cooperation, rather than confrontation, between Europe and its Member States.’

‘The fiscal policies adopted after the financial crisis – based on austerity, on the compression of domestic demand – actually contributed to prolonging the economic crisis, after a shock that was initially less severe than the pandemic one. Even monetary policy adopted the necessary expansive stance only with the arrival of Draghi at the ECB. The reaction to COVID-19 was different. We stimulated domestic demand with wide-ranging European fiscal measures. Monetary policy intervened decisively, guaranteeing favourable financing conditions in all euro area countries and nullifying the deflationary pressures caused by the shock. And it worked: the fall in GDP was deep but short-lived and was followed by a sharp rebound. This is why it is not useful to discuss end-of-the-world scenarios without taking into account our ability to intervene.’

Makhlouf (Central Bank of Ireland):

12 May 2022

‘While the domestic economy is doing well, the global economy faces considerable headwinds. The resurgence of COVID-19 in China could prolong supply bottlenecks, inflation is affecting economies around the world, not just in Europe, with more broad-based price increases emerging, and economic conditions may deteriorate in our trading partners. And of course the Russian invasion of Ukraine has clouded the outlook significantly. While this is first and foremost a humanitarian tragedy for the Ukrainian people, the economic consequences of the war are being felt across Europe through higher inflation, as well as greater uncertainty and negative sentiment effects. Ireland will feel these effects, albeit not as directly as some other European countries. Headline inflation is projected to average 6.5% this year, reflecting particularly high energy price inflation. The effects of inflation will be felt across the Irish economy, although more strongly for some households than others. Cost of living increases from higher food and energy prices tend to be proportionally larger for lower income, older and rural households, who typically spend more of their weekly outgoings on these products. I will return to this important issue, and the monetary policy response, in a few moments. In line with the wider economic recovery, the adjustment of the labour market has been striking, with numbers employed now exceeding 2019 levels and the standard monthly unemployment rate at 4.8% in April. … Of course, it is still early in the recovery from the pandemic and the effects on the labour market in the longer-term remain to be seen. Despite the uncertainties around the economic outlook, we do expect to see the labour market tighten. This should result in stronger and broader-based wage growth than we have observed in recent years. This is a good thing, particularly as real incomes are likely to fall this year due to relatively high inflation. However, where growth in wages or profits respond entirely to the currently high rates of inflation, or are detached from underlying productivity growth, the likelihood increases that harmful higher inflation becomes embedded.’

‘Let me turn to our response to inflation. For the avoidance of doubt, the current level of inflation is concerning. It affects households’ purchasing power and it affects business investment decisions. It affects the whole community – as I said earlier, some more than others – whether households or businesses, and whether small or large. The ECB’s objective is for inflation to be at 2% over the medium term and we are clearly some way from that now. We know why we are here: the pandemic, the price of energy and the Russian aggression in Ukraine. The pandemic has not gone away and it remains a key driver of inflation dynamics. The lifting of restrictions and, perhaps paradoxically, the current set of restrictions in China has contributed to bottleneck pressures in global supply chains. Businesses have found it challenging to meet demand as economies rebounded quickly once pandemic-related restrictions were lifted. China’s approach to tackling the pandemic is not going to ease those bottlenecks quickly. Linked to the lifting of restrictions has been the increase in energy prices since the summer of last year which has had a significant impact on the euro area in view of its reliance on the imports of oil and gas. And of course, the Russian war is amplifying the energy shock, creating new bottlenecks and damaging consumer and business confidence, leading to uncertainty which drags on economic activity. When considering such supply shocks, monetary policymakers have to consider a more subtle question than when faced with aggregate demand that is too weak or too strong. Monetary policy is well-placed to take action to ensure price stability with respect to demand shocks but it isn’t necessarily the best tool to deal with supply shocks. There’s always a risk that economic growth could be slowed unnecessarily. On the other hand, we do need to prevent supply side shocks leading to more persistent inflationary pressures. Late last year, I noted that patience was an important and worthwhile virtue and that we should pursue a strategy of vigilance, remaining data-driven and maintaining optionality in our toolkit and acting when necessary. In my view, the disinflationary dynamics that the euro area has experienced over the last decade are very unlikely to return and we have now reached the point when we need to act. As inflation persists at levels significantly above 2%, it is putting at risk the expectations that we will deliver on our target over the medium term. And as President Lagarde said yesterday, actions that demonstrate our commitment to price stability will be critical to anchor inflation expectations and contain second-round effects. So when the evidence changes, we should not hesitate to change our approach. The balance of advantage has tilted decisively towards the need for further action, albeit not necessarily at a similar pace to that of other central banks that have also changed their stance, such as the Federal Reserve. The differences in underlying inflation dynamics and drivers supports a differential pace. Notably, inflation is more broad-based in the US – something we see in significantly higher core inflation rates – and expectations are more elevated relative to target, and wages are growing at a faster rate. The last decade has seen us maintain very accommodative monetary policy and less accommodation is now warranted. Following our decision last December to start the process of normalising monetary policy by ending our pandemic emergency purchase programme (PEPP), we should now move to also end our net asset purchases under the asset purchase programme (APP) either next month or in July. From here, I think we need to consider the implications of operating with a large central bank balance sheet as we continue the normalisation journey. There also needs to be a careful assessment and monitoring of reinvestments and possible side effects on market functioning. The possibility of adverse effects from our non-standard measures on market functioning were assessed as the balance sheet grew, and a similar assessment will be just as important when the size of our balance sheet reduces. The question of interest rate rises is both more and less straightforward. What is clear is that the era of negative rates is reaching its conclusion. What is less clear is the precise path towards normalisation, when exactly rates should start to rise and when they should stop rising. I think it is realistic to expect that the first move in the ECB’s interest rates will happen soon after net asset purchases end and that rates are likely to be in positive territory by early next year. But I should make clear that this isn’t forward guidance: the calibration of our policies should remain data-dependent and we should maintain vigilance, optionality and flexibility as core principles in our decision-making. At the end of day, we have the tools, the determination and the responsibility to deliver our 2% target.’

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.’

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)

12 May 2022

‘Ready to hike in July -- and not just the beautiful Atlas Mountains here in #Morocco’

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)

06 May 2022

‘We hear people’s concerns and take them seriously. Inflation is very high at the moment, which is particularly hard on people with low incomes. We will decide on the next step for the normalisation of our policies in June’

‘Surging energy prices are the main reason for current high inflation, but supply bottlenecks are also playing a role. While higher interest rates would not solve this, we have to ensure that high inflation does not get entrenched in people’s expectations’

‘The exact timing of rate hikes will depend on incoming data. We will discuss this in detail at our next Governing Council meeting on 9 June in Amsterdam’

‘Weaker incoming data don’t suggest so far that we’re entering a recession and we expect inflation to decline – all depending on how the war evolves and the impact of sanctions. We will decide on the next step for the normalisation of our policies in June’

‘Over the last few years, we were faced with severe shocks like the pandemic and now the war. By adjusting borrowing costs we can steer the economy in a way that supports a return to our 2% target over time. This is our unwavering commitment’

‘It is true that the war is weighing significantly on activity, but it also pushes up inflation, mainly through higher energy prices. Our mandate is price stability, so we will make sure that we bring inflation to our target of 2% over the medium term’

‘Our approach to policy normalisation is completely data-dependent. We will discuss this in detail at our June meeting’

‘The ECB’s projections have underestimated inflation. This reflected factors that many other expert forecasters did not foresee either, like the unexpected surge in energy prices and more persistent supply bottlenecks that have been aggravated by the war’

‘We are fully symmetric in our commitment to achieving our price stability mandate. We react just as decisively whether inflation is too low or too high’

‘No, we don’t see Japanification in the euro area, meaning structurally low growth and low inflation. Our population structure is different, our banks are in better shape, and there is no comparable real estate bubble’

‘The money/GDP ratio has grown in all major advanced economies, ranging from about 90% in the US to above 200% in Japan. There is no right/wrong ratio; it is a reflection of how much of their wealth people and firms wish to hold in bank deposits’

‘We are planning to end our net asset purchases soon, in the third quarter of this year. They have worked well and helped our inflation outlook to stabilise around 2% in the medium term’

‘We have already started normalisation. We ended the pandemic purchase programme in March and have started reducing our net asset purchases. Ending net purchases soon will enable us to consider rate hikes this summer’

‘The special interest rate for banks was introduced to support their lending to the economy during the pandemic. We’re confident that this policy support will no longer be needed. We assess that banks can generate profits without taking too many risks’

‘We must ensure that monetary policy is transmitted evenly to all parts of the euro area. We are ready to use a wide range of instruments to address fragmentation, including the possible flexibility under the PEPP’s reinvestments’

‘While we cannot lower oil prices, we will make sure that high inflation does not become entrenched in expectations and leads to second-round effects’