They Said it - Recent Monetary Policy Comments Made by ECB Governing Council Members
14 June 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 31 and includes comments from the following (those whose name is in bold have commented since the previous version):
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01 June 2022
‘With this strategy and in the current environment, a gradual withdrawal of the extraordinary monetary stimulus is appropriate: inflation expectations at intermediate and medium-term horizons are around 2%, core inflation is clearly above 2% and there are upside risks to the projections. Thus, in March 2022, net asset purchases under the PEPP were completed and, in April, we announced that those under the APP would be completed in the third quarter. In my view, given that the inflation outlook is inflation outlook is consistent with meeting the conditions of our forward guidance, this completion should take place very early in the quarter, with the first interest rate hike in July shortly thereafter and an exit from negative rates by the end of that quarter. Subsequently, one of the references that could serve as a guide in the normalisation process is the level of the natural interest rate, defined as that which keeps inflation stable at its target. Available estimates, subject to high uncertainty, place it at low values in the euro area, around or slightly above 1%, which would suggest that, until these levels are reached, the monetary policy stance will remain expansionary. The process of raising interest rates should be gradual. The aim is to avoid abrupt movements, which could be particularly damaging in a context of high uncertainty such as the current one. For this gradual approach to be adopted, it is essential that inflation expectations remain anchored and that no second-round and indirect effects of a magnitude that could jeopardise this anchoring materialise. Moreover, we do not have a pre-established standardisation pattern. In principle, following the first interest rate movements mentioned above, further increases could be made in subsequent quarters until, for example, levels in line with the natural rate of interest are reached, if the medium-term inflation outlook remains around our objective. But it should be borne in mind that the current uncertainty affects aspects as relevant for future inflation as the development of the military conflict, the resolution of bottlenecks in production and international transport, the degree of materialisation of second-round effects, the dynamics of globalisation and energy and climate change policies. Therefore, we will have to adjust the standardisation process to the information we receive. It is not optimal to commit a priori to a specific interest rate path, especially in the current context of high uncertainty. We will act with full flexibility and take the necessary steps to fulfil our mandate and to contribute to safeguarding our mandate and to contribute to safeguarding financial stability. Flexibility is particularly important on the path towards a specific interest rate setting, especially in the current context of high uncertainty. more neutral, to prevent the emergence of threats to the smooth transmission of monetary policy across the euro area. The pandemic has shown that, under stressed conditions, flexibility in asset purchases has been effective in countering such threats. Within our mandate, such flexibility will remain a key element of our monetary policy. In line with the communication of this process of monetary policy normalisation, since December there has been an advance in the timing of expectations of policy rate hikes. The prospect of a normalisation of the monetary policy stance has also been reflected in a pick-up in short and 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 some 133 bps since the beginning of the year, while the 12-month Euribor has increased by 85 bps. For its part, the risk premium on Spanish government bonds increased in this period by 34 bp.’
10 June 2022
‘We took this decision yesterday in the face of a concern which is the number one concern of the French and Europeans, namely inflation which is too high. We have also published forecasts. Total inflation is expected to reach 7% this year on average in the euro area. I note in passing that it is lower in France, but in France it is also too high: just over 5%. And inflation is not only too high but it is too high: there is of course the energy shock following the war in Ukraine, but when we look at inflation excluding energy and food, what we call core inflation, it is around 3.5%, so well above our 2% objective. This is what requires the normalisation of monetary policy.’
‘No, at this stage [there is no wage-price spiral]. We are seeing a certain number of signs of wage increases in certain European countries, but I believe that it is very important that wages remain decentralised, as close as possible to social negotiation and the economic reality of each company and each branch. But the heart of the matter is inflation: this is what we have as a compass, and this compass corresponds to the expectations of our fellow citizens, that we bring inflation back to the right level.’
‘What we call fragmentation is the excessive and unjustified rate differentials between the countries of the Eurozone, which hinder the proper transmission of monetary policy. Here, I think we need to look at our history, the more than 20 years of the euro: we have always been able to combat this fragmentation. In 2010, in 2012, in 2020, each time with different instruments. So sorry, I'm going to use some rather barbaric acronyms: it was called the SMP in 2010, the OMT in 2012, the PEPP in 2020. … So one should have the slightest doubt, including in the markets, as to our collective will to prevent this fragmentation. We talked about it yesterday, you may have noticed that it was a unanimous Governing Council. … We have the will, and no one should have any doubt that we will have the instruments if and when necessary. I want to say this very clearly. … I reminded you of the history. Each time, we have found the appropriate instruments when and if necessary to deal with situations of tension.’
‘This is what we call unjustified fragmentation. It's not a country that has an ill-adapted or divergent economic policy, it's rate differentials that are not justified, that are deemed excessive. And there, no one should have any doubt. We have always been able to do this and we will be able to do it if necessary, when necessary, and with the appropriate instruments.’
‘Today, we are marking a departure on a path, a start. Why is there this standardisation? I am very keen on the word normalisation and not tightening up. It's because we are coming out of monetary conditions that were exceptional, exceptionally accommodating, because inflation was too low. I would remind you that at the beginning of 2021 - it's not very old, it's a little over a year ago - inflation was at 0, which was the opposite concern.’
‘Exiting these exceptional conditions means stopping the latest net asset purchases, the famous QE, and exiting negative rates. This will be done, as you said, in September. Then we will have a gradual but sustained rise in interest rates to normal levels. So the economists talk about the "neutral rate"... You can use any word you like, and there are no precise figures for the neutral rate, but it's the equilibrium rate when we are in a neutral economic situation. I personally had the opportunity to give an estimate of between 1 and 2%. Perhaps we will have to go further. But once again, it's a path, and one that we will follow with a lot of pragmatism, that is to say, according to the evolution of inflation data.’
‘No [we are not afraid of choking off growth]. First of all, I repeat, it's a normalisation: it's not a tightening, it's the return to normal monetary conditions. It just so happens that inflation is the number one concern weighing on growth.’
27 May 2022
‘That [where inflation ends] very much depends on how the war against Ukraine develops and what consequences it has for the supply of energy. Even without the war, inflation would be high, but not as high as it is now. As things currently stand, we expect the inflation rate to average around 7% in Germany in 2022. From next year onwards, inflation is likely to edge back down gradually.’
‘I don't have a crystal ball. But one thing is clear: if more supply chains break down and energy prices continue to rise, inflationary pressures will remain high for the time being. As central banks, we do, however, have the tools to reduce inflationary pressures and push prices back down to our target in the medium term. We can do it, and we will do it.’
‘That inflation would rise on such a scale was something that could not have been predicted and took most forecasters by surprise. However, some observers did point to the upside risks to inflation, the Bank for International Settlements (BIS), for instance. In my inaugural speech in January of this year, I already warned that inflation could remain elevated for longer. At that time, no one was expecting a war. However, energy prices were already high and supply bottlenecks were already an issue.’
‘Philip Lane is doing a good job, and ultimately the ECB’s Governing Council makes the decisions. As I said, when the going gets as tough as it is now, then there will be much uncertainty. Forecasting is therefore extremely difficult. We are seeing the same thing in the United States and the United Kingdom. However, we must, of course, learn from our misjudgements and take account of the new circumstances.’
‘It is enormously difficult in monetary policy to predict the right moment to change tack. In the euro area, core inflation, which is inflation excluding energy and food prices, stands at 3.5%, while in the United States the figure is 6.2%. Inflation’s intrinsic momentum is consequently much higher there.’
‘We are very well aware of this [that people also have to pay for energy and food], and we will act. When the Governing Council of the ECB meets next in Amsterdam on 9 June, we will take decisions on our monetary policy stance. We then need to be crystal clear in communicating them.’
‘[Crystal clear communication means] That financial markets and people understand us and trust that we will achieve our objective. The ECB President has made her position clear. And she clearly advocates the decisions of the ECB Governing Council. I think she is doing that well.’
‘Differences of opinion aren’t a problem. What matters is that confidential discussions remain confidential. It’s like what goes on in Der SPIEGEL’s editorial office: if you discuss something in private, you want to keep it to yourselves to begin with.’
‘Our task is to make just that [that the ECB is finally getting serious about combatting rising prices] clear to the general public and to put words into action. But inflation isn’t going to fall overnight; that might take some time yet. What counts is that longer-term inflation expectations are well anchored.’
‘Our June meeting will need to send a clear message about where we are heading. My view today is that we will then, in July, have to take a first interest rate step, followed by more in the second half of the year. Negative interest rates will soon be a thing of the past.’
‘It is correct to say that we will start by concluding net asset purchases and then raise interest rates. That is what we have agreed upon.’
‘What matters first of all is that the stocks do not increase any further. You have to take your foot off the accelerator before you apply the brake. But there is no question that, at the end of the day, the Eurosystem will have to scale back its very large bond holdings. That is part of the normalisation of monetary policy.’
‘That [special bank lending conditions] was a component of the accommodative monetary policy and it was contingent on bank lending. As things currently stand, there is no need for that anymore, which is why the pandemic-related special conditions for these operations are going to expire in June, as announced.’
‘I am not surprised that the trade union for the metalworking industry, IG Metall, for example, is making an initial demand of 8.2%. A wage-price spiral depends not just on wages, but also on how enterprises set their prices. All things considered, though, I think the risk of a wage-price spiral is manageable if we keep inflation expectations firmly anchored at 2%. We are monitoring developments closely.’
‘The labour market is far tighter in the United States than it is in the euro area. Lots of people in the United States are currently switching jobs because they see a chance to boost their earnings. Wages are going to increase more significantly here as well, but I see no signs at present that things are getting out of control.’
‘The German economy is not faring that badly: before the war, we were predicting growth of more than 4% for 2022. That might now roughly halve in size. With growth of around 2%, things are still looking quite respectable.’
‘You are outlining a stagflation scenario which I do not consider likely at present. The situation is still robust.’
‘I cannot rule out a development in that direction [of de-globalisation]. And there are other trends besides that might push the inflation rate up for longer. The decarbonisation of the economy alone could lead to more inflation in the coming years. That is something we need to take into account in our monetary policy. In any case, the era of zero or negative interest rates is thus over for the time being.’
‘Italy’s debt ratio has seen another increase during the pandemic, that’s true. But, the risk premia on Italian government bonds still aren’t exceptionally high. Of course, Italy, like all countries, needs to convince the capital markets that its public finances are in sustainable order.’
‘The high debt ratios have to be reduced reliably. Credible and binding fiscal rules can help with that. What’s clear is that the state of public finances in Italy, Germany or any other country must not set the tone for European monetary policy.’
‘Compromising on our stability objective is not something that I’ve so far witnessed in the Governing Council of the ECB. We need to ensure stable prices, that is what we are tasked with doing.’
‘There’s no talk of any covert buying of government bonds in the ECB Governing Council. We review our monetary policy toolkit on a regular basis. One thing is certain: we are not allowed to engage in monetary financing of governments.’
‘Doves, hawks – I’m all for clear positions, but I find this sorting into supposed groups problematic. We all work together in the Governing Council of the ECB. Isn’t there another type of animal that could fit?’
‘I welcome the fact that we will soon be raising the key interest rates and acting decisively to combat inflation.’
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.’
01 June 2022
‘The exchange rate isn’t a, a very important, element of that. I mean, it’s something we have to deal with. And in December … we felt it was important to make a statement in the monetary policy statement. And in the future So there is a principle of flexibility when needed. Of course we look at the er as a transmission factor for policy. It’s not UK or Sweden
09 June 2022
‘High inflation is a major challenge for all of us. The Governing Council will make sure that inflation returns to our 2% target over the medium term. In May inflation again rose significantly, mainly because of surging energy and food prices, including due to the impact of the war. But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly. Eurosystem staff have revised their baseline inflation projections up significantly. These projections indicate that inflation will remain undesirably elevated for some time. However, moderating energy costs, the easing of supply disruptions related to the pandemic and the normalisation of monetary policy are expected to lead to a decline in inflation. The new staff projections foresee annual inflation at 6.8% in 2022, before it is projected to decline to 3.5% in 2023 and 2.1% in 2024 – higher than in the March projections. This means that headline inflation at the end of the projection horizon is projected to be slightly above our target. Inflation excluding energy and food is projected to average 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024 – also above the March projections. Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, is leading to shortages of materials and is contributing to high energy and commodity prices. These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic. Once current headwinds abate, economic activity is expected to pick up again. This outlook is broadly reflected in the Eurosystem staff projections, which foresee annual real GDP growth at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. Compared with the March projections, the outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up. On the basis of our updated assessment, we decided to take further steps in normalising our monetary policy. Throughout this process, the Governing Council will maintain optionality, data-dependence, gradualism and flexibility in the conduct of monetary policy. First, we decided to end net asset purchases under our asset purchase programme (APP) as of 1 July 2022. The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance. Second, we undertook a careful review of the conditions which, according to our forward guidance, should be satisfied before we start raising the key ECB interest rates. As a result of this assessment, the Governing Council concluded that those conditions have been satisfied. Accordingly, and in line with our policy sequencing, we intend to raise the key ECB interest rates by 25 basis points at our July monetary policy meeting. Looking further ahead, we expect to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at our September meeting. Third, beyond September, based on our current assessment, we anticipate that a gradual but sustained path of further increases in interest rates will be appropriate. In line with our commitment to our 2% medium-term target, the pace at which we adjust our monetary policy will depend on the incoming data and how we assess inflation to develop in the medium term. 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. The decisions taken today are set out in full in a press release available on our website. 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.’
‘In the near term, we expect activity to be dampened by high energy costs, the deterioration in the terms of trade, greater uncertainty and the adverse impact of high inflation on disposable income. The war in Ukraine and renewed pandemic restrictions in China have made supply bottlenecks worse again. As a result, firms face higher costs and disruptions in their supply chains, and their outlook for future output has deteriorated. However, there are also factors supporting economic activity and these are expected to strengthen over the months to come. 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 consumption. In addition, savings accumulated during the pandemic are a buffer. Fiscal policy is helping to cushion the impact of the war. Targeted and temporary budgetary measures protect those people bearing the brunt of higher energy prices while limiting the risk of adding to inflationary pressures. The swift implementation of the investment and structural reform plans under the Next Generation EU programme, the “Fit for 55” package and the REPowerEU plan would also help the euro area economy to grow faster in a sustainable manner and become more resilient to global shocks.’
‘Inflation rose further to 8.1% in May. Although governments have intervened and have helped slow energy inflation, energy prices stand 39.2% above their levels one year ago. Market-based indicators suggest that global energy prices will stay high in the near term but will then moderate to some extent. Food prices rose 7.5% in May, in part reflecting the importance of Ukraine and Russia among the main global producers of agricultural goods. Prices have also gone up more strongly because of renewed supply bottlenecks and because of recovering domestic demand, especially in the services sector, as our economy reopens. Price rises are becoming more widespread across sectors. Accordingly, measures of underlying inflation have been rising further.’
‘The labour market continues to improve, with unemployment remaining at its historical low of 6.8% in April. Job vacancies across many sectors show that there is robust demand for labour. Wage growth, including in forward-looking indicators, has started to pick up. Over time, the strengthening of the economy and some catch-up effects should support faster growth in wages. While most measures of longer-term inflation expectations derived from financial markets and from expert surveys stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring.’
‘Risks relating to the pandemic have declined but the war continues to be a significant downside risk to growth. In particular, a major risk would be a further disruption in the energy supply to the euro area, as reflected in the downside scenario included in the staff projections. Furthermore, if the war were to escalate, economic sentiment could worsen, supply-side constraints could increase, and energy and food costs could remain persistently higher than expected. The risks surrounding inflation are primarily on the upside. The risks to the medium-term inflation outlook include a durable worsening of the production capacity of our economy, persistently high energy and food prices, inflation expectations rising above our target and higher than anticipated wage rises. However, if demand were to weaken over the medium term, it would lower pressures on prices.’
‘Market interest rates have increased in response to the changing outlook for inflation and monetary policy. With benchmark interest rates rising, bank funding costs have increased, and this has fed into higher bank lending rates in particular for households. Nevertheless, lending to firms picked up in March. This was because of the continued need to finance investment and working capital, against the backdrop of increasing production costs, persisting supply bottlenecks and lower reliance on market funding. Lending to households also increased, reflecting continued robust demand for mortgages.’
‘Summing up, Russia’s unjustified aggression towards Ukraine is severely affecting the euro area economy and the outlook is still surrounded by high uncertainty. But the conditions are in place for the economy to continue to grow and to recover further over the medium term. Inflation is undesirably high and is expected to remain above our target for some time. We will make sure that inflation returns to our 2% target over the medium term. Accordingly, we decided to take further steps in normalising our monetary policy. 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.’
‘The Governing Council, on the occasion of this meeting organised outside of Frankfurt, in beautiful Amsterdam – thanks to the National Central Bank of the Netherlands – focussed primarily on the challenge of high inflation facing the euro area, and on taking further steps in our normalisation path that we started back in December. So it's not a question of catching up; it's a question of using all the tools that we have in order to deliver on our mandate of price stability and in order to bring inflation down to target over the medium term. Our analysis was obviously that inflation was undesirably high and that we had to take the steps that I have identified in the monetary policy statement. I would like to add that it's not just a step; it's a journey. We started back in December. We gradually over the course of time put ourselves in a position to move away from unconventional monetary policy, which will actually be taking place as of 1 July, in order to use more conventional tools which are the interest rates. On the issue of the interest rates: we also identified a path, which is not only limited to a particular move, but a series of moves over the course of the next few months depending on the medium-term outlook of inflation. On the second issue: we have to have the right monetary policy stance; that is critically important and that is what we are doing with that identification of the journey that I just mentioned. But we also have to make sure that our monetary policy is transmitted throughout the entire euro area. To that end, obviously, we need to make sure that there is no fragmentation that would prevent the adequate monetary policy transmission throughout the entire region. We have existing instruments. I think that we have described them in the past. It is obviously the reinvestment capacity that we have under the PEPP, which is a complete reinvestment package that totals €1.7 trillion, that will be reinvested with total flexibility if warranted across time, across jurisdictions, across products. If it is necessary, as we have amply demonstrated in the past, we will deploy either existing adjusted instruments or new instruments that will be made available. But we are committed to proper transmission of our monetary policy, and as a result fragmentation will indeed be avoided to the extent that it would impair that transmission.’
‘We had very productive discussions in Amsterdam and these discussions concluded with an unanimously approved decision. We are on a journey, but this is clearly an important step in that journey given that we are actually deciding to end net asset purchases under the APP as of 1 July, which effectively means that we stop before – for all sorts of market operation conditions. But we are also setting a path in which July and then September are the next first steps along the way of hiking interest rates. While we intend to raise interest rates by 25 basis points in July on the basis of the assessment that we conducted today, we also indicate that – and I will read very carefully for you because it was obviously a sentence that we drafted carefully in order to capture our commitment – I'll read you the whole paragraph, actually, because it's a really important one: “We undertook a careful review of the conditions which, according to our forward guidance” – you all remember the forward guidance with the three conditions – “should be satisfied before we start raising the key ECB interest rates.” Well, we concluded that these three conditions were satisfied. Accordingly, in line with our policy sequencing, for those of you who wonder why we didn't do it today, well, we have a sequencing in place that dictates – and we want to be predictable on that front – that we first of all stop net asset purchases and then we look at interest rate hikes. So, in accordance with our policy sequencing, “we intend to raise the key ECB interest rates by 25 basis points at our July monetary policy meeting.” And – that's the September that you were asking me about – “looking further ahead, we expect to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at our September meeting.” That is pretty precise as a commitment, but it is also a factor of how the situation evolves. So, if the medium-term outlook persists as we see it now, or even deteriorates – which of course we don't wish, but it could happen – then obviously the increment will be higher than 25 [basis points]. And then we go further because we take a third step along that journey to indicate what we will do beyond September, which is also the anticipation that further rate hikes will be necessary on the basis of the data that we collect.’
‘I don't want to give a reading exercise because some of you occasionally comment on the fact that I read too much, but this one, I really want to read it a bit because it matters - and every word matters, including plural versus singular – to your point. What we say is: “looking further ahead” – so today we say that – “we expect to raise the key ECB interest rates” – the three of them – “again in September” most likely. “The calibration of this rate increase will depend on the updated medium-term inflation outlook.” And here is the important one: “if the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at our September meeting.” So I think that you took the example of, if you are at 2.1% in 2024 or beyond, then the increment adjustment will be higher. The answer is yes.’
‘Do we expect that our July interest rate hikes will have an immediate effect on inflation? The answer to that is no and I would like to develop that a little bit. First of all, because of the anticipation of our monetary policy, because of the inflation and growth outlook, financing costs have already moderately but significantly increased, whether you look at corporate bonds, whether you look at sovereign bonds, whether you look at bank costs. Those financing costs have increased and with the signal that we are giving here, particularly concerning the short-term rates, this signal will continue to have an impact on financing costs. Now, typically monetary policy decisions have a longer-term impact in relation to inflation itself, so we have to stay the course, be determined, committed to delivering the 2%, but we cannot expect that to happen on the 22 July for a decision that we would have made in July. On the other hand, because you mentioned inflation expectations, we observed that inflation expectations are well anchored and we certainly want to indicate to those who form expectations – whether they are markets, whether they are experts, whether they are consumers – that we are determined to delivering on our target of 2% in the medium term. Therefore expectations should absolutely remain anchored because we will deliver. The neutral rate: this is a topic that we have deliberately decided not to have on the occasion of this Governing Council meeting. I am sure that we will ad nauseum argue as to whether it is 0.96 or 1.97 or beyond, or below or whatever. Suffice to say that the neutral rate over the course of time for multiple reasons, having to do with productivity, with demographics and all the rest of it, has gone down. But where it stands exactly, we have decided not to discuss it on this Governing Council meeting. Believe me, we had plenty to discuss so we saved a little bit for later. To be fair as well, it's not something that we can observe and determine with precision today. It's as you get closer, we will understand better where exactly it stands – and we will debate it. I have no illusion on that.’
‘First of all, on the issue of forward guidance: I'm assuming that you're referring to the forward guidance relating to asset purchases. So if you look at that forward guidance, we have actually changed it. If you recall, the forward guidance that we had referred to favourable financing conditions and to the accommodative aspect of our monetary policy. We have changed that and if you look at the third paragraph on the second page, we do refer to the fact that we will do so for as long as necessary to maintain ample – not favourable – liquidity conditions and an appropriate monetary policy stance. So we take account of the change that has indeed taken place. You're right; we are in a different universe. A lot of the tools, the forward guidance, the considerations over the last 11 years had to do with exactly the opposite movement; trying to bring inflation up because it was too low, and often at risk of deflation. Now we are in the opposite situation, where inflation is too high and we need to bring it back to our target of 2% over the medium term. Now, how confident are we about our projections? First of all, I'd like to say that our staff do the best work they can do and apply their whole consciousness and professionalism to producing those projections. Second, those projections are not just the ECB; the projections that you have in front of you are the projections of the entire Eurosystem. So it's the ECB and 19 national central banks including the great Bank of the Netherlands, which has actively and always actively participated in this exercise. So, it's a cohesive work that is done, that is tedious, that is iterative and that really checks everything. Third, it is clear that the massive energy prices hike and the war in Ukraine and the fast pace of the recovery have taken all forecasters by surprise. I actually thought you would ask me a question like that: so what did I do? I looked at other – I hope I can find it now. Anyway, it doesn't really matter if I don't find it. The point being that all international institutions, all forecasters of repute have actually made the same mistake of underestimating or not anticipating some of the developments such as the war, such as the energy crisis. Fourth point: I think we, the Eurosystem and the ECB in particular, are the only central bank which has gone back to the work that was done, which has looked under every stone to understand where the errors came from. I use the word errors with some trepidation because it's mis-forecasting caused by very unpredictable events. Three quarters of the forecasting errors are actually attributable to energy prices and the rest is largely attributable to bottlenecks that have lasted longer than had been anticipated. So again they do everything they can, as well as they can. They make the same kind of forecasts as other international institutions. Events that have developed are not captured in either models or sometimes just the sheer imagination of us all, when we talk about the war at the doorstep of Europe. Fourth, we do the introspective exercise of trying to find out where it went wrong and we will continue doing so in the future because we have to improve, no question.’
‘On the reinvestment policy that we decided for PEPP and for the APP, both of them, will now be operative as of 1 July for APP and has already begun for PEPP. It is a matter that we will be discussing within the Governing Council, which we have decided not to debate today. We had, as I said, plenty to do already in the last couple of days. But we will be looking at it and I have to tell you something: there are some of us on the Governing Council who will be interested not only to deploy flexibility, if warranted, on clusters of assets, by jurisdictions, over temporality, but some of us are also interested in looking at how we can support the financing of the measures needed against climate change. I've said already before that a green LTRO was interesting to consider. I think the reinvestment decisions that we will make in the coming months and years might also be inspired by this concern that we have. That's point number one. Your point number two is: why not 50 [basis points] in July? Well, we are coming out of 11 years of no interest rate move. We are on our path to exit negative interest rates soon. It is good practice, and it is actually often done by most central banks around the world, to start with an incremental increase that is sizeable, not excessive and that indicates a path. As I said, the decisions that we have made today are not just one intention of one single month of July. It's a whole journey that will take us back to the 2% target in the medium term. We also want to observe how markets are going to operate. As I have mentioned, we couple our July determination with our September indication.’
‘I want to take you back to the monetary policy statement because I think that the key principles that we will be inspired by in order to be predictable by you, but also to set the rules according to which we will proceed, are captured on the top of page 2, and say the following: “throughout this process the Governing Council will maintain optionality, data-dependence, gradualism and flexibility in the conduct of monetary policy”. So all four will matter and there will be circumstances when one might be more important than another. There might be other circumstances where the pecking order will change. So I think by doing that we are trying to have as much optionality as we can, be able to use flexibility if and when warranted and necessary, be as data-dependent as we have demonstrated and we will continue to demonstrate, and also deploy the gradualism that will be appropriate given the circumstances. I think in times of great uncertainty, gradualism is probably appropriate, more so than if the path is clear, well identified and we all understand where we are heading. On the second issue I just want to yet again come back to this issue of fragmentation, because I know that this is dear to some. I just want to reiterate that within our mandate, we are committed to preventing fragmentation risks in the euro area. Fragmented financial markets would obstruct the monetary policy transmission and undermine the possibility for the ECB to achieve its price stability mandate. That's the reason we monitor constantly, and that is the reason we have available at hand all the dimensions of flexibility that can be applied to our reinvestment policies under the PEPP, because flexibility conditions are clearly associated with PEPP to the extent that it relates to consequences of the pandemic. But we know how to design and we know how to deploy new instruments if and when necessary. We've demonstrated that in the past; we will do so again.’
‘It is a case that a large portion of the inflation that we have analysed is attributable either directly or indirectly to terms of trade; what you call imported inflation. Whether it is energy, exogenous bottlenecks, that is clearly a so-called imported inflation; but it's not it. We are clearly seeing an unprecedented 75% of the items considered to measure inflation being above 2%. That applies to non-energy industrial goods, it applies to services and it is partly a factor of the energy passthrough – but not only. Number two, we are also very attentive to wages, wage negotiations and to the risk of second-round effects and potential spiralling. We are not seeing the risk of spiralling at all, but we are seeing wage increases that have picked up particularly since March and that, as we indicated in the monetary policy statement, would not be entirely surprising whether it is by way of catch-up effects or by way of general wage increase. We are also aware that Germany, for instance, will implement the [higher] minimum wage as of 1 October. So it is largely and certainly much more so than in the US for instance – to come back to your questions about the difference between the EU and the US – it is more so imported inflation than it would be attributed to overheating demand, as is probably more so the case in the US. But it's spreading more broadly than strictly speaking in energy-related sectors. Then you had another question: it's a bit of a story of on the one hand, on the other hand, the current situation of the economy. There is probably more of the negative hand than the positive hand, but we have both. On the negative front we clearly have the continued impact of the war in particular, the reactivation of lockdown measures in China which went away, then are maybe slightly coming back. The bottlenecks impact that it induces and the dampening effect it has on growth, not to mention the reduced disposable income that some of the households are suffering. But on the other hand, you have entire sectors of the economy that are recovering, and when you look at the tourism industry, the accommodation industry, hospitality: those sectors are really recovering at a fast pace. We looked on a per-country basis at the prices of hotels, of restaurants; it is clearly on its way up with a strong demand in those sectors in particular. We cannot exclude also – we hope, that remains to be seen – that some of the factors that have a dampening effect on growth will gradually fade a bit.’
‘In relation to the July rate hikes that we discussed, we certainly considered that the three rates would be impacted by the hike, not just the deposit facility rate (DFR). For future references: as of September, we might also apply the principle of hikes to the three, but we have not discussed that yet. I think the intention will probably be to have a close look at that and to determine whether or not we want to just keep those spreads or return to a better symmetry between those three. That's clearly to be debated at either our next meeting or the September meeting. On the conditions that would trigger the anti-fragmentation: let's be clear, the critical point is monetary policy transmission and we are very attentive to make sure that it transmits throughout the entire euro area. So there is no specific level of yields increase or lending rates or bond spreads that can unconditionally trigger this or that. The principle is that we will not tolerate fragmentation that would impair monetary policy transmission, and we will determine on the basis of circumstances, of countries, how and when that risk is likely to materialise, and we will prevent it.’
‘I can only repeat what I have said, which is that we will not tolerate fragmentation that would impair the proper transmission of monetary policy throughout the entire euro area. We do have existing flexibility that is embedded in the reinvestment of PEPP, in particular. We have demonstrated in the past – we will demonstrate if necessary in the future – that we can design, we can deploy the appropriate instrument to prevent that risk from materialising.’
‘I have to tell you that I'm concerned about the war, full stop. But your question goes further than that, of course. The financial stability side of the question, I will defer to my esteemed colleague, friend and Vice President de Guindos. The first one: yes, we are going to pay a lot of attention to data and we are considering data dependency as one of the key four principles according to which we will operate. Obviously the quarterly projections that we produce are very rich, inform our decisions best, but we cannot be un-attentive to developments and to data that we continuously collect, both at the ECB and within the national central banks as well. So, we are not going to put ourselves in a straitjacket of only taking decisions when we have projections.’
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 longer‑term market‑based inflation expectations, the expected average inflation rate over a five‑year 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.’
31 May 2022
‘The economic outlook has therefore changed considerably in the last few months. Given that the risk of deflation, which had called for the introduction of unconventional monetary policy measures, has been averted, and the impact of the pandemic on final demand has faded, the negative key rates policy can now be left behind. A raise in these rates, which the ECB Governing Council might decide to start in the summer, should proceed by taking account of the uncertain evolution of the economic outlook. Financing conditions for households and firms, which are today exceptionally accommodative, will remain favourable; according to current market quotations, short-term interest rates in the euro area will stay negative in real terms for several years to come. The Governing Council stands ready to adjust all its instruments to pursue its medium-term inflation aim. During the pandemic crisis, flexibility in the design and conduct of asset purchases was crucial to counter tensions on the financial markets; it remains a key element in our strategy in the event that malfunctions in the monetary transmission mechanism risk compromising the pursuit of price stability. To address rapidly evolving needs, particular attention will have to be paid to ensuring that the monetary policy normalization process takes place in an orderly manner and to preventing the emergence of any market fragmentation that is not justified by the economic fundamentals. The action of the Eurosystem is still intertwined with that of the fiscal authorities. The increase in commodity prices cannot be directly countered by monetary policy. What monetary policy can do is ensure price stability in the medium term, maintaining the anchoring of inflation expectations and countering pointless wage-price spirals. Temporary fiscal interventions, carefully calibrated to protect the soundness of the public finances, are able to limit rises in energy prices and to support the income of the households most in difficulty, in both cases reducing pressures to increase wages. This allows for a more gradual normalization of monetary policy, mitigating the risks of a recessive impact on the economy.’
01 June 2022
‘In recent months the economic outlook has worsened worldwide as a result of the war in Ukraine. The growth of the Dutch economy has also slowed down. So far, the economic impact of the war has mainly been felt in the energy and commodity markets, resulting in high inflation rates. Energy and commodity prices had already risen sharply in 2021 due to a combination of strong economic recovery, previous supply disruptions and geopolitical tensions, but prices have risen to record levels since the start of the war in Ukraine. Inflation has become more broad-based, but high energy prices still account for two-thirds of it. Interest rates have also risen in the wake of inflation. That too marks a fundamental change, after a long period of very low interest rates. Financial markets are thus anticipating the expected further monetary tightening. The 10-year interest rate on Dutch government paper has now hit 1.4%, a level not seen since 2014. The interest rate rise is also reflected in rates on mortgages and corporate loans, and in those markets too people had become accustomed to low interest rates. In summary, the war in Ukraine and high inflation are putting a substantial drag on the economic outlook. At the same time, as far as the financial institutions and financial markets are concerned, we can say: so far, so good.’
‘Finally, any undue delay in the normalisation of monetary policy could pose risks to financial stability. After a long period of accommodative financial conditions and a search for yield, an adjustment of the economy and the financial system is ultimately both inevitable and desirable. On the other hand, a sudden tightening of financial conditions could have a negative impact on financial stability. Monetary policy adjustments must therefore always be timely and predictable. The large-scale purchase programmes are already being phased out, after which interest rates will be raised. Now that the medium-term inflation outlook has converged towards target, a more neutral interest rate level is appropriate that will neither slow nor stimulate the eurozone economy. The precise path will of course depend partly on the further evolution of the inflation outlook.’
Holzmann (Austrian National Bank):
10 June 2022
‘It [Thursday’s decision] is a necessary first signal to the markets that we are aware of the risks of high inflation and are taking the right decisions in the Governing Council to meet the price stability objective in the euro area.’
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.’
27 May 2022
‘From the perspective of the world economy, the effects of the Russian invasion depend mainly on how long and extensive the war will be. The war increases uncertainty about future developments, which may reduce, among other things, investment and consumption. In addition, the war raises energy and commodity prices and thus global inflation. More expensive energy and food prices affect us all, but above all people in poorer countries, where high energy and food prices threaten to lead to a humanitarian crisis. The war also exacerbates the already tight production bottlenecks, as there is a shortage of many minerals, metals, cereals and fertilizers. The war thus complicates the difficult situation we were already in globally with the pandemic. The pandemic is not over, and especially in China, the pandemic and the strict restrictions continue to cause problems in the production chains. This further increases prices and reduces the supply of certain goods. Globally, climate change causes great uncertainty for the future prospects, especially regarding refugee flows and consumption opportunities. On the other hand, Europe's need to move away from fossil fuels to green investment encourages growth, which can drive growth. Before the outbreak of the war, the eurozone economy had recovered better than expected from the corona crisis. In 2023, total production was expected to return to the growth trend that prevailed before the pandemic. With the war, growth in the euro area is weakening, especially due to higher energy prices and production bottlenecks. It is now crucial to assess the consequences of a rapid reduction in Europe's dependence on energy imports from Russia. This will largely depend on the extent to which energy imported from Russia can be replaced by energy imported from elsewhere, and on the ability of production chains to adapt to the reduction of fossil energy. Developments in energy and commodity prices have, of course, affected the inflation outlook for the euro area. Rising inflation is now a major issue in several countries, both economically and politically. Central banks in the United States, the United Kingdom and Sweden, among others, have already begun to raise interest rates. Inflation in the euro area was 7.4% in April, and core inflation - ie inflation excluding energy and food prices - rose to 3.5%. Only the rise in energy prices explains more than half of total inflation. By 2024, inflation can stabilize closer to the ECB's target of 2%, if energy and commodity prices stabilize. Energy inflation and production bottlenecks alone will not lead to a lasting increase in inflation unless there is a spiral of rising prices and wages. Unlike the US, wage inflation has so far been moderate in the euro area, although there are probably some signs of acceleration in the first months of the year. The ECB's monetary policy contributes to Europe's survival in a changing environment. Now it is important that inflation expectations remain anchored. The Governing Council is ready to use, if necessary, all its instruments to stabilize inflation in line with the 2% target in the medium term. The euro area central banks also help to ensure the stability of banking and other financial systems in this uncertain situation.’
10 June 2022
‘It is becoming increasingly clear that it is appropriate to talk about a more sustained upward pressure on prices, and this is precisely the situation in which the central bank must intervene. … the central bank would be to blame for a possible deepening price increase if we did not react to the now more widespread price increase. The full impact of today's decisions by the central bank on price increases will only be felt in a few years, but we cannot hesitate any longer. The decisions of the Governing Council of the European Central Bank this week are reflected in this statement. The European Central Bank's additional bond purchases will end on 1 July. In addition, we have essentially decided to start raising central bank interest rates in July. This change has been predicted in the financial markets for some time, which is why the EURIBOR interest rates typically referred to in loan agreements have risen recently. Thus, since this week, the 6-month EURIBOR, which has affected the majority of borrowers in Estonia again, has been positive, which has been below zero since the end of 2015. It may seem paradoxical - why is the central bank making people's home loan payments more expensive with its decisions, when it is already difficult for everyone due to the rapid rise in prices? The reason is that if we do not raise interest rates, the rise in prices will accelerate even further, and it will clearly be worse. And if a hesitant central bank loses confidence, it will be very difficult to control inflation again later. Then it would require an even bigger rise in interest rates, perhaps at the cost of a recession. Almost everyone's incomes and savings are suffering as a result of the rapid rise in prices, but the most economically vulnerable people are being hit hardest. It is their income that largely goes to cover basic needs, and they generally do not have real estate or other investments that can maintain their value even in a period of rapid inflation. In historical comparison, interest rates in the euro area remain virtually low, even after the likely increase in interest rates this year. Let me remind you that the 6-month EURIBOR, which we have become accustomed to in recent years, was more than 5% in both 2008 and 2000. … All in all, it is clear that the central bank must play its part in bringing price control under control, and we are ready for that.’
25 May 2022
‘This war is also affecting the economy, in Europe and beyond. The invasion and the associated uncertainty have prompted some repricing in global financial markets, albeit with much less turmoil than seen in March 2020, and dampened the confidence of businesses and consumers that are only just emerging from the tight restrictions imposed during the coronavirus COVID-19 pandemic. Higher energy and commodity prices are pushing up inflation and slowing the economic recovery. Elevated volatility has highlighted some liquidity risks, notably in some commodity derivatives markets. However, the main threat to euro area financial stability comes from the impact through macroeconomic channels. This implies additional challenges for indebted businesses at a point in time when countries’ fiscal space is very limited and support may need to be more targeted than the broad fiscal policy response to the pandemic.’
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.’
10 June 2022
‘Members of the Governing Council yesterday discussed new forecasts of economic developments for the euro area, which are marked mainly by the consequences of Russian military aggression. This has lowered expectations for economic growth in the current and next two years, which will otherwise remain relatively favourable, but above all raised inflation forecasts. In these circumstances, the members of the Governing Council have decided to continue to normalise monetary policy. The decisions taken are thus linked to (i) the completion of net purchases of securities under the APP program, (ii) the finding that the conditions of the forward-looking monetary policy (forward guidance) are met, and (iii) the intention to raise interest rates in July. At the same time, we will ensure that inflation stabilises at 2% in the medium term. Russia's military aggression in Ukraine and intensified epidemic measures in China are causing persistently high prices of raw materials and energy, and continued congestion in supply chains. As a result, economic activity in the euro area continues to slow down and inflationary pressures increase. Inflation in the euro area thus stood at 8.1% in May, reaching an all-time high. The continuing uncertainty is also reflected in the latest announcements made by the members of the Governing Council at yesterday's meeting. Economic activity is expected to increase by 2.8% this year, and in the next two years we expect the situation in the supply chain to improve, and a robust labour market, accumulated savings and generous fiscal support will help stabilize economic growth at 2.1 %. At the same time, we expect inflation to remain higher for longer. Due to high energy and food prices, inflation will be 6.8% this year, well above core inflation of 3.3%. With the expected stabilisation of inflationary pressures, both measures are expected to gradually approach our 2% target by 2024. Since the last monetary meeting of the Governing Council in April, market financing conditions have tightened further, but not at the expense of increased uncertainty, but primarily as a result of more restrictive monetary policy by central banks seeking to stabilise inflation. Share prices fell and required bond yields rose sharply. Since the beginning of the year, borrowing costs in the euro area have risen by more than one percentage point. Investors demand approximately a 2% yield for a 10-year bond of the Republic of Slovenia, while the yield was 0.4% at the beginning of the year. The required yield on a 10-year German bond has risen from around 0% to 1.2% since the beginning of the year. In the first months of 2022, interest rates on bank loans to households and non-financial corporations also began to rise at the euro area level, but their levels have historically remained very low and lending remains robust. Based on recent economic developments and new forecasts, the Governing Council has decided to continue to normalise monetary policy: First: We have decided to end net purchases of APP securities on 1 July, keeping the reinvestment framework unchanged. Secondly, we found that the conditions from the forward-looking monetary policy, which allow interest rates to rise, have been met. Accordingly, we plan to raise our key interest rates by 25 basis points in July. At the same time, we expect a further rise in interest rates in September, the size of which will depend on the medium-term inflation outlook. If these persist or worsen, a larger increase in interest rates will be appropriate in September. Thirdly, we estimate that a gradual but consistent increase in the ECB's key interest rates will continue after September. At the same time, we will ensure that inflation stabilises at 2% in the medium term.’
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.’
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.’
25 May 2022
‘Unlike some other advanced economies, the euro area is not facing a situation of excess domestic demand. As ECB President Christine Lagarde recently noted, “consumption and investment remain below their pre-crisis levels, and even further below their pre-crisis trends”. Instead, the euro area is confronted with a war on its doorstep that comes on top of a series of negative supply shocks generated abroad. These shocks – above all the increase in energy prices – are creating sizeable and persistent upward pressures on near-term inflation. But by hitting real incomes, confidence and ultimately domestic demand, these shocks could derail the post-pandemic recovery. In other words, the very shocks that have led to a surge in inflation are also depressing output. As a result, the inflation path is starting from a much higher point, but the medium-term inflation outlook is characterised by high uncertainty. In this situation, policy normalisation needs to be clearly defined, and how it is carried out needs to be carefully judged and calibrated. In my remarks today, I will outline what it means to normalise monetary policy, what implications this normalisation has for our policy instruments, and how far it should go. For now, given the exceptional level of uncertainty we face, we should normalise our monetary policy gradually, in line with the progressive adjustment that has inspired our action in recent months.’
‘There are three important distinctions we need to make about normalisation. First, normalisation is not the same thing as a neutral policy stance, which is when monetary policy is neither accommodative nor contractionary for the economy. A neutral stance allows the central bank to stabilise inflation around its target when output is at potential and when there are no transitory shocks disrupting the inflation path. But if we have a situation where there are shocks depressing the economic outlook, uncertainty is high and output is still below its potential level, cementing the inflation path at 2% would require a gradual withdrawal of accommodation, so that the stimulus is reduced over time but does not suddenly disappear. Second, the normalisation process should not be assessed against unobservable reference points, such as the natural (or neutral) rate of interest and some optimal or “normal” size and composition of the central bank’s balance sheet in the long run. These concepts are only vague guideposts at the best of times, and they are particularly fraught with uncertainty in the current environment. Before the pandemic, the real natural rate of interest for the euro area was estimated to range from just over 0% to less than -2%, depending on the model used. In fact, proxies of real rates are already at the higher end of that range – for instance, the one-year forward real rate nine years ahead recently increased significantly, reaching 0%. But the natural rate of interest is particularly hard to estimate at the moment, not least because the pandemic has scrambled all the typical models used to calculate it. All we can say with confidence is that the natural rate of interest has declined significantly compared with the period before the global financial crisis and that estimates are imprecise and widely dispersed. As such, they cannot serve as an actual guide for policy. The picture is further clouded when it comes to the “normal” size and composition of the central bank’s balance sheet. It is unlikely that the prevailing size and composition prior to the global financial crisis are still valid benchmarks – we can surmise that the optimal balance sheet is different in size and composition today. But there has so far been little empirical work in this area, so it cannot serve as an actual guide for policy either. This uncertainty means we should think about normalisation in terms of changes in the degree of accommodation we are providing based on the medium-term inflation outlook, rather than the distance of our policy tools from their unobservable theoretical levels. So, if we were to see shocks that would lead to the medium-term inflation path being revised upwards, we would change our policy stance to reduce accommodation more rapidly – and vice versa – so as to keep inflation on target over the medium term. Third, normalisation does not imply adjusting unconventional instruments more rapidly than conventional ones. In the review of the ECB’s monetary policy strategy that we completed last year, we were clear that both types of instrument are essential and permanent components of our toolkit. What matters is finding the combination of tools to deliver the necessary policy stance in the most effective and proportionate way. In the ECB’s case, we currently have three main levers that we can, in principle, use to adjust policy. The first is interest rates, which have a greater influence on the short and medium-term segments of the risk-free yield curve. The second is asset purchases, which have a greater influence on the longer end of the yield curve and risk premia. The third is the provision of liquidity through our targeted longer-term refinancing operations (TLTROs). TLTROs influence the transmission of benchmark yields to bank lending conditions, as well as overall liquidity conditions in the financial markets. This, in turn, helps to control rates at the short end of the money market and affects risk premia. Various combinations of tools could be used to achieve the desired policy stance. For instance, if we bring net purchases to an end but continue to reinvest the stock of assets purchased, our balance sheet will keep supporting the economy through what is known as the “stock effect”, but it will no longer provide additional accommodation. In fact, for technical reasons, the degree of accommodation it provides is likely to decrease over the coming years. So the appropriate stance could in principle involve maintaining a constant stock of assets purchased under our asset purchase programme (APP) and pandemic emergency purchase programme (PEPP). At the same time, we would be using interest rates to adjust the degree of policy accommodation – so long as this combination of tools remains consistent with inflation stabilising at 2% over the medium term. Overall, this way of defining normalisation is consistent with our inflation-targeting framework. It is not about targeting unobservable natural settings for our instruments, or about preferring some tools over others. Rather, it is about using an efficient mix of instruments to achieve the policy stance that effectively cements inflation at 2% over the medium term.’
‘In my view, there are two principles we need to apply to orient the normalisation process correctly. The first is gradualism, and the second is robustness. These principles can, in turn, help us to define the pace of normalisation and the mix of instruments. As William Brainard proposed in his seminal work, gradualism is necessary when the transmission of policy changes to the economy is uncertain. In such conditions, the optimal policy involves moving cautiously and observing how the economy responds to a gradual adjustment. Gradualism is clearly appropriate in the euro area today, for several reasons. First, the nature and strength of recent shocks is generating extreme uncertainty about the outlook for economic activity in the period ahead. The range of plausible outcomes is wide. The economy has faced a series of negative global supply shocks in the form of surging energy and commodity prices, compounded by supply bottlenecks. The Russian invasion of Ukraine and “zero Covid” policies in China are now prolonging and amplifying these shocks, which are all contributing to very high imported inflation. The higher cost of imports, in turn, is eating into domestic demand and pulling production away from full capacity, reinforcing the war’s negative impact on confidence. It is hard to gauge how far-reaching and persistent the implications of the hit to euro area consumer and business confidence will be. The weakening in consumption registered this year suggests that the rise in near-term inflation expectations is not prompting consumers to bring purchases forward. Rather, as recent research findings illustrate, it is leading households to be more pessimistic about their real income and to reduce their consumption. In other words, the depressing effect on consumption from higher inflation is working through the expected – and not just the realised – hit to real income. We may also be underestimating the full impact on global growth of the simultaneous tightening of financing conditions across advanced economies, coupled with the slowdown in China. A recent survey suggests that global growth optimism has collapsed to record lows. The second reason why gradualism is appropriate is that, given the unprecedented nature of the shocks we are facing and the lack of reliable benchmarks for our policy stance, we can only truly gauge the effects of the withdrawal of accommodation by getting feedback from the economy. This means not only monitoring soft leading indicators – like inflation projections and expectations or confidence indicators – but also assessing hard data on financing conditions and economic activity. As a result, we will have to move step by step, reassessing and adjusting our policy as necessary. In an environment where leverage in the economy is high, small rate increases might have larger effects. We are already seeing some evidence of this in the United States, where some highly leveraged segments of asset markets – such as the technology sector – are responding strongly and non-linearly to policy adjustment. During the pandemic, demand has largely been concentrated in sectors that are sensitive to interest rates, such as durable goods and construction. This could also mean that rate increases will have a sizeable effect on demand. The considerable uncertainty surrounding how monetary tightening will be transmitted through broader financing conditions and across the euro area is another reason why we should take small steps. Typically, at cyclical turning points financial markets become more volatile and banks’ lending policies are more difficult to forecast. In the euro area, this latter effect is reinforced by the phasing-out of the TLTROs. Of course, a gradual approach is not appropriate in all circumstances. For example, when faced with deflationary shocks that risk rooting interest rates at the lower bound, it pays to act more decisively. The same is true when inflation expectations are threatening to become de-anchored or if we see incipient signs that a wage-price spiral may start. The current short-term inflationary pressure may spill over to inflation expectations, leading to more protracted inflationary pressures. These risks have to be carefully considered when we are deciding on both the pace and path of the withdrawal of accommodation. If we were to see clear signs of a de-anchoring of medium-term inflation expectations, we would accelerate the pace of withdrawal, and we could go further and adopt a restrictive stance if necessary. For now, we do not see this “ugly inflation” scenario materialising, but the risks need to be monitored. Currently, premia-adjusted market-based measures of inflation expectations are consistent with inflation meeting our 2% target at the end of 2024, and being slightly below 2% from 2025 onwards. Turning to the second principle, we need to choose the mix of instruments that is most robust to the wide range of plausible scenarios we are facing. This calls for us to avoid normalising our monetary policy using all instruments at once, in order to minimise uncertainty and reduce the risk of financial stability being negatively affected. The natural way forward would be to start raising interest rates while keeping the stock of assets purchased under the APP and PEPP constant. This seems the most appropriate approach for a number of reasons. First, the size of our balance sheet is already expected to significantly shrink and its composition will change as the TLTROs are wound down, ultimately leading to a reduction of around €2.2 trillion in excess liquidity. Second, we do not need to risk unsettling financial markets via a passive runoff or active sales of bonds we hold on our balance sheet, given that we could proceed with the necessary withdrawal of accommodation in other ways. Starting to reduce the stock of assets purchased under the APP and PEPP would likely exacerbate the impact of rate changes, both along the yield curve and on risk premia, especially if liquidity is declining. Third, although we have plenty of experience of how asset purchases and policy rates can reinforce each other as part of an easing strategy, we have no experience of the reverse scenario in the euro area. And the experience of other major central banks, limited as it is, is unlikely to be transferable to the euro area given the unique nature of our economic, financial and institutional set-up. In this context, we will be much more able to anticipate the consequences of gradually adjusting rates while keeping our balance sheet constant. Using policy rates to withdraw accommodation thus allows us to better calibrate the adjustment that is consistent with 2% inflation over the medium term. This reduces the risk of an overcorrection that would durably depress the economy. And, at the same time, it allows us to move faster if the risk of second-round effects starts to materialise. Tightening policy through rate changes would also be simpler for us to communicate and easier for the general public to understand, reinforcing confidence and the anchoring of inflation expectations at our target. So, once net asset purchases have come to an end and the stock is being reinvested, I see rate policy as being clearly superior to balance sheet policy as the main tool to deliver these various goals. This is the position of the ECB. We currently intend to end net asset purchases in the third quarter. However, even after net asset purchases come to an end and policy rates start to rise, we still intend to continue reinvesting in full the principal payments from maturing securities.’
‘Subject to incoming data – we are and should remain data-driven – both the economic outlook and the principles I have outlined justify ending net asset purchases and then gradually exiting negative rates. This would allow us to continue to normalise policy by removing the part of our monetary accommodation that is no longer needed today. In particular, negative rates may imply distortions which were only necessary and proportionate when inflation was threatening to be too low over the medium term, relative to our target.The first adjustment is already under way. The ECB has already made two major announcements on asset purchases, first in December last year, and then again in March, when we signalled our expectation that net asset purchases would be concluded in the third quarter of this year. At the same time, the stock effects associated with our reinvestment policy will ensure that accommodation is withdrawn gradually. This will avoid creating financial stability risks in an already very volatile and uncertain environment. The second adjustment – the adjustment to our deposit facility rate – would allow the recent rise in medium-term inflation expectations to be reflected in our monetary policy. It would be consistent with a progressive removal of accommodation, still allowing us to steer output back towards potential but confirming the direction of normalisation that has already led to an increase in rate expectations. By the time we consider the next steps, we will have more information on which to base our decisions. In particular, we will have a better sense of two key developments. First, the sensitivity of the economy to the significant adjustment in financing conditions that is already under way, so we can gauge whether the pace at which we are withdrawing accommodation is appropriate. We have already seen a material increase in nominal yields and real rates in recent months. In fact, an adjustment is already working its way through the economy. And according to our latest bank lending survey, banks expect to tighten credit conditions markedly in the coming quarters. The second key development will be how resilient the domestic economy is to the combined impact of the war, lower real incomes and a darkening global outlook. So far, we are seeing a clear weakening of soft leading indicators. Signs of economic stress are emerging in the hard data – signs which may become more visible in the coming months. Against this background, pre-committing to further steps – just like ruling them out – seems unnecessary and unwise. The uncertainty we are facing makes it harder to accurately forecast economic developments beyond short time horizons. Given these circumstances, speculating about monetary policy measures over an extended period of time would be a futile exercise at this stage, as further evidence is needed in the period ahead. Finally, a critical element in determining the normalisation process will be how rate increases are transmitted across the euro area. In this respect, ensuring monetary policy is transmitted smoothly and evenly and delivering the adequate degree of policy normalisation are two sides of the same coin. And this is not a new concept for the ECB. During the recovery from the global financial crisis, the ECB applied a “separation principle” to its various policy tools, whereby measures that prevented financial fragmentation could be deployed regardless of the level of interest rates. The logic was that delivering the appropriate policy stance should not come at the cost of disrupting the transmission of the stance through the financial sector. I believe a similar principle should apply today. In particular, we should be ready to intervene as needed to neutralise any non-linear market responses that may arise from raising rates, and to mitigate the impact of an asymmetric tightening of financing conditions within the euro area. In other words, we should avoid the risk of a “normalisation tantrum”. An anti-fragmentation tool of this nature would be even more beneficial if we were to see incipient signs of a de-anchoring of inflation expectations or risks of a wage-price spiral, which would dictate that rates should rise more rapidly. We should thus ensure that we are in a position to credibly announce the availability and readiness of such an anti-fragmentation tool. In other words, addressing fragmentation risks is central to the normal conduct of monetary policy in the euro area. At the same time, the successful implementation of the national investment and reform plans under the Next Generation EU programme remain critical to support macroeconomic resilience, thereby also addressing fragilities that increase fragmentation risks. And joint European investments to reduce energy dependence would help cushion the effects of the idiosyncratic shocks that may result from the war.’
‘The ECB is currently dealing with the economic effects of an unprecedented sequence of shocks generated abroad. Like other major central banks, we are faced with the task of normalising monetary policy at a point in time that is anything but normal. In this difficult situation we will guarantee medium-term price stability, just like we protected the euro area economy from deflation during the pandemic. Normalisation does not mean removing stimulus outright. Rather, it is a process of gradually reducing that stimulus in a way that firmly anchors the inflation path at 2% over the medium term. This process has already got under way in the euro area. Getting normalisation right is no easy task, as the euro area economy must contend with an outlook that is marked by exceptional uncertainty. This means we should normalise our monetary policy gradually and choose a mix of instruments that is robust to the wide range of plausible scenarios we could face. These tried-and-tested principles have proved instrumental for central banks in the past. We should remain true to them today.’
Makhlouf (Central Bank of Ireland):
30 May 2022
‘‘The economic consequences of the war are being felt across Europe and has sparked a chain of events that presents significant challenges to the outlook for inflation and growth. The war has led to increased uncertainty and complicated the path to a permanently less disruptive existence with the virus.’
11 June 2022
‘The ECB has published the outcome of its strategy review one year ago. For us, central bankers, the crucial finding of this review was the acknowledgement that the neutral, or, in other words, equilibrium rate is much lower today than it was several decades ago. This significant decline was led by various structural factors, for example: the slowdown in productivity growth, changing demographics, and increasing demand for safe assets. Productivity growth has been on a downward trend for several decades due to the sluggish labor productivity growth. Changing demographics and, in particular, population ageing led to a decrease in working-age population. Furthermore, lower growth rates of investment have weighed on capital stock contributions to potential growth. These were the insights from the ECB Strategy Review – the Review we concluded when the COVID-19 pandemic was just about starting to recede due to increasing availability of vaccines, and when the idea of a full-scale war in Europe was deemed to be more of a fantasy than a real possibility. Today we live the 107th day of war in Ukraine. This Russian war, combined with the still troublesome aftermath of the pandemic, not only added pressures to price evolution in the short term, but also might have implications for long-term structural developments that drive neutral rate. Now is the time to discuss how the main findings of the ECB Strategy review were altered by this war. Might these recent shocks change the decades-long trend of declining neutral rate? In my view, these shocks will most probably not fundamentally reverse this trend. There are some questionable aspects, however, regarding productivity, potential growth and how they change with globalization. Allow me to elaborate. Potential output growth has been significantly negatively impacted by the Global financial crisis and has not fully recovered since. The recent shocks – the COVID pandemic and the Russian war – might further depress potential growth. We probably must get used to shorter and less-profitable global value chains, extension of bottlenecks and never-ending supply shocks. The most pressing issue for central bankers today therefore is how to react to these global supply shocks. It seems that these shocks are emerging constantly and have become more persistent. It seems inevitable that global trade and supply chains will undergo some structural changes. Foreign trade relations in future may be increasingly shaped by resilience and risk management considerations. We also live through times of elevated uncertainty - both in the financial markets and in the private sector – and this uncertainty might not go away easily. For European economies, we are likely moving towards less trade with non-democratic or geopolitically more risky countries and a goal for greater independence in the production of essential goods, such as pharmaceuticals, military equipment, and high-technology goods. At the same time, we should avoid protectionism, aiming for an “open strategic autonomy”. Such a diversification of trade flows and reorientation of suppliers of sensitive or critical products towards producers within the EU and other geopolitically less risky countries – the so-called regionalization and “friend-shoring” - would enhance the resilience of European economies to global geopolitical or pandemic-like shocks. At the same time, an evolution in this direction would likely increase production costs and suppress profitability and productivity growth in normal times due to reduced use of global comparative advantages. At the same time, there are structural factors that push back against the effects of retreating globalization. I believe that the NextGenerationEU – namely the green transition and digitalization – might put a positive pressure on the potential output growth. Investments in green and digital technologies could boost labor productivity and foster sustainable growth. Consequently, the ultimate question we policy makers must find answers to is which factors will be dominating in the near future. With such long-term developments and the current circumstances, how should we balance economic slowdown and increasing prices? To be more precise, what weight should we give to the Taylor rule variables and what time dimension of projections should we focus on? There is some merit to believe that structural forces that push neutral interest rate lower such as demographics, globalization and digitalization may not fade out - globalization may be an exception to some extent as I tried to explain - and a threat of the too-low inflation may return to our agenda. In other words, if the interest rate changes affect prices in one-to-two years’ time only, how strong should we be in reducing our monetary policy accommodation? Nevertheless, this does not change the fact that in the current environment we must tighten monetary policy to keep inflation expectations from increasing to unsustainable levels. De-anchored inflation expectations would make it much more difficult for the central bank to achieve its mandate of price stability. Overall, I think we should gradually raise rates to retain credibility. We must be apprehensive, that, as the neutral rate is currently much lower, we cannot increase policy rates to the levels seen 15-20 years ago. Still, as of this moment, it is extremely important to prevent the situation in which inflation expectations become entrenched at significantly higher levels than our inflation targets over the medium term.’
Herodotou (Central Bank of Cyprus):
05 May 2022
‘The war has heightened the uncertainty of future price developments and the pace with which supply bottlenecks will recede. In parallel, new pandemic restrictive measures in China, for example the closing of the city of Shanghai and its port, which is considered the busiest port in the world, also accentuate supply chain difficulties. Energy prices, which were driven even higher after the outbreak of the war, now stand 45% above their level one year ago and continue to constitute the main reason for the high level of inflation. Overall, inflation pressures are projected to remain strong in the short-term undermining business and consumer confidence. The main challenge for monetary policy now is to control inflation without jeopardising economic recovery. This requires careful attention of all these elevated uncertainties and their implications on the evolving economic outlook. The complication is that the inflation pressures result mainly from the supply side shocks which cannot be remedied via monetary policy. Higher interest rates will neither restore supply chains nor reduce energy prices. For this reason, at the ECB Governing Council, we have already began adjusting certain monetary policy instruments such as the Pandemic Emergency Purchasing Programme and the Asset Purchasing Programme, reducing significantly the bonds bought by the national central banks of the euro area members states. In other words monetary tightening has already begun. There is a clear sequencing of monetary policy actions that has been set and is being followed by the Governing Council. We closely monitor all incoming data and adjustment of the ECB monetary policy instruments will be done gradually and flexibly to target any demand side or second-round inflationary effects or de-anchoring of inflation expectations. The volatility and high uncertainty force a need for optionality in the conduct of monetary policy to ensure price stability over the medium term. It is both interesting and important here to briefly explain the difference in the monetary policy actions employed so far by the ECB and the Federal Reserve in response to the inflationary shocks. The policy actions of the ECB and the Federal Reserve, diverge since they face very different economic environments and data. In the U.S., where the Federal Reserve has already raised rates and delivered today the biggest rate hike since 2000, the inflationary pressure has been made more acute by a tight labour market. In the euro area the labour market is not tight. Also, domestic demand in the euro area is back to pre-Covid levels. In the U.S., it is higher. Therefore, the US is facing demand-side inflationary pressure that monetary policy can deal with.’
Kažimír (National Bank of Slovakia)
13 June 2022
‘After a decade with zero and negative rates, we are starting to turn the rudder, and it looks like we will return to positive territory in the fall. Here, of course, I mean our key deposit rate, which is -0.50% today. Tighter monetary policy, or, if you like, higher interest rates, will translate into higher interest rates on mortgages, business or consumer loans. However, there is no crazy jump or rocket interest rate growth. So what to expect from us in the summer and by the end of the year? In the summer, we start with a gradual tightening of monetary policy and the first expected step will be an increase of 0.25%. There are several reasons, the main and most important is the strong price growth and the risks associated with it. Inflation in Slovakia is double-digit and it is more than likely that it will remain double-digit next year. There are several reasons for this and you can find more about it on our website. Higher energy costs continue to be the main cause of rising prices in the euro area. However, the prices of food and many other goods and services are also rising sharply. Inflation in the euro area, even at home, is much, much higher than we would like, and will remain high for some time to come. In addition to high inflation, the economy will grow slower than we expected in the near future. It is hampered by the war in Ukraine, high energy costs and greater uncertainty. At the same time, pandemic restrictions in China are constantly contributing to the deepening of international trade problems. We will present our current view of how we see the Slovak economy and inflation next week. Well, it won't be a very pleasant read, I can tell you today. But nothing ends in summer, it just begins. In the autumn, specifically in September, we will continue to raise rates, and here I can clearly see the need to accelerate the pace and deliver an increase of 0.50%. From my point of view, it is more sensible to act preventively than to grab your head as to why we have been procrastinating. The incoming data only confirms to me that there is no reason to hesitate. Negative interest rates must be a thing of the past in September. I believe that we need to talk openly and transparently about what is to come. People and the economy must prepare for this. We are going to tighten monetary policy at a time of economic cooling. Regardless of the current monetary policy stance, we are facing quarters of weak growth, perhaps in some euro area countries there is also a transitional period of a slight decline. Most importantly, however, it looks good for the economy over the horizon of 2024 and beyond, which is good news for both the labour market and the household budget. This is a summer that will be hot in view of the upcoming data on developments in the euro area. Looking to the future, however, I am optimistic.’
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:
- 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.
- 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.’
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’