Ignazio Visco: Inflation expectations and monetary policy in the euro area

Text of the Robert Mundell Distinguished Address by Mr Ignazio Visco, Governor of the Bank of Italy, at the 95th International Atlantic Economic Conference, Rome, 23 March 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
24 March 2023

After a long period of moderate, perhaps even insufficient, consumer price changes, inflation has returned to levels that are severely influencing the behaviour of households and firms (fig. 1). While its underlying sources are different across the major advanced economies, since late 2021 most central banks have progressively tightened their monetary policy stance to ensure a timely return to price stability.

In the current macroeconomic debate, inflation expectations are in the spotlight. A proper monetary policy response aimed at anchoring these expectations to central bank targets is, in fact, key to minimising the risk of a wage-prices spiral that would lead to higher and more persistent inflation. This is especially important in the face of large shocks such as those caused by the major increase in gas prices in Europe over the last two years or so. As an "external tax", the consequent decline in the terms of trade cannot be undone but instead should be rapidly absorbed, ideally redistributing it in order to protect the most fragile members of the population. Generalised backward-looking attempts at recovering the losses in purchasing power generate the real risk of protracting the high inflation rates resulting from the rise in energy prices. This may, in turn, affect inflation expectations and give rise to second round effects that must inevitably be countered with more restrictive monetary policy measures.