Fabio Panetta: Patient monetary policy amid a rocky recovery

Speech by Mr Fabio Panetta, Member of the Executive Board of the European Central Bank, at Sciences Po, Paris, 24 November 2021.

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

The long and rocky road out of the pandemic is creating challenges for monetary policy. Following years of too-low inflation and policy oriented at addressing deflationary risks, we are now in an environment of two-way inflation risks and heightened short-term volatility (Chart 1). Markets are indicating increasing uncertainty about the inflation outlook, and investors' expectations of lift-off dates have become more dispersed.

In this environment, central banks must clarify their reaction function, so that market expectations remain aligned with their policy intentions. This, in turn, requires a clear framework for thinking about inflation developments and what conditions would warrant a monetary policy response.

We are facing a unique combination of shocks that reflect the exceptional nature of the recovery from the pandemic: supply bottlenecks, surging energy prices and labour market frictions. We cannot say exactly when these factors will normalise. But in order to design our policy action, we need to gauge their implications for inflation in the medium term. Our focus needs to be on the risk that inflation in the medium term turns out persistently lower or higher than our 2% target, rather than on short-run developments.