Klaas Knot: A time to act. The outlook for monetary policy in the euro area.

Speech by Mr Klaas Knot, President of the Netherlands Bank, at the Danske Bank, Copenhagen, 30 August 2022. 

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

There is no time for tinkering. We must forcefully tackle the still growing problem of persistently high inflation, within the core of our mandate.

Let me recap the reasons behind this urgency.

Euro area headline inflation reached 8.9% yoy in July, the highest figure since the creation of the euro (see Figure 1 below).

In explaining high inflation, much attention has focused on energy and food price inflation, which have provided the largest contribution to headline inflation, and which are driven by negative supply shocks related to supply chain constraints and Russia's war in Ukraine. But this is not the full story. Positive demand shocks – related to the strong pick-up in demand following the relaxation of COVID-19 restrictions – have also been at play. To me, two main types of evidence point to an important role that demand shocks have played so far.