Fabio Panetta: Mind the step - calibrating monetary policy in a volatile environment

Keynote speech by Mr Fabio Panetta, Member of the Executive Board of the European Central Bank, at the ECB Money Market Conference, Frankfurt am Main, 3 November 2022.

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

Accompanying slides of the speech.

The euro area is facing a sequence of unprecedented supply shocks resulting from the pandemic and Russia's aggression against Ukraine. These shocks have compounded each other and caused the current spike in inflation. Price pressures have broadened as firms have sought to pass higher costs on to consumers as the economy reopened.

As a result, the ECB has accelerated the adjustment of monetary policy to keep inflation expectations anchored at levels consistent with its target. Across the last three Governing Council meetings, we have increased our interest rates by 200 basis points. This is the fastest rate hike in the ECB's history.

Looking ahead, the medium-term inflation outlook presents clear upside risks in a general context of extraordinary uncertainty about the future evolution of the European economy.

Today I will argue that, at present, the direction of monetary policy is clear. A further policy adjustment is warranted in order to keep inflation expectations anchored and stave off second-round effects. However, the calibration of our stance should not rely on a one-sided view of risks − especially as we continue normalising our monetary policy in a highly uncertain economic environment. And it should remain focused on medium-term inflationary developments.

We need to bring inflation back to our 2% target as soon as possible, but not sooner.

We might otherwise create unintended effects, achieving little reduction of inflation in the short term, but causing excessive market volatility and a protracted economic slowdown beyond what is necessary to stabilise inflation in the medium term.

Implementing the correct calibration of monetary policy will be challenging. We will need to carefully consider the resilience of our economy, the implications of global monetary spillovers, and emerging threats to financial stability.