Klaas Knot: Play defensively, but be ready to strike back: a gradual easing of monetary policy

It's great to be back at Analysis, and it's great to be back in Italy. As some of you may know, I've had a love affair with your country ever since my time as a student in Pavia, 34 years ago. Although I must say that it's also a bit of a relief to be away from the Netherlands for a few days. Because, well... this is more or less what my country looks like right now.

I love football, I really do. But this is a bit too much even for me. Thankfully, we always have monetary policy to talk about.

Of course, I realise that most of you are probably preoccupied by tonight's game against Spain. But please spare me your attention for just a few minutes. So let's kick off.

Two weeks ago the ECB decided to lower its policy rate by 25 basis points. 

The question everyone is asking: at what pace and up to what point will the ECB continue its descent from restrictive territory? How will our monetary policy evolve in the short and longer term?

The simple answer is that we're sticking to our data-dependent approach. The three criteria that we used when inflation was on the way up will remain relevant on the way down. They are: the inflation outlook in the light of incoming data; the dynamics of underlying inflation, and the strength of monetary policy transmission.

Let me go through these three criteria one by one.

First, the inflation outlook. Looking at our latest forecast, inflation is expected to reach our target of 2% by the end of next year. Forecast errors have also become smaller, which allows us to be more confident in our outlook. Moreover, inflation data show we are well underway in the disinflation process. Inflation has come down from a peak of over 10% to below 3% currently. That being said, the recent uptick in the May inflation figures reminds us that this process is bumpy and will remain so, at the least for the rest of this year.