Firms reacted by building up inventories and hoarding labour, fuelling inflationary pressures. The reopening of the economy after the pandemic gave a sudden boost to demand (Chart 1) at a time when supply disruptions had not yet been resolved, leading to persistent bottlenecks. For example, the unprecedented sequence of domestic and global shocks makes it difficult to distinguish supply-demand imbalances triggered by the pandemic and the energy crisis from persistent, self-sustained inflationary dynamics. Global shocks, their pass-through and their unwindingĪ major source of uncertainty surrounding both inflation and economic activity relates to the pass-through of global shocks and their unwinding. Over the past three years we have faced considerable uncertainty from both domestic and global shocks, complicating the policy diagnosis and increasing the risks of either underreacting or overreacting. And I will outline what this means for our monetary policy in the current environment. I will then turn to the policy response to these shocks and their spillovers across jurisdictions.
I will start by illustrating the global shocks and the uncertainty they create. But we should remain focused on our primary mandate of ensuring price stability in the euro area, without being overly conditioned by other jurisdictions. We need to maintain our disinflationary stance until we see convincing signs that inflation is returning to our target, in line with the “separation principle”: delivering the appropriate policy stance should not come at the cost of impairing its transmission.Īnd third: given the global nature of the shocks we are facing, we need to consider how they are transmitted across markets and economies as well as the potential spillovers from policies adopted abroad. The experience of other jurisdictions suggests that abrupt adjustments could make it more difficult for investors to adapt to evolving market conditions. In particular, we should continuously assess the combined effect of raising rates and reducing the size of our balance sheet. Second, we need to monitor the effects of our measures and the way our different instruments interact with each other. This way we can ensure that we calibrate our measures in the light of the incoming information. We should be guided by our reaction function, taking stock of inflation developments, underlying inflation dynamics and the strength of monetary policy transmission, also given the possible risks for the medium term outlook stemming from both the real economy and the financial sector. Three principles can help guide our monetary policy decisions in this context.įirst, given the prevailing uncertainty and the ground we have already covered in tightening our policy, we must remain fully data-dependent and avoid pre-committing to any specific policy path. We need to adapt our policies to the overlapping effects of the shocks, to geopolitical developments, to the risk of financial amplification and to spillovers from other jurisdictions. There are no simple solutions to these complex problems. Inevitably, we need to navigate between the risk of underreacting – which could prolong the inflationary effects of these shocks – and that of overreacting, which could turn volatility into instability. The resulting swings in activity and prices have presented policymakers with the challenge of identifying turning points in their underlying dynamics at a time of disruption in the economy and the financial sector. In just three years we have seen a pandemic, severe supply chain disruptions, a war, an energy crisis and now tensions in banking markets. We are still going through a sequence of global shocks that are disrupting economies around the world.
LIQUID WAR 6 HOW TO
Speech by Fabio Panetta, Member of the Executive Board of the ECB, at a panel on “Global shocks, policy spillovers and geo-strategic risks: how to coordinate policies” at The ECB and its Watchers XXIII Conference
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