(AGENPARL) – sab 11 febbraio 2023 Si invia in allegato il testo dell’intervento del Governatore Ignazio Visco ‘Monetary policy and the return of inflation’ tenuto oggi al Warwick Economics Summit.
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Testo Allegato: In�ation is back. After at least three decades of moderate-to-very moderate consumer price
changes in advanced economies, in�ation has returned to levels that are severely a�ecting
the lives of households and �rms, their decisions to consume and to save, to work and
to invest. Last year, average in�ation for the world economy was almost 9 per cent, more
than 7 per cent in advanced countries and almost 10 per cent in emerging and developing
economies. During the year it peaked at between 9 and 11 per cent in the United States,
the euro area and the United Kingdom, well above the targets of central banks (�g. 1).
In this lecture, I will mainly consider the recent developments of in�ation in the euro area
The high in�ation that we are observing is by no means a new phenomenon, although
perhaps one that had been increasingly considered a phenomenon of the past. Indeed,
and the early 1980s. A close look at the dynamics of in�ation since 1970 suggests a
The years of high in�ation
. The 1970s and 1980s were characterised by two oil shocks,
which pushed consumer price in�ation above 20 per cent in countries like the United
Kingdom and Italy, and to 15 per cent in the United States. To make things worse,
following the spikes due to higher oil prices (initially linked to the Yom Kippur war in
1973 and subsequently as a result of the Iranian revolution in 1979), and notwithstanding
some key di�erences in its manifestation across countries, in�ation turned out to be very
persistent. In Italy and the United Kingdom, for example, high in�ation lasted until the
counter-shock of 1986;
in the United States, consumer price growth remained above
In 1986, when Saudi Arabia decided to increase production to raise its market share, oil prices collapsed returning to
Monetary policy and the return of in�ation*
I wish to thank the organisers of the Warwick Economics Summit 2023 for their invitation and for setting up an
impressive programme and Avinash Persaud who kindly asked me to deliver the Bishnodat Persaud Lecture. I am also
5 per cent until what became to be known as the “Volcker disin�ation” brought it back
under control, by means of a very restrictive monetary policy that caused a double-dip
recession in 1981-83 and a large surge in unemployment. Where in�ation lasted longest,
multiple factors caused it to persist, including high wage growth, often spurred by
explicit or implicit indexation mechanisms, which gave rise to wage-price spirals; strongly
expansionary �scal policies, in many cases already taking place before the two shocks
had occurred; the scarce attention paid to (the anchoring of) in�ation expectations; and
The Great Moderation
. In the 1990s and until the Global Financial Crisis of 2007-08 the
picture changed substantially. In advanced countries, the lessons learned in previous
years led to an increased autonomy granted to central banks and to closer attention paid
to in�ation expectations and wage dynamics within the framework of (�exible) in�ation
Even more importantly, globalisation and the strong progress in information
and communication technologies (the “ICT revolution”) favoured a solid economic
expansion in a low in�ation environment. Economic growth was, of course, not always
not all countries managed to take full advantage of these changes,
and, most
importantly, bene�ts were not equally shared among households, with many left behind
without adequate safety nets; yet, in�ation overall was moderate (hence the label of
The Great Recession and its legacy
. From 2008 to 2019, �rst the global �nancial crisis
and then the euro area sovereign debt crisis triggered strong �nancial and economic
turbulence and intense disin�ationary pressures. Negative in�ation rates were observed,
for the �rst time in many years, both in the United States and in the euro area. The decline
in real interest rates seemed unstoppable and many observers put forward the possibility
of a new phase of secular stagnation.
Central banks responded by implementing a series
of non-standard monetary measures, the most well-known being quantitative easing
(QE), that is the massive purchase of securities in the open market to maintain favourable
�nancing conditions across the whole term structure of nominal interest rates and spur
The return of in�ation
. The last three years have seen the arrival of a new shock and the
return of an older one. In early 2020, the outbreak and spread of the Covid-19 pandemic
shook the world economy. Many countries recorded a sharp and sudden collapse of
GDP and employment, as a consequence of both the unprecedented implementation
of “lockdown measures” to contain infections and the deep surge in uncertainty that
For a recent and detailed description of those years as well as of the following periods see Bernanke (2022) and the
In Europe, for example, a series of di�culties, including the legacies of the high in�ation period and the consequences
of the reuni�cation of Germany, led to the 1992-93 crisis of the European Monetary System and to a deep recession
Germany and Italy, among others, lagged behind in terms of growth of both productivity and GDP, even if the former
During those years the debate was initiated by Summers (2013, 2014), who resurrected and adapted the theory of
secular stagnation �rst put forward by Hansen (1938). For a thorough discussion see also Pagano and Sbracia (2018).
a�ected households’ and businesses’ saving and investment decisions. The response of
economic policies was equally swift and extraordinary, aimed at strengthening health
systems and supporting households and businesses. When the pandemic waves seemed
to become less critical, in part thanks to the success of vaccination campaigns, during 2021
energy prices started to increase. They began accelerating mid-year, reaching extremely
high levels for natural gas in Europe, where it was mostly imported from Russia. This
phenomenon gained in intensity and persistence with Russia’s invasion of Ukraine, and
Even though in�ation is currently a�ecting many economies in an apparently similar
manner, its underlying sources are di�erent across countries, especially so if we compare
First, while �scal policies were expansionary everywhere during the acute phase of the
pandemic, measures in the United States were especially bold: the public debt-to-GDP
ratio rose by 25 percentage points in 2020-21, to over 130 per cent. In the euro area,
instead, the increase was limited to 15 percentage points, to slightly less than 100 per
cent, despite a much deeper decline of nominal GDP in 2020 (by 4.8 per cent, against
2.2) and a slower recovery in 2021 (7.5 versus 10.1 per cent). The exceptional support
provided to US households is particularly evident when comparing the dynamics of GDP
and disposable income (�g. 2): in 2020, just as the former recorded its sharpest collapse in
real terms in the entire post-World War II period (-3.4 per cent), real disposable personal
income grew by over 6 per cent, its largest rise since the mid-1980s. In the euro area,
instead, household real disposable income declined, even though by a smaller extent
Second, the di�erent dynamics of household disposable income across the two
economic areas translated into very diverse e�ects on demand. In the US, GDP returned
to its pre
crisis trend at the end of 2021, but aggregate data hid an elevated degree of
heterogeneity between sectors: while demand in the service sector was restrained by
pandemic-related factors, the goods sector increasingly showed signs of overheating
3). In the spring of 2021, for example, personal consumption expenditure in the
durable goods sector was already more than 30 per cent higher than its pre-crisis level.
The fast recovery in US demand, in a phase in which supply elsewhere was still constrained
due to the pandemic waves, caused bottlenecks in the global value chains to drove up
the prices of intermediate goods everywhere. In the euro area, demand for both goods
Third, the labour market appears to be much tighter in the United States than in the
euro area. The US unemployment rate still stands at just 3.4 per cent, a value last seen
only in the late 1960s and about half the level of the euro area (6.6 per cent). More
importantly, the di�erence between the number of vacancies in the US non-farm sector
and the number of people who are unemployed is, today, over 5 million, i.e. there are
many more jobs available than there are people looking for them, while in the euro
area the opposite is true, with the number of unemployed exceeding the number of job
vacancies by about 6 million. Unsurprisingly, the annual change of US nominal wages
(measured by the employment cost index) surpassed 4 per cent as early as in the third
quarter of 2021, approached 6 per cent in 2022, and today still stands above 5 per cent, a
level that is di�cult to reconcile with an in�ation target of 2 per cent (�g. 4). In the euro
area, on the other hand, in spite of current requests for sizeable wage increases in some
countries, wage growth has so far remained moderate, around 3 per cent, and there are
Fourth, the energy shock had a very di�erent role on both sides of the Atlantic. Since the
second half of 2020, oil prices rose gradually in both the United States and the euro area.
The price of the natural gas delivered in the United States increased much more sharply,
rising from around $10 per megawatt hour before the pandemic to a peak of over $30
last summer, before sliding back below $10 (�g. 5). However, it was the price of the
natural gas delivered in Europe that recorded the most extraordinary dynamics, dwar�ng
even the 1973 oil price increase (which itself had increased four-fold): from slightly above
€10 per megawatt hour in early 2020, it rocketed to €180 before the war, soaring to a
peak of €350 last summer and then stabilising at around €60 over the past few weeks.
further major problem then emerged, i.e. the extreme volatility of gas prices, the result
of a “bullwhip e�ect”, which is the response of demand to uncertain supply, consisting of
As a result of these dynamics, US consumer price in�ation increased from below 2 per
cent in February 2021 to a peak of over 9 per cent last June (�g. 6). Core in�ation (i.e. net
of energy and food products) took the lion’s share of this increase, peaking at almost 7
per cent last year. In the euro area, on the other hand, the increase in the price of food
(another consequence of the war in Ukraine) and energy was responsible for the largest
share of the rise in headline in�ation, with energy costs increasing by about 40 per cent
since last spring. Considering the combination of direct and indirect e�ects, in 2022
However, when discussing the high level of headline in�ation reached within the euro
area, some commentators have paid less attention to the size and persistence of the
energy shock, instead pointing the �nger at the supposed delays of the central bank in
exiting from QE and initiating monetary tightening.
Critics of this hypothetical mistake
have also highlighted the errors in the in�ation projections made by the ECB/Eurosystem
sta� in 2022 (�g. 7). The forecast errors in predicting consumer price changes during
last year were indeed sizeable and much larger than those observed in the past.
Some
have even argued that these large errors call into question the very credibility of the
ECB, although other international institutions and private forecasters have made similarly
From pre-pandemic levels around $60 per barrel, oil prices in the US and the euro area, as measured by the prices,
respectively, of the blends West Texas Intermediate and Brent rose at similar rates to over $80 in October 2021,
For the projections one-quarter (four-quarters) ahead, the forecast errors made in 2022 were, on average, �ve (seven)
While the observed size of the errors may understandably cast doubt on the reliability
of the models used for the projections, our analyses for Italy indicate that the e�ects of
energy prices – the most important exogenous variables in the forecasting model, whose
changes are usually inferred from the market price of futures contracts – explain, directly
and indirectly (i.e. via their e�ects on production costs), 70 per cent of the overall error
made in forecasting in�ation in 2022.
This share rises to 80 per cent when the e�ects
of food prices, the other volatile component of the consumer price index, are also taken
into account. Critics also forget that, in June 2021, the euro area headline in�ation was
still below 2 per cent and the core in�ation below 1 per cent: therefore, at the time, the
ECB Governing Council was still concentrating on how to increase in�ation durably, in the
These results suggest that, although all models should be (and are) subject to continuous
checks and improvements, the functioning of the economy has not changed dramatically
over the last year. They do draw our attention, however, to the quality of the forecasts used
as inputs. Undoubtedly the e�ects of supply bottlenecks, although much less signi�cant
than in the United States, were underestimated. The key problem, however, has been
the generalised underestimation of the recent geopolitical tensions. The sharp drop in
gas supplies from Russia observed since early 2021 was in fact (probably mistakenly)
attributed at �rst to the e�ects of a particularly cold winter in Russia and subsequently to
the political pressure from the Russian government to accelerate the opening of the Nord
Stream 2 gas pipeline. As a consequence, up until the end of 2021, futures quotations
had continued to factor in declining gas prices for the months following the 2021-22
winter. The Russian invasion of Ukraine a year ago has, instead, dramatically changed this
picture, triggering a sharp rise in volatility and pushing both current and expected gas
As in�ation had started to show worrying signals, at the end of 2021 the ECB Governing
Council began the process of monetary normalisation, announcing the reduction of net
purchases under its quantitative easing programmes. In the early part of last year, the
process gained speed, avoiding, however, the potentially dangerous cli�-e�ects of too
sharp a drop, not least in view of the major uncertainty caused by the Russian invasion of
Ukraine. It was completed on the 1st of July. A few weeks later, we started raising the key
o�cial interest rates by a signi�cant size, with the aim of frontloading the exit from their
Important steps forward have already been taken. Following last week’s monetary policy
decision, the overall increase of o�cial rates since July has reached 300 basis points and
has been fully transmitted to market interest rates. Since the start of the reduction of
monetary accommodation, one-year risk-free rates (measured by overnight index swaps)
Focusing on the projections formulated, for 2022, by the Bank of Italy sta� in December 2021, the energy component
of the harmonized consumer price index (net of the impact of exchange rates) accounts directly for about 60 per cent
of the error; the indirect e�ect, computed by simulating the response of the non
energy component to the observed
have picked up from negative levels to 3.4 per cent, while ten-year rates have increased
from barely positive values to 2.7 per cent. In real terms, using the in�ation-linked swap
(ILS) as a de�ator, interest rates currently stand at about 0.9 and 0.3 per cent respectively,
Another look at the role of supply and demand factors and a �rst measure of the e�ects
of monetary tightening can be obtained through a quanti�cation of the structural
drivers of euro area and US in�ation expectations, as measured by ILSs, obtained by
breaking down their daily �uctuations into domestic and global shocks (�g. 9).
Leaving
the technicalities aside, results show that, since the start of the war in Ukraine, in�ation
expectations (5-year ILS) in the euro area increased mostly in response to supply shocks;
the much smaller contribution of demand shocks rose progressively over the course
of 2022, re�ecting improved business cycle conditions. Results also document strong
spillover e�ects of US monetary policy on euro area in�ation expectations since the
second half of 2022 and initial signs that the ECB’s monetary policy tightening is having
the desired soothing e�ects on the economy. In the United States, on the other hand,
in�ation expectations had been steadily sustained by domestic demand until the end of
Other preliminary signs of the success of the ECB monetary strategy can be found by
looking at headline in�ation, which came down from its peak of 10.6 per cent in October
2022 to 8.5 per cent in January 2023, although the core component has remained steady
at 5.2 per cent, owing to the usual lags in the pass-through of increased energy prices.
a 3-month annualised basis, which o�ers the most faithful representation of the
impulses that have been predominantly driving in�ation recently, the deceleration of
Given the previous historical excursus, and despite the current encouraging signs around
the in�ation situation, we may wonder whether the euro area will experience the long
persistence of in�ation observed in many countries during the 1970s. I believe that this is
very unlikely, not only because of substantial improvements in monetary policymaking,
but also and above all because of the numerous structural changes that have taken place
First, the euro area today is well integrated into a global economic system which certainly
has a greater capacity to absorb in�ationary shocks through positive technological
Second, in the 1970s, the oil shocks were preceded and followed by a substantial instability
of exchange rates that, for countries like Italy and the United Kingdom, caused large rises
in imported in�ation. In the euro area today, however, this is much more limited by the
Hoynck and Rossi (2023), in particular, decompose the �uctuations of index-linked swaps for both the euro area and
the United States by means of a Bayesian VAR model disentangling the e�ects of seven shocks: supply, demand and
Key changes have also taken place in product and labour markets. In most countries,
such as Italy, following the negative experience of the wage-price spirals of the 1970s and
1980s, automatic indexation to previous price changes has been completely superseded.
For the euro area as a whole, the share of wages and salaries directly linked to in�ation
The framework within which monetary policy is conducted today has also changed
dramatically. Indeed, the ECB has a �rm mandate to preserve price stability and acts
accordingly. Monetary policy is transparent in its objectives and is credible, as is also
shown by the resilience of in�ation expectations. The context in which �scal policies
operate has also changed and nowadays, it would be unthinkable to maintain excessive
and prolonged �scal de�cit as it occurred, for example, in Italy during the 1970s and
After 25 years of low and stable in�ation, many observers have questioned the connection
between money and prices as well as that between in�ation and real economic activity.
This includes attempts to protect labour incomes and accumulated savings from the
loss in purchasing power generated by the energy shock, giving rise to “second-round”
On the �rst issue, the persistence of low in�ation during the 2010s, despite the extensive
liquidity created by central banks, may seem at odds with Milton Friedman’s famous
quote that “in�ation is always and everywhere a monetary phenomenon”. Indeed, “too
much money chasing too few goods” did not result in too much in�ation during those
Clearly, it must be acknowledged that Friedman’s words, besides being a statement on
the long-run neutrality of money, can be interpreted either as an innocuous truism or as
a causal relation between money supply and the level of prices that may hold, albeit with
variable lags, on horizons that are not necessarily long. Some say that the breadth and
persistence of the in�ationary consequences of the energy shock may have found fertile
ground in the abundant liquidity created before and after the pandemic. According to
this view, this may have resulted in a fully-�edged cumulative increase in the general level
of prices, spurring persistent in�ation, rather than being limited to a change of relative
prices. In any case, the crucial point is what will happen next. I see no compelling reasons
for in�ation not to return to target, notwithstanding the still abundant (and excessive)
liquidity present in the economic system. The latter will be gradually reduced through the
actions of monetary policy. At the same time, it will be crucial to consider how society at
The issue has been widely investigated in recent times. Among others, Borio, Hofmann and Zakrajšek (2023) �nd
that the strength of the link between money growth and in�ation depends on the in�ation regime and, namely, it
is one
to-one when in�ation is high, while virtually non-existent when it is low. In a similar vein, in Cadamuro and
Papadia (2021) monetary aggregates are only relevant for in�ation in unsettled monetary and in�ationary conditions.
With respect to the second issue, let us remember that the debate on the �attening of
the Phillips curve is in full swing. There is some evidence of a signi�cant reduction in the
slope of the curve compared with estimates relating to the second half of the last century,
although not to levels that would result in a complete disconnect.
The drop in the slope
might be linked to the structural changes discussed above, and especially to the wage
bargaining process and to the pricing behaviour of �rms in globally integrated markets.
Whatever the underlying reason, if the unemployment and the output gaps have a smaller
e�ect on in�ation, preserving price stability may have to hinge strongly on maintaining
well-anchored in�ation expectations. Following a supply shock, in particular, expectations
that remain �rmly anchored to the in�ation target may succeed in containing wage
growth, helping to bring in�ation back to the central bank target, with a limited impact
However, we may observe that, after a substantial hit to their purchasing power, such as
the one generated by the extreme hike in energy prices, wage earners may �rst attempt
to catch up with the increase in the overall consumer price level. This would re�ect
both the direct and the indirect e�ects of the energy shock, the former on the cost of
related goods and services purchased by households, the second resulting from
the pass-through of higher energy costs, �rst to the producer and then to the retail
In such a situation, the organisation and results of the bargaining process between labour
and �rms will clearly be crucial. In several countries in the 1970s and 1980s, formal and
de facto
mechanisms of price indexation were at work. This helped to propagate in�ation
As I was, at the time, involved in econometric modelling at the Bank of Italy, paying
special attention to the e�ects of price indexation and in�ation expectations, I would just
like to recall the main results of our investigations. Basically, changes in unemployment
appeared to have a signi�cant, even if not exceptional, impact on nominal wages,
though a permanent trade-o� between unemployment and wage in�ation was ruled
out by the data. Expected in�ation only in�uenced wage changes in the short term, but
wages caught up quite rapidly with respect to previous errors in anticipating in�ation.
Eventually, all that mattered were past actual price changes. As this took place with rather
short lags and with producer prices marking up on unit labour costs – while re�ecting the
pass-through of the increase in the prices of imported production inputs due to negative
supply shocks and exchange rate depreciations – a prolonged wage-price spiral was a
rather obvious consequence, calling for a strong and, at times intricate, monetary policy
See, for example, Blanchard, Cerutti and Summers (2015), Blanchard (2016), Hazell et al. (2022) and Leduc and Wilson
See, among others, Del Negro et al. (2020) and Ratner and Sim (2022). For the case of Italy, some recent empirical
studies points to either increased strategic complementarity in price setting, due in turn to higher sensitivity of
demand elasticity to prices (Riggi and Santoro, 2015) or to the weakening of workers’ bargaining power (Lombardi,
The many changes that took place after those years of high in�ation included a general
withdrawal of formal indexation mechanisms. In the bargaining process, more attention
was possibly paid to the links between real wages and productivity, while nominal wages,
rather than looking at past in�ation, tended to be evaluated in terms of new, much more
moderate, in�ation trends. This led to the consideration that, in order to maintain this
moderation, it would be crucial to keep short-to-medium term in�ation expectations
under check. The �rm anchoring of longer-term expectations was a clear indicator of the
The situation that we are currently in is consistent with this picture. In the euro area,
short-term in�ation expectations derived from �nancial market prices are falling sharply.
In�ation-linked swap rates indicate that the expected in�ation rate twelve months
ahead is 2.4 per cent (�g. 11). At the same time, the initial signs of a decline in in�ation
On the other hand, longer-term expectations, net of risk premia, remain at levels consistent
with our 2 per cent price stability target, and tail-risks of excessive in�ation are gradually
dissipating (�g. 12).
The anchoring of in�ation expectations is also supported by the
results of the January ECB surveys of analysts. The credibility that the ECB has gained over
time has not been lost and is currently paying o�. However, we may ask whether this will
be enough in light of the substantial losses of purchasing power due to the energy shock,
which, as I have said, has been extremely violent in Europe, especially so for the price of
the natural gas imported from Russia. In short, the question now is what can be done to
avoid a return to the old model of catching up with those losses and propagating them
through second round e�ects and wage-price spirals (though certainly mitigated today
There is no question that the restriction of the euro area monetary stance must continue
to ensure that a temporary increase in in�ation caused by a supply shock does not
become a more persistent phenomenon sustained by demand factors. There is also high
uncertainty, not only over the global economic picture, but especially over geopolitical
developments. These have highly signi�cant consequences for the evolution of energy
prices, currently back at considerably lower levels than the peaks observed last year
(and also much lower than the cap on natural gas prices unilaterally established by the
European Union in December). These levels are re�ected in the current mood of �nancial
markets and the substantial lowering of short-term in�ation expectations. Yet we have
seen how volatile gas prices have been and it is still extremely di�cult to assess to what
extent the dramatic con�ict in Ukraine will bear on the euro area economy. Following
the ECB Governing Council’s latest decision, the pace of any further rate hike will then
continue to be decided on the basis of incoming data and their impact on the in�ation
It will also remain essential to continue balancing the risk of a too gradual recalibration,
which could cause in�ation to become entrenched in expectations and in wage
processes, with that of an excessive tightening, which would result in signi�cant
repercussions for economic activity, �nancial stability and, ultimately, medium-term price
developments. In line with our symmetrical price stability objective, equal weight should
be given to both risks. In particular, I am concerned about statements that seem to give
It is true that in�ation is still currently above our target, and especially so if we look at
various measures of core or underlying in�ation, and I do understand that it would come
at a cost for the economy if this led to the need for a stronger and more prolonged
restriction of monetary policy. However, the costs linked to the risk of doing too much
must not be considered less important, as we have learned from the experience in the
aftermath of the great �nancial crisis.
Nor must we ignore the fact that, if the consequence
of doing too much were to be an overshooting below our target, nonlinear ampli�cations
stemming from �rms’ balance sheets could start to bite. Today, disin�ation is obviously
needed, but given the levels of private and public debts that prevail in the euro area, we
must be careful to avoid engineering an unnecessary and excessive rise in real interest
rates. Indeed, I am convinced that the credibility of our actions is preserved not by �exing
our muscles in the face of in�ation, but by continually showing wisdom and balance. To
this end, careful quantitative evaluations of the risks I just mentioned and their e�ects is
On the same note, I do not believe that a recession is inevitable for reducing in�ation.
Recent developments in the euro area and in the United States as well as surveys and
market expectations are comforting in this perspective, as in�ation is predicted to decline
rapidly to 2 per cent in the context of a temporary slowdown. Communicating a strong
commitment to bringing in�ation down to target in a speedy manner is fundamental, but
doing so by minimising the costs for the real economy is not any less important. In fact,
not only is the ECB required by the Maastricht Treaty to contribute, without prejudice to
price stability, to the achievement of the wider objectives of the European Union, but also
the social consequences of our actions, and the political reactions, including those on the
�scal front that could result in further pressures on public debts, should not be ignored.
All this, of course, without any concession to instances of “�scal dominance”, in the spirit
A cautious approach is also advisable due to a series of considerations. The �rst is
related to the high level of economic uncertainty and the Brainard principle, which states
that when the central bank is uncertain about the e�ects of its actions, it should move
An
exception to this principle is in the case of substantial uncertainty
around the persistence of in�ation. More recent studies, in fact, suggest that when
persistence is high, a strong monetary reaction may be required,
so as to avoid high
price growth becoming entrenched in agents’ mind-sets. While this possibility should
be carefully monitored, the most recent data on market- and survey-based in�ation
expectations – including their fall at short horizons and their further declining pro�le
may call into question, at least temporarily, the persistence of in�ation in the euro area
at the current high levels, reinforcing the arguments in favour of gradual monetary
The second concerns the “long and variable lags” of the monetary transmission process.
Credit dynamics are especially relevant in this respect. On a 3-month (annualised) basis,
the growth of loans to �rms in the euro area was virtually nil in December (0.3 per cent)
from an almost double-digit expansion in October (9.8 per cent and 4.5 in November).
Although this deceleration is the natural (and desired) consequence of monetary
normalisation, both its size and speed require us to be cautious in our decisions on the
magnitude and time distribution of interest rate hikes. This observation is all the more
relevant when taking into account the fact that credit growth is negative in real terms and
that the additional tightening in credit conditions signalled by the Bank Lending Survey
The potential risks to �nancial stability also require a good dose of caution. The
unprecedented coordinated rises in o�cial rates around the world may create spillover
e�ects that are di�cult to quantify but may not be negligible, as I have previously
suggested. Financial instability risks are particularly relevant in the Economic and
Monetary Union, whose incomplete architecture – especially its decentralised �scal policy
and the delays in completing the banking and the capital markets unions – exposes it to
a possible fragmentation of �nancial markets along national borders. For this reason, the
Governing Council will continue to exploit the �exibility in its asset purchase programme
related to the pandemic emergency and stands ready to resort to its new Transmission
Protection Instrument, to prevent �nancial markets tensions from counteracting any
Finally, as I have mentioned, in the current uncertain environment, models and forecasts
should necessarily be taken
cum grano salis
, in particular when determining the
“terminal” level of key interest rates. This does not mean that quantitative assessments
cannot be made; on the contrary, they remain very useful for estimating the e�ects of
rate increases on aggregate demand and changes in the costs and prices of goods and
services. However, their insights have to be assessed together with the information that
will gradually become available on in�ation expectations and on the evolution of labour
During the pandemic, central banks’ interventions, as well as �scal measures, have been
crucial in supporting households and businesses and alleviating tensions in �nancial
markets. The size of the interventions may be up for debate, and in hindsight may have
been excessive in some economies, or should perhaps have been halted somewhat earlier.
However, central banks and �scal authorities have been key in preventing a temporary
crisis from triggering permanent destructions on the supply side as well as creating
We are now confronted with a new critical situation and the revival of a character that
many thought had left the scene, in the new context of globalised markets, continuous
technological progress and independent central banks. Non-negligible in�ation is back,
a result of both the recovery of �nal demand having met bottlenecks in supply and
of the unprecedented skyrocketing of energy prices, caused by worrying geopolitical
developments culminating in the dramatic aggression of Ukraine. The former factor has
been especially visible in the US economy; the latter has played a crucial role in Europe,
where the dependence on imports of natural gas from Russia was particularly high. Both
have resulted in a tightening of monetary policy. In the euro area this has especially
intended to counter the likelihood of second-round e�ects following such a major supply
It may still be too early to conclude that there is a tendency for relatively high in�ation to
become entrenched in wage negotiations and in the formation of individual producer and
consumer prices. Indeed, on the whole, in�ation expectations seem to have remained well
anchored, and central banks stand fully committed to delivering price stability. However,
the experience of the 1970s and 1980s suggests that a straightforward achievement of
this goal also hinges on �rms’ business strategies, responsible agreements on labour
costs and prudent �scal policies on the demand side (but su�ciently supportive of
The energy shock has, in fact, caused a change in the terms of trade, a “tax” on the euro
area economy that cannot be returned to sender and that cannot be eliminated through
what would become a fruitless race between prices and wages, a race to which monetary
policy would readily react, nor through excessive and permanent increases in public
debt, which would put the burden on the younger and future generations. To
up for the loss of purchasing power, the only solution could be to rely on sustained
productivity growth, although targeted and temporary �scal measures to alleviate the
burden on more severely hit households and �rms should obviously not be excluded. If
the current reduction in headline in�ation, re�ecting the return of gas prices in Europe to
more moderate levels, is followed by a similar, although lagged tendency in underlying
in�ation, the supply shock will have proved to have been temporary, albeit longer lasting
than expected, also as a further negative result of the dramatic events in Ukraine. But this
I have argued that the extreme uncertainty we are living through today must inevitably
imply, for the time being, a continuing tightening of monetary policy to avoid the
possibility of relevant second-round e�ects reverberating across the euro area. However,
this same uncertainty also suggests we move gradually and prudently, with o�cial rates
continuing to rise in a progressive but measured way, on the basis of the incoming data
and their use in the assessment of the in�ation outlook. I also believe that we should be
very careful in providing a quantitative evaluation of the e�ects of preferring one or the
other of the two opposite risks of doing too much or too little. It seems to me that there is
no reason
a priori
to prefer erring on the one side or the other. The monetary framework
is indeed currently centred around the symmetric target of a 2 per cent headline in�ation
If signs of a wage-price spiral were to appear and in�ation expectations were to become
insu�ciently anchored, further and signi�cant tightening of monetary policy would
certainly be justi�ed. I do not think, however, that we should rely solely on monetary policy.
contribution of all policies, including perhaps some new versions of old
income policy recipes, could substantially help to prevent demand from overheating and
in�ation from declining more slowly. There is signi�cant evidence that this worked well
in some countries at some crucial stage. In Italy, it came at the end of a long process
that began in the early 1980s when Carlo Azeglio Ciampi, then governor of the Bank of
Italy, emphatically remarked that “Central banks autonomy, reinforcement of budgetary
procedures and a code for collective bargaining are a prerequisite for monetary stability”.
Bean C. (2003), “Asset Prices, Financial Imbalances and Monetary Policy: Are In�ation
Bernanke B. (2022),
21st Century Monetary Policy: The Federal Reserve from the Great
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American Economic Review
Blanchard O., E. Cerutti and L. Summers (2015), “In�ation and Activity: Two Explorations
Borio C., B. Hofmann and E. Zakrajšek (2023), “Does Money Growth Help Explain the
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, 2022-028, Board of Governors of the Federal
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SUERF Policy
Figure 1
(monthly data; annual percentage changes)
1970
1980
1990
2000
2010
2020
UK
EZ
IT
Source: Eurostat, Istat, UK Office for National Statistics and US Bureau of Labor Statistics.
Note: EZ denotes the euro area (changing composition after 1999 and weighted average of the 11 countries partecipating
Figure 2
Disposable income and GDP
(annual data; percentage changes)
disposable
income
GDP
disposable
income
GDP
2005
2010
2015
2020
Source: Eurostat and US Bureau of Economic Analysis.
Figure 3
Demand in the goods and services sectors
(monthly and quarterly data; indices: Jan. 2020 / 2019 Q4 = 100)
Goods sector
Services sector
2020
2021
2020
2021
2020
2021
2020
2021
Source: US Bureau of Economic Analysis and estimates based on Eurostat data.
Note: dashed lines show pre-pandemic trends.
Figure 4
Nominal wage growth
(quarterly data; annual percentage changes)
United States
2007
2012
2017
2022
Source: ECB and US Bureau of Labor Statistics.
Figure 5
Natural gas prices
(daily data)
United States (dollars)
2021
2022
Source: Renitiv.
Note: Title Transfer Facility (TTF) quotations for European gas and Henry Hub for US gas.
Figure 6
Headline and core ination
(monthly data; annual percentage changes)
headline
core
2020
2021
2022
headline
core
2020
2021
2022
Source: Eurostat and US Bureau of Labor Statistics.
Figure 7
ECB/Eurosystem projections errors for euro area headline ination
(percentage points)
1 quarter ahead projection errors
4 quarters ahead projection errors
2007
2011
2015
2019
2023
2007
2011
2015
2019
2023
Source: Bank of Italy and ECB.
Note: dashed lines denote an interval around zero of plus/minus two standard deviations of projection errors realized in
2003-2020; latest observation: 2022 Q4.
Figure 8
Real interest rates in the euro area
Term structure, spot rates
Term structure, 1-year forward rates
mid2022
9 February 2023
mid2022
9 February 2023
Source: based on Bloomberg and Renitiv data.
Note: nominal OIS interest rates deated by the corresponding ination
linked swap rates.
Figure 9
Drivers of changes in ination expectations
(daily; cumulative percentage changes)
euro area
United States
31/01/22
28/02/22
28/03/22
26/04/22
24/05/22
21/06/22
20/07/22
17/08/22
14/09/22
12/10/22
10/11/22
08/12/22
05/01/23
03/02/23
-1.6
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.
2
0.
4
0.
6
0.
8
1
1.
2
1.
4
6
31/01/22
28/02/22
28/03/22
26/04/22
24/05/22
21/06/22
20/07/22
17/08/22
14/09/22
12/10/22
10/11/22
08/12/22
05/01/23
03/02/23
-1.6
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.
2
0.
4
0.
6
0.
8
1
1.
2
1.
4
6
the US”, mimeo, Bank of Italy, Rome.
Note: 5-year ination swap rates.
Figure 10
(monthly data; 3-month annualised percentage changes)
2022
UK
EZ
Source: Eurostat, UK Office for National Statistics and US Bureau of Labor Statistics.
Note: EZ denotes the euro area.
Figure 11
(daily data; per cent)
10year
2021
2022
Source: Bloomberg.
Note: 1-year and 10-year ination-linked swap rates.
Figure 12
Ination tail risks in the euro area
(daily data; per cent)


Source: based on Bloomberg data.
Note: probabilities inferred from ination options; 0 (1) is the probability of ination being smaller than 0 (1) on
average in the next 5 years;�� 3 (4) is the probability of ination being larger than 3 (4) on average in the next 5 years;
50-days moving averages.