ECB Financial Bulletin: Inflation will remain high

The war in Ukraine has had a serious impact on the Eurozone economy and has significantly increased uncertainty, the European Central Bank reiterates in its Financial Bulletin released today.

“The impact of the war on the economy will depend on the course of the conflict, the impact of the sanctions imposed and the possibility of further action,” the ECB said, warning that “inflation will remain high in the coming months, mainly due to the sharp rise.” energy costs “.

At the same time, the ECB emphasizes that it is ready to take any action necessary to safeguard financial stability and fulfill its mission.

In 2021 at a glance

The central bank also released the Annual Report for 2021. In its introductory message to the Report – which was finalized before the Russian invasion of Ukraine – ECB President Christine Lagarde points out that 2021 was the year in which The euro area has entered a more stable recovery from the pandemic crisis.

“The economy has recovered sharply and real GDP has grown by 5.3%, although growth slowed at the end of the year as a new pandemic wave due to the coronavirus’s Micron mutation led to the re-imposition of restrictive measures,” he said. The recovery was also accompanied by an increase in employment and the unemployment rate fell to an unprecedented low at the end of the year.

However, the recovery was marked by friction in the context of the rapid restart of the economy. Although the euro area recorded very low inflation in early 2021, supply constraints due to the pandemic, the recovery in global demand and the sharp rise in energy prices have led to a sharp rise in inflation. On average for the year, the inflation rate reached 2.6% in 2021, compared to just 0.3% in 2020.

The ECB completed its review of its monetary policy strategy in 2021. In this way, we updated our strategy taking into account new challenges and acquired tools for managing this complex environment. The Board of Directors set a simple and understandable target for inflation at 2% in the medium term. The target is symmetrical, in the sense that both the negative and positive deviations of inflation from this target are equally undesirable. The goal is also solid, as it was approved unanimously by the Board.

The Governing Council also agreed on how the ECB will fulfill its commitment to symmetry. In particular, when the economy operates close to the policy threshold, particularly strong or persistent monetary policy measures are needed to prevent negative deviations from the inflation target from consolidating. This new strategy was reflected in our adjusted interest rate guidance and guided the monetary policy decisions we made in response to economic developments in the second half of the year.

While the recovery remained fragile and inflation low, we provided plenty of monetary policy support to the economy to bring inflation closer to our target. As inflation began to rise, we showed patience and perseverance in the course of our policy, so as to avoid an early contractionary change in response to supply-side disruptions. We have adjusted the monthly rate of net securities purchases through the pandemic emergency purchase program (PEPP) according to the evolution of prospects and the evaluation of financing conditions.

In December, the Board of Directors decided that the progress of the economic recovery and the convergence of inflation towards our medium-term target allowed a gradual reduction of the monthly rate of securities purchases in the following quarters. He announced that the net purchases through the PEPP program will end in March 2022 and that the other securities purchase programs will be gradually reduced.

As part of its strategy review, the ECB has also published an ambitious action plan, along with a detailed roadmap to integrate climate change parameters into our monetary policy. Among other things, efforts are being made in the field of macroeconomic models and forecasts to better capture the effects of climate change, while developing new indicators for analyzing the risks associated with climate change. The ECB Climate Change Center, established in 2021, will play an important role in coordinating relevant actions within the bank. As of this year, the Annual Report includes a special chapter outlining the ECB’s actions and initiatives on sustainability.

The ECB has also made some significant changes in the field of communication. In July, the Governing Council introduced a new type of monetary policy statement that presents monetary policy decisions in a more comprehensible way. This new statement is complemented by an illustrated version of it, entitled “Our Monetary Policy Statement at a Glance”, which is addressed to the general public, explaining the ECB’s decisions in all official EU languages, in simple words and pictures.

Support for the euro is strong: 79% of eurozone respondents to the Eurobarometer poll, conducted in June-July 2021, are in favor of the single currency. However, the euro must be ready for the digital age. For this reason in 2021 the Board of Directors started the 24-month investigation phase in the framework of a project for the possible issuance of digital euros. At the same time, cash will continue to play an important role in our lives. In December, the ECB announced plans to redesign future euro banknotes. Citizens will also have a say in the planning process, while the selection of the final plans is expected to be made in 2024.

Changes in the euro are therefore expected in the coming years. But one thing will remain unshakable: the ECB’s commitment to a single currency and price stability. ”

See the Financial Bulletin and the Annual Report in the right column “Related Archives”