Monetary Policy in a Post-Energy Shock Economy: Assessing Potential Implications
Quick Summary
Fabio Panetta on ECB Monetary Policy Stance in Post-Energy Shock Economy: In his speech at a London-based event, Fabio Panetta, Member of the Executive Board of the ECB discussed their response to the energy shock stemming from Russia’s aggression against Ukraine. Policies implemented by the ECB included raising interest rates by 300 basis points and reducing asset purchase program holdings by an average of €15 billion per month. However, incoming data suggests that supply shocks have started to reverse, leading to more balanced inflation outlook risks. As we advance, the ECB will need to assess these developments and further adjust their monetary policy accordingly.
Full Story – Monetary policy after the energy shock
Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an event organized by the Centre for European Reform, the Delegation of the European Union to the United Kingdom and the ECB Representative Office in London
London, 16 February 2023
It is a pleasure to be with you here in London today.
The energy shock stemming from Russia’s aggression against Ukraine has prolonged and aggravated a sequence of unprecedented supply shocks.[1] These shocks, combined with the reopening of the economy after the pandemic, have driven inflation in the euro area to persistently high levels.[2]
To prevent inflation from becoming entrenched, the ECB tightened its monetary policy stance decisively. We needed to avert second-round effects in the form of a de-anchoring of inflation expectations or a wage-price spiral.
We started to adjust our stance in December 2021[3]. Since July we have increased rates by 300 basis points. We have also started to normalize our balance sheet, which has shrunk by about €1 trillion since its peak. And from March we will reduce our asset purchase program holdings by an average of €15 billion per month[4].
After this pronounced tightening, we need to carefully reassess the medium-term outlook for inflation and the risks surrounding it. In this respect, risks to the inflation outlook are now more balanced than at the time of our projections in December.
The economic environment is changing. Supply shocks have started to reverse, with energy and…
