Fabio Panetta: Getting disinflation right

Speech by Mr Fabio Panetta, Member of the Executive Board of the European Central Bank, at the Bocconi University, Milan, 3 August 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

In recent years, the euro area has seen multiple supply shocks hitting the economy at the same time. These shocks have combined to create an inflationary shock of such magnitude and persistence that inflation risked becoming entrenched.

These adverse developments coincided with a phase of highly accommodative monetary policy, following a long period of fighting too-low inflation and the risks to price stability associated with the pandemic shock. To avoid exacerbating inflationary pressures by stimulating demand and to prevent the de-anchoring of inflation expectations, we rapidly normalised our monetary policy stance. We increased rates by a total of 425 basis points in the space of just 12 months.

In parallel, the end of net asset purchases and reinvestments under the asset purchase programme (APP), coupled with the repayment of our targeted longer-term refinancing operations, is making our balance sheet shrink considerably.

With policy rates now firmly in restrictive territory, setting and communicating the direction of monetary policy has become more complex. Our monetary policy stance needs to be calibrated in a way that brings inflation back to target in a timely manner while avoiding unnecessary harm to economic activity.