ECB Chief Economist Philip Lane said in a speech, “the Governing Council sees it as increasingly likely that inflation will stabilise at our two per cent target over the medium term”. Under this pathway, ‘the degree of monetary policy stimulus put in place to address the pre-pandemic challenge of persistent below-target inflation can be normalised in a gradual fashion towards a more neutral setting.”

“In current conditions, it is especially important to remain data-dependent and for optionality to be two-sided,” he said. “On the one side, we should ensure that our policy settings are adjusted if de-anchored inflation expectations, an intensification in catch-up wage dynamics or a persistent deterioration in supply capacity threaten to keep inflation above target in the medium term.”

“On the other side, we should also be fully prepared to appropriately revise our monetary policy settings if the energy price shock and the Russia-Ukraine war were to result in a significant deterioration in macroeconomic prospects and thereby weaken the medium-term inflation outlook.”

Full speech here.

ECB Governing Council member Gabriel Makhlouf said today, “as for the economic consequences of the war in Ukraine, it is too early to give a definitive view. It clearly represents a significant challenge to the outlook for inflation and growth and adds new uncertainty to what had started to become a less uncertain picture.”

“The war is likely to have a material impact on economic activity and inflation in the euro area. But in some countries, including Ireland, the effects will be more indirect than for others although that does not mean they will be insignificant,” he added.

ECB President Christine Lagarde said in a speech the economic impact of Ukraine war is a “supply shock” that ” simultaneously pushes up inflation and reduces growth.” Three main favors are likely to take inflation higher, including energy, food, and manufacturing bottlenecks.

The war also posses “significant risks” to growth, implying a loss of EUR 150B in the economy in one year. The conflict also “drain confidence” through at least two channels. Firstly, households become more pessimistic and cut back on spending. Secondly, business investment is likely to be affected.

As for ECB, Lagarde said the best way to navigate this uncertainty is to emphasize the “principles of optionality, gradualism and flexibility.” Optionality means if incoming data support that medium term inflation will not weaken after the end of net asset purchases, the APP will be concluded in Q3. But ECB also stand ready to revise the schedule for net asset purchases in terms of size and/or duration. Gradualism means the adjustments to interest rate will take place “some time” after end of net purchases and will be gradual. Flexibility means ECB will use the its toolkit to ensure policy is transmitted evenly across all parts of Eurozone.

Full speech here.