Policy tightening isn't over; inflation risks are here to stay

Due to persistent and broadening inflationary risks, we needed to continue our advance and deliver another substantial hike in our key interest rates in October.

There is a risk that inflation in Eurozone will remain higher for longer, and we stay above the target despite the expected drop in inflation over the next two years. This is not acceptable, and we need to act. Consistently. 

It won’t be easy. Risks of a recession in the Eurozone are growing, while financial markets face ongoing uncertainty and volatility. The good news is that the labor market remains resilient for now; we’ll see how long it lasts. 

The problem is that inflationary risks are spreading, and there’s a risk of them becoming entrenched. While the current inflation spike is primarily driven by energy and food prices, more and more elements are joining. 

Today, risks to inflation are clearly on the upside, and they are not negligible. Fiscal policy is slowly but surely joining the list of these risks. Compensatory measures by governments aimed to mitigate adverse impacts on households and the business sector are appropriate and irreplaceable. They must, however, be tailored, targeted, and temporary. 

The problem is that it’s not often the case; on the contrary. Flat-rate solutions carry considerable risks for the inflation outlook. We will see. 

That being said. It would be more than welcome should structural reforms designed to strengthen the resilience of the European economy would accompany these measures, including those that will enhance our energy independence. 

So, where are we now?

Yesterday’s decision lifted the deposit rate to 1.5 percent, a level we last saw in 2009 when Slovakia joined the Eurozone. It will go even higher in December and the first months of next year. 

Incoming data and indicators will determine the number of steps and their pace. 

There’s something I can say already today. We will cross the neutral rate (regardless of where anyone currently sees it) like a runaway train. We need to get monetary policy into the restrictive environment, at least for a certain period.