Summer Solstice Approaches

While the view from the 41st floor of the ECB building was beautifully sunny last week, the shadow cast by the conflict in the Middle East continues to darken.

We are operating in a highly volatile and unpredictable environment; as the stand-off drags on, energy prices remain both high and volatile.

It is becoming increasingly likely that we must prepare for a prolonged period of broad-based price increases coupled with visibly weaker growth across the eurozone.

We decided to keep policy unchanged – for now. We need more granular data to understand exactly how current events are affecting the economy.

There is naturally little we can do to offset inflation driven by large, external supply shocks immediately.

The rise to 3% in April was largely expected because of the energy shock. Further increases are likely to come in the near future.

We are carefully charting the way forward in a world which has become more uncertain but one-sided from a monetary policy perspective.

We must understand the broader impact of higher energy prices. They are bound to spread to the rest of the economy.

Supply chains are likely to come under pressure yet again. We need to understand how quickly this may happen and how large the effects could be.

Poorly designed government responses could easily add fuel to the inflationary fire.  Governments should ensure that fiscal responses are temporary and targeted. Otherwise, it is better if they do nothing.

Taking all this into account, we must update our assessment of how far we have already moved from our March baseline scenario.

In the meantime, financing conditions have already been tightening. This signals that the markets understand how we think and how we are going to react.

Short‑term inflation expectations have risen steeply, but movements in longer-term expectations have been small. The memory of the high inflation years is fresh but so is our success in guiding inflation back to target. We face the current challenges from the position of stability.

We are not committed to any fixed path, but we remain firm in our approach. On this basis, policy tightening in June is all but inevitable. It has been a part of our baseline since March and the events have, sadly, not surprised us in a positive way.

Our June forecast should tell us more about how far we have moved from our March baseline, the types and magnitude of risks we face in a more adverse setting. And, of course, what this means for our policy.