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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 deanchoring 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.

This is a fine line to walk, as the effects of monetary policy emerge with a lag. While our past decisions have already led to a material tightening in credit conditions and loan dynamics, their effects have yet to be felt in full across the real economy.

At the same time, inflation remains elevated. Even if it is now falling as the effects of adverse supply shocks begin to fade and weaker growth eases price pressures, it will still take some time to reach levels compatible with price stability.

In order to successfully complete the disinflation of the European economy, we need to flexibly adapt our policy to the evolving inflation outlook. In the current context where policy rates are around the level necessary to deliver medium-term price stability, I will argue that monetary policy may operate not just by increasing rates but also by keeping the prevailing level of policy rates for longer. In other words, persistence matters as much as level.

This raises challenges for steering our policy stance. I will argue that our data-dependent approach, underpinned by our firm commitment to returning inflation to its target, is equipped to navigate these intricacies.