The effect of monetary policy must be transmitted to the entire euro area, writes the President of the European Central Bank.
Inflation is currently too fast. Russia’s war in Ukraine increases the prices of energy and agricultural products. Due to the pandemic, it has been difficult to obtain manufacturing materials, equipment and labor, which also accelerates inflation. Residents and companies in the euro area with relatively low incomes are particularly affected by the situation.
There are many factors behind the rise in prices that the central bank cannot influence. However, we can prevent the situation from prolonging – it would be a threat if prices started to rise in more and more industries and inflation was only expected to accelerate all the time. When the rise in both prices and wages calms down, inflation will not be able to gallop as it did in the past.
We therefore decided at Thursday’s ECB Council meeting to raise key interest rates in the euro area by 0.5 percentage points. Our deposit rate had been negative for eight years. The ECB Council is committed to returning the annual inflation rate to the two percent target in the medium term.
The interest rate hike was the first in more than ten years. However, it is only part of our activities to slow down inflation. In the background, we are decomposing a wide variety of exceptional measures that have been needed during the crisis. We started in December by announcing that we would stop making new bond purchases in the pandemic-related purchase program. The purchases helped the eurozone economy survive the coronavirus crisis. Last month, we stopped new purchases in the bond buying program launched in 2015, which was used to avoid deflation. A constant drop in the price level would have been just as harmful as rapid inflation.
Inflation will return to the two percent target.
Our actions signal to companies, workers and investors that the annual inflation rate will return to two percent in the medium term. The effect is already visible in interest rates across the euro area, which helps to stabilize the general price level.
We will continue raising interest rates until the inflation trend returns to our target. We know that, for example, war and energy price developments are now causing considerable uncertainty in Europe. The ECB Council constantly receives new information about how the economy reacts to challenges in the euro area and outside it, and schedules its actions according to the situation.
We take care of monetary policy in the monetary union of 19 countries – which will soon have 20 countries. Our monetary policy therefore affects the financial conditions of households and companies in 19 countries. However, we cannot slow down inflation throughout the euro area if the effect is transmitted to different countries in different ways. We have therefore created a new instrument to support the transmission of monetary policy. With it, monetary policy will remain common in the future so that prices remain stable in the medium term in the entire euro area.
The euro is the common currency of 340 million people. It is a stable currency, and we are committed to keeping it stable.
President of the European Central Bank
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