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Normalising monetary policy in non-normal times | ECB |

Following the acute phase of the pandemic, central banks in most advanced economies have started to withdraw stimulus as the recovery has progressed and inflationary pressures have emerged. In the jargon of central bankers, this process is often described as bringing about a "normalisation" of monetary policy.
We are not, however, in normal times.

Unlike some other advanced economies, the euro area is not facing a situation of excess domestic demand. As ECB President Christine Lagarde recently noted, "consumption and investment remain below their pre-crisis levels, and even further below their pre-crisis trends".

Instead, the euro area is confronted with a war on its doorstep that comes on top of a series of negative supply shocks generated abroad. These shocks - above all the increase in energy prices - are creating sizeable and persistent upward pressures on near-term inflation. But by hitting real incomes, confidence and ultimately domestic demand, these shocks could derail the post-pandemic recovery.

In other words, the very shocks that have led to a surge in inflation are also depressing output. As a result, the inflation path is starting from a much higher point but the medium-term inflation outlook is characterised by high uncertainty.

Euro zone inflation hits yet another record high as food and energy prices soar | CNBC |

'Sapere aude'

by Oui (Oui) on Tue May 31st, 2022 at 01:18:56 PM EST
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