In the first place, inflation was fuelled by severe supply chain disruptions due to Covid and then by the shock to commodity prices as vaccines paved the way for the world’s economies to reopen simultaneously. As these factors began to recede, Russia’s invasion of Ukraine caused a rapid run-up in the prices of energy and commodities, including agricultural commodities. Today, the effects of these shocks on inflation have begun to fade. This winter, energy prices fell sharply, and global grain prices have headed downwards since February. But the nature of inflation has changed. In spreading to the wider economy, these shocks stoked internal inflation, as higher production costs prompted companies to pass the increases on to their selling prices. The effects of inflation also widened to include all goods and services. Accordingly, “underlying” inflation, i.e. excluding food and energy, has climbed to 4.6% in France and could prove more persistent than the headline number. Monetary policy can and must curb this more “domestic” and broad-based inflation. To do this, the Eurosystem has responded quickly and forcefully over the last year, hiking policy rates by 350 basis points to take the deposit facility rate from -0.5% to 3% between July 2022 and March 2023. Monetary policy has now entered into a “restrictive” territory, after reaching a neutral position at the end of last year, and has shifted to an “instrumentpiloting” approach based on three economic instrument dials: the outlook for headline inflation, underlying inflation and the proper transmission of monetary policy.

This could dent the capital and liquidity positions of banks and other financial intermediaries, thereby weakening their ability to channel funds to the real economy. If the financial system is weakened, the transmission of monetary policy is impaired, meaning that changes to the monetary policy stance will not be properly transmitted to the real economy. The third channel is via climate-related financial risks on the Eurosystem balance sheet. Rules regarding asset purchase programmes and the collateral framework will be revised to encourage counterparties to steer away from fossil fuels, speeding up the transition to net zero. The Eurosystem, which consists of the ECB and all the national central banks of the euro area – including the Central Bank of Malta - has taken steps towards integrating climate change considerations into its policies and operations. In fact climate features prominently in the review of the ECB’s monetary policy strategy that was finalised in July 2021. The ECB laid out three core objectives: (i)  managing and mitigating the financial risks associated with climate change and assessing its economic impact,  (ii)  promoting sustainable finance to support an orderly transition to a lowcarbon economy, and  (iii) sharing our expertise to foster wider changes in behaviour. Let me elaborate. 4  The Eurosystem will adjust its corporate bond holdings towards issuers with better climate performance. Better climate performance will be measured with reference to lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate-related disclosures.