The European Central Bank’s monetary policy Against the recent backdrop of high inflationary pressures, the European Central Bank (ECB) has continued with the normalisation of its monetary policy initiated last December. The Governing Council has explicitly expressed its willingness to maintain optionality, gradualism and flexibility in the conduct of monetary policy going forward. In the current climate of uncertainty, this is deemed necessary to allow us to respond to  incoming data to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability. Indeed, the war in Ukraine is increasing the short-term upward inflationary dynamics, adding to the pressures generated by rising energy prices, bottlenecks and the normalisation of demand. The intensification and prolongation of these short-term inflationary pressures make it more likely that second-round effects will emerge and, therefore, that the inflation dynamics will become entrenched in the medium term. However, the war is having an adverse effect on economic growth, which could potentially be significant, particularly in the short term, in a setting where euro area GDP remains below its potential level. Overall, the upside risks to the inflation outlook have intensified, particularly in the near term. Although various indicators of long-term inflation expectations drawn from financial markets and surveys of professional forecasters put inflation at around 2%, there are preliminary signs, which will have to be monitored carefully, of those indicators being revised to above-target levels. In step with the normalisation of monetary policy, net purchases under the pandemic emergency purchase programme (PEPP) were discontinued on 31 March.

The necessary coordination at national level must therefore be combined with mechanisms to ensure the agreement is able to cater to the existing productivity and activity-related differences across firms and sectors.8 Equally, where the standard of living of certain segments of households is hit particularly hard by rising energy costs, the incomes agreement should naturally seek to mitigate their straitened circumstances. In short, these considerations reveal the need to avoid overly sweeping measures to implement a potential incomes agreement that might prove too rigid for certain groups of agents. Third, any approaches that automatically link wages to past inflation or indexation clauses are also to be avoided9. The aim is precisely to reduce the risk of triggering a wage-price feedback loop. In this regard, workers with collective bargaining agreements registered up to March this year that provide for any form of wage guarantee clause linking the final wage increases agreed in 2022 to developments in inflation are admittedly in the minority. Nonetheless, the figure (30%) is notably higher than it was at the end of 2021, when it stood at 17%. Of even more concern is the fact that this figure rises to 50% of the total when considering the agreements entering into force in 2023, albeit still referring to a small number of agreements in this case. Fourth, any incomes agreement should provide for multi-year wage increase and job protection-related undertakings. This would offer households and businesses some certainty in their spending and investment decisions.