speech mind the step : calibrating monetary policy in a volatile environment keynote speech by fabio panetta, member of the executive board of the ecb, at the ecb money market conference frankfurt am main, 3 november 2022 the euro area is facing a sequence of unprecedented supply shocks resulting from the pandemic and russia ’ s aggression against ukraine. these shocks have compounded each other and caused the current spike in inflation. price pressures have broadened as firms have sought to pass higher costs on to consumers as the economy reopened. as a result, the ecb has accelerated the adjustment of monetary policy to keep inflation expectations anchored at levels consistent with its target. across the last three governing council meetings, we have increased our interest rates by 200 basis points. this is the fastest rate hike in the ecb ’ s history. looking ahead, the medium - term inflation outlook presents clear upside risks in a general context of extraordinary uncertainty about the future evolution of the european economy. today i will argue that, at present, the direction of monetary policy is clear. a further policy adjustment is warranted in order to keep inflation expectations anchored and stave off second - round effects. however, the calibration of our stance should not rely on a one - sided view of risks − especially as we continue normalising our monetary policy in a highly uncertain economic environment. and it should remain focused on medium - term inflationary developments. we need to bring inflation back to our 2 % target as soon as possible, but not sooner. we might otherwise create unintended effects, achieving little reduction of inflation in the short term, but causing excessive market volatility and a protracted economic slowdown beyond what is necessary to stabilise inflation in the medium term. implementing the correct calibration of monetary policy will be challenging. we will need to carefully consider the resilience of our economy, the implications of global monetary spillovers, and emerging threats to financial stability. trade - offs in setting the appropriate monetary policy stance in the current situation, the direction of our monetary policy is clear. inflation in the euro area is too high and will remain above our target for an extended period. headline inflation reached 10. 7 % in october. core inflation is around 5 %. monetary policy normalisation is necessary when repeated supply shocks drive inflation higher for longer. [ 2 ] it signals that the central bank will not tolerate a de - anchoring of inflation expectations, reducing the likelihood of such a de - anchor

across 20 items ( e. g. chemicals, electrical items, packaging, steel and textiles ). the latest observation are for september 2022 and october 2022 ( flash pmi estimates for the united kingdom and the euro area ). chart 6 spot prices of oil, gas, coal and electricity ( eur / mwh for gas and electricity ( left - hand scale ), usd / barrel for oil ( right - hand scale ) ) sources : refinitiv, hwwi, energy intelligence and ecb staff calculations. note : the latest observation is for october 2022. to sum up, the implementation of monetary policy presents us with a difficult trade - off. on the one hand, our need to ensure that inflation expectations remain anchored speaks for targeting the upper part of the range of estimates of the target - consistent terminal rate. and this range would move higher if upside risks to medium - term inflation materialised. but, on the other hand, in setting the monetary policy response we need to keep basing our decisions on the latest evidence and factor in downside risks to the economic outlook. policy normalisation, transmission lags and global spillovers in recent months, the public debate has stressed the risks of doing too little to curb inflation, since this would require a more painful future adjustment. but this should not make us underappreciate the risk of doing too much. first, we should bear in mind that it takes time before the full impact of our measures is felt in the economy. [ 16 ] moreover, monetary policy is transmitted to different variables with different lags. it immediately affects market expectations and financial market conditions through bond yields, equity prices and exchange rates. since we started normalising monetary policy at the end of 2021, the one - year forward real rates have moved significantly higher across the entire term structure ( chart 7 ) and the oneyear forward real rate one year ahead is now in positive territory. likewise, nominal and real ten - year rates have increased by around 300 and 250 basis points respectively ( chart 8 ). chart 7 change in euro area forward real interest rates ( percentage points ) sources : bloomberg, refinitiv and ecb calculations. notes : real forward rates are calculated by subtracting the inflation - linked swap forward rates from the nominal overnight index swap forward rates for each maturity. the latest observation is for 20 october 2022. chart 8 ten - year real, nominal and inflation - linked swap rates for the euro area ( percentages per