home news & media press releases article staying the course : monetary policy to avoid persistent inflation - remarks by governor gabriel makhlouf staying the course : monetary policy to avoid persistent inflation - remarks by governor gabriel makhlouf 04 april 2023 speech remarks at markets news international event by gabriel makhlouf governor central bank of ireland and member of the governing council of the ecb good afternoon. the title of my talk today –'staying the course – monetary policy to avoid persistent inflation ’ – reveals much about my current views on inflation and the near term path for monetary policy. the latest data suggest that the direct effects of the supply shocks we have seen over the last two years are gradually fading. we see this in the declining rate of headline inflation in recent months. however, indirect effects are still working their way through the economy as the input price increases we saw last year pass through more slowly into core inflation, and domestic cost pressures emerge in the form of wages and profit margins. monetary policy must ensure that this does not become a source of persistent inflation above our 2 per cent target. to achieve this, the governing council decided last month to increase the three key ecb interest rates by 50 basis points. the interest rate applied to our deposit facility is now at 3 per cent, up from minus 0. 5 per cent last july. this represents a significant tightening of the monetary policy stance, commensurate with the challenges to price stability we have been facing. the scale and pace of interest rate increases – up 3. 5 percentage points in just nine months – is unprecedented. for comparison, previous rate hiking cycles in the euro area in 1999 - 2000 and 2005 - 07 saw rates rise by 2. 25 and 2 percentage points over a 13 and 21 month period, respectively. today i will highlight my view on the key factors that will influence the future path of monetary policy. they include both the data i am monitoring, and how i react to this data when making policy decisions. the first is the assessment of the inflation outlook in light of the incoming economic and financial data, as embedded in the economic narrative underlying the quarterly projections. the second is the dynamics of underlying inflation, as a cross - check on how the projections compare with the evolving data. and the third is the judgement as to the strength of the transmission of monetary policy to date. let me begin with a review of the drivers of core and headline inflation. the path of headline and core inflation the sharp increase in headline inflation

throughout 2022 stems from both supply and demand factors. on the supply side, overlapping negative shocks from pandemic bottlenecks and the war in ukraine led to higher costs for firms. on the demand side, the re - opening of the economy after the pandemic boosted consumer demand at a time when supply was already constrained. the build - up of pandemic savings in parallel with pent - up demand also meant that higher input costs, as a result of supply shocks, could be more easily passed on to consumers. the decline in energy prices and the easing of supply bottlenecks in recent months will help ease some of the inflationary pressures as the cost of inputs fall. however, countering this deflationary impulse are more domesticallyoriented, demand - related factors. underlying the ecb staff march macroeconomic projections is an assumption that above average nominal wage growth will play a central role in inflation dynamics through to end - 2025. however, some of this wage growth is expected to be absorbed into profit margins as the conditions that allowed firms to increase margins during 2022 fade. headline inflation in the euro area peaked at 10. 6 per cent in october 2022 and fell to 6. 9 per cent in march 2023. but, while headline inflation has been falling, underlying inflation ( as measured by core inflation, i. e., the headline measure excluding food and energy ) has continued to increase, rising from 5. 0 to 5. 7 per cent between october and march. core is typically more slow - moving than headline measures, and tells us something about the persistence of inflation over the medium term. as chart 1 ( left - panel ) shows, measures of underlying inflation tracked by the ecb and the central bank of ireland are either trending higher or remain elevated, with the broader range of measures currently between 4 per cent and 8 per cent. similarly, chart 2 ( right - panel ) shows that, while momentum in energy prices has declined sharply in the past two months, momentum of price growth in the food, goods and services components of hicp remain elevated. this recent divergence between headline and underlying inflation reflects two factors : first, the delayed pass through of supply - related input cost shocks into core prices ; and second, an increasing role for more domestically - driven inflation drivers, such as wages and profits, as i mentioned earlier. therefore, a prolonged period of higher wage demands and / or increasing profit margins could drive the persistence of underlying inflation in