bostjan vasle : opening address for governor madis muller's lecture opening address by mr bostjan vasle, governor of bank of slovenia, for governor madis muller's lecture entitled " why is inflation so high and so different in different euro area countries? ", ljubljana, 3 march 2023. * * * the spoken word applies. ladies and gentleman, esteemed colleagues, good morning and welcome to banka slovenije, and also to all of you following us over the video link. it is my great pleasure today to have the opportunity to host my dear colleague mr madis mueller, governor of the bank of estonia. * * * the topic of his lecture will be inflation. more precisely, identifying the drivers of elevated inflation and why there are such big differences in the level of price growth rates between member states. according to the latest data, published yesterday, the lowest rate of inflation in february was recorded in luxembourg, 4. 8 %, and the highest in latvia, with 20. 1 %, while the average rate was 8. 5 %. estonia recorded an inflation rate of 17. 8 % and slovenia one of 9. 4 %. these are all - time - high inflation differentials within the euro area. needless to say, these are figures which are uncomfortably high, for households, enterprises and, sovereigns alike. and the increased public concern about inflation is also reflected in the results of the autumn eurobarometer survey, where more than 90 % of europeans ranked the rise in the cost of living as the number one issue of concern. and of course it is also a concern for us central bankers, whose mandate is price stability. * * * that is why we reacted already last year, when inflation increased further after the russian aggression on ukraine, with all its consequences for global markets and prices. let me briefly remind you that just one year ago our policy was still very accommodative, with our main interest rate at - 0. 5 % and expanding programmes of asset purchases, pepp & app. then in april, we changed course, firstly by ending net purchases under pepp, followed three months later with ending net purchases under app. 1 / 2 bis - central bankers'speeches in july, we raised our main interest rates for the first time in about a decade. firstly by 0. 5 percentage point to 0 %, followed by two increases of 0. 75 percentage point each, followed by two increases of

the number of business failures that usually follow an economic downturn. we helped to 1 / 3 bis - central bankers'speeches set the stage for the rapid economic rebound that has followed the reductions of pandemic - related restrictions in the third quarter last year and in recent months. * * * the economic recovery is strong, but new waves of the pandemic may slow it down. the priority of economic policies is to continue providing support to the economy until the recovery is set to last and uncertainty subsides. however, as the pandemic has been with us for quite some time now, it is important that policy support is targeted at the most affected and vulnerable households and businesses and that it does not hamper structural adjustment, as this could undermine productivity growth, which has slowed markedly in europe over the last 25 years. the main operational challenge is how to distinguish between viable and nonviable businesses. for those that have dismal chances of survival, it is necessary to prepare the ground for the most efficient liquidation process. it is important that capital is freed up and directed to promising activities and that workers who are likely to lose jobs are equipped with the skills for reallocation as soon as possible. the eventual unwinding of the remaining pandemic support measures should be gradual and guided by stable improvement in economic data. in the medium term, fiscal and monetary policy will need to begin rebuilding space to address future shocks. however, planning for necessary structural reforms, to the pension and healthcare system, for example, should start as soon as possible, as their implementation usually takes time. * * * the european banking system remains resilient, as shown by recent stress tests carried out by the eba and the ecb. its solid position reflects, among other things, the cleaning up of balance sheets, recapitalisations, and strengthening of regulatory and supervisory frameworks after the previous financial crisis. the path of strengthening the resilience of the banking system is not yet complete, however. it is therefore necessary to continue towards the completion of the banking union and bank resolution framework, including a common backstop, and with harmonisation of national insolvency laws. as the health and economic situation stabilises, additional attention should be paid to the long - term challenges of many european banks, namely low profitability and the issue of sustainability of bank business models. as the recovery continues, banks will continue to play an important role in financing businesses and households.