the euro area. absent future shocks to energy and commodity prices, the outlook for inflation over the medium term – the ecb ’ s 2 per cent target – will be closely linked to developments in underlying inflation. let me now discuss the prospects for these dynamics in the context of the broader macroeconomic environment. chart 1 : headline and underlying inflation factors source : eurostat and aydin yakut ( 2023 ). notes : trend inflation is based on the methodology of aydin yakut ( 2023 ). latest observation for hicp, core and trend inflation is march 2023, supercore and trimmed mean is february 2023. momentum is defined as the annualised 3 months on 3 months rates, seasonally adjusted data. economic outlook and transmission of monetary policy given the high uncertainty around the outlook for the economy, my colleagues and i will be especially focused on incoming data as part of making our monetary policy decisions. the euro area economy slowed in the fourth quarter of 2022, with economic growth stagnant in the face of falling private domestic demand. high inflation, prevailing uncertainties and tighter financing conditions dented private consumption and investment, which fell by 0. 9 per cent and 3. 6 per cent respectively. however, the ecb staff march macroeconomic projections envisage a recovery in the next few quarters as supply conditions improve further, confidence recovers, and firms work off large order backlogs. rising nominal wages and falling energy prices will partly offset the loss of purchasing power that many households are experiencing as a result of high inflation. this, in turn, will support consumer spending. looking ahead, with record low unemployment expected to hold steady at 6. 7 per cent, the ecb staff ’ s current projections embed a significant degree of real wage catch - up, with wages returning to 2022 levels in real terms by end2025. nominal wage growth projections of 5. 0, 4. 4 and 3. 6 per cent in 2023, 2024 and 2025 are significantly above historic averages. for wage developments, much will depend on ongoing levels of labour market tightness. while the number of job vacancies in the euro area have started to recede gradually since the turn of this year, the number of job openings relative to unemployed remains at a historic high. meanwhile, despite the weaker pmi ( purchasing managers ’ index ) data we saw towards the end of 2022, employment expectations remained in significant positive territory ( chart 2

had no information at hand indicating that any of the banks were about to experience losses far in excess of their capital reserves. what i have suggested as the best course of action ( given the lack of such information scenario 2 ) – buying time for negotiation with partners, seizing control over the two failing banks, and limiting the scope of the guarantee – could hardly ( unless those negotiations had proved remarkably successful ) have reduced the direct fiscal bill by more than a few billion – a fraction of the actual damage. the alternative ( under the hindsight scenario 1 ) of bailing - in some of the bondholders and depositors of anglo and inbs would have imposed additional disruption to economic activity and capital formation which would have offset a lot of the savings to the state from not paying the creditors. i conclude that the need for “ austerity measures ” : the scale of tax increases and expenditure reductions that have proved necessary since, could have been reduced somewhat, but not all that much, by anything done at the end of september 2008. maintaining perspective as i have remarked recently, the boom and the bust both damaged our economy. the boom, and the decisions that were taken during it, meant that ireland had to adjust down from living standards that could never have been sustained, with sizeable and capricious shifts in the distribution of wealth. the style of banking in ireland, its regulation and broader economic policy were strongly influenced by comparable styles adopted at that time in countries often used as exemplars for irish decision makers, and in particular the us and uk. but the scale of the excesses in ireland put its banking crisis in a different league ( though not as bad as iceland ). the extent and nature of the guarantee decision frustrated subsequent efforts to minimise the costs and speed the recovery. but the bulk of these costs could not have been avoided by a different course of action on the night of the guarantee. bis central bankers ’ speeches