, stable and sustainable finances to ensure and support welfare and wellbeing. this is a balancing act that requires all of us to weigh in. for there are many challenges that can disturb the balance. wh thi k f th t i fi i l h ll i ti f th id when we now think of the most pressing financial challenges our societies face, the rapid revival of inflation stands out. the strong price increase for energy and commodities in particular has hit societies all over the world with force. pushed past its point of inflection, inflation eats away at consumption and investment capacity and frustrates financial planning. in response, the ecb rallied to raise policy rates to calm down the business cycle and keep inflation expectations anchored. we will continue doing so until the inflation outlook has stabilized around our 2 % target in the medium term. this can however hardly be considered a walk in the park. first of all, some of the most important inflationary drivers are of an imported nature. this not only makes us collectively poorer as we spend more euros or koruna ’ s abroad, but also makes inflation more complicated to control. secondly, central bankers are having to walk a tight rope between controlling inflation and preserving financial stability. in the aftermath of the pandemic, debt levels and asset valuations peaked. both make our system vulnerable to disorderly market corrections and cross - border spillovers. given these considerations, one might ask oneself what we can do. recent analysis by dnb staff confirms that high inflation has been driven not only by negative supply shocks but to a significant extent - also by positive demand shocks. with the tightening of monetary policy, european governments should be mindful not to implement generic fiscal support measures. instead, targeted fiscal measures should focus on distributing support where needed most. this would also demonstrate our commitment to budgetary discipline. but our interdependence goes much deeper. the early days of the pandemic serve as a stark reminder that - in our globalized economies - inward - looking policies almost always lead to a negative sum game. this means that financial institutions, businesses and governments should each consider the wider impact of their decisions. each of us has a role to play when it comes to limiting the perils of cross - border spillovers. to maintain our balance, we rely on the international coordination of policymakers and industry leaders. our teamwork determines the resilience of the real economy and, in particular, its financial system. for the longer term

relative price movements are welfare enhancing and not something that we should be concerned about. in practice, the world is not so simple and markets are not perfectly competitive. relative price movements do not always occur freely, and adjustments to changes in preferences or technology can be costly. monetary policy cannot and should not influence relative prices within the euro area to offset divergences between sectors or countries. those relative prices are determined by real factors. instead, the best contribution that monetary policy can make to society ’ s welfare is to stabilise the general euro area price level. that reduces the noise in relative price changes, and therefore improves the workings of the price mechanism. nonetheless, central bankers do monitor divergences. why do we monitor divergences if there is nothing we can do about them? first, our knowledge of the monetary transmission mechanism is incomplete. information about the various parts of the economy, including divergences, adds to our knowledge of the economy as a whole. we are particularly conscious of this in the euro area where we are still in the process of developing and enhancing indicators for the euro area as a whole. the second reason for our interest is that regional or sectoral differences in economic performance can provide early signals of area - wide developments, as us experience has shown. if monetary policy cannot and should not react to divergences, what about other policy areas? as i mentioned earlier, allowing relative price changes to occur is often the best approach, so that resources are allocated to their most effective uses. accordingly, structural reforms that allow the relative price mechanism to operate are generally sensible. and, hearing central bankers call for structural reforms is nothing new! my colleagues and i on the ecb governing council have been regularly calling for further structural reform. for example, labour market reform that stimulates the movement of labour around the euro area is likely to reduce euro area unemployment overall, as well as reducing disparity in prices, wages and unemployment rates between regions. central bankers in other countries make similar points. another approach would be to use fiscal policy to try and dampen national divergences. however, given the planning and implementation lags, it is not easy to use fiscal policy in a counter - cyclical manner. in addition, the main objective of fiscal policy is not normally to reduce cross - country or cross - sector divergences. even though fiscal policy is normally formulated within a multi - year framework, elements of discretion remain. any discretion should be used to reduce,