s inflation readings via base effects. chart 2 provides a more structural decomposition of inflation, based on recent dnb research. among the set of models we use at dnb, this one focuses particularly on capturing supply - side constraints. while the model supports the notion that supply - side shocks were dominant drivers of the rise in euro area inflation, it still attributes more than one third of the inflation dynamics to demand shocks. for the disinflation period, the decline in demand is particularly important. the contribution of demand has narrowed to less than one fifth relative to the peak. monetary policy – which is captured here largely as affecting demand – has thus supported the disinflationary process. but the reaction of monetary policy has also been important in the face of these supplyside shocks. even though monetary policy has less effects on supply bottlenecks or on food and energy prices, the public is particularly sensitive to these salient aspects. as a result, an extended period of above - target inflation and possible second round effects create the risk that high inflation will become entrenched and, at some point, that inflation expectations will drift away from the target. a timely return of inflation to target is therefore crucial. that ’ s why it is important for monetary policy to react forcefully to underline our commitment to price stability. © dnb taking a step back, many have argued that the ecb was too late in hiking rates. while i, with the benefit of hindsight, understand where that interpretation is coming from, i would like to make three points in defence of the governing council ’ s response. first, it is important not to reduce the monetary stance to the policy rates alone. the governing council adjusted its forward guidance long before and tapered its bond purchases under the app as early as december 2021. second, it is important to note that the energy shocks were a direct consequence of the unjustified russian invasion of ukraine. as such, these shocks were not only unprecedented, but with a war at the european borders, the uncertainty went beyond energy prices. in this situation, my colleagues and i on the governing council were wary to choke off the economy in light of possible contractionary effects of the war. finally, even if we had initially fallen somewhat behind the curve, the eventual response has been very forceful and united, thus underlining the governing council ’ s commitment to its 2 % inflation target over the medium term. this interpretation is also supported by a simple – so - called thick –

the largest part of these forecast errors can be explained by assumptions about energy prices and their direct and indirect effects on inflation, indicated by the yellow and red bars. this is not surprising given the large shocks to energy prices we observed in this sample. other non - energy related errors also play an important role in the latter part of the sample. i ’ m convinced that this multi - pillar approach with a stronger focus on actual data realisations has served us well recently and that we need to continue to be data - dependent going forward. at the same time, as the decline in forecast errors in chart 5 shows, there are also reasons to regain some confidence in our projections. this, together with the fact that a lot of the relevant and comprehensive data such as that on wages, productivity and profit margins are only published on a quarterly basis, suggests to me that projection round meetings of the governing council will be the key meetings for our interest rate decisions. currently, the monetary stance remains historically tight. this is not only the case for the level of policy rates themselves, but also when comparing real interest rates relative to the natural rate of interest, r - star. chart 6 shows this gap between the ex - ante real interest rate and r - star for the euro area and the us, based on dnb research. of course, these estimates always have to be taken with a grain of salt given the sizeable model and estimation uncertainty as highlighted by the huge confidence bands. but the picture looks similar across a wide array of eurosystem models. according to this model, the degree of monetary tightness is comparable across the two regions. however, as the disinflationary path in the euro area continues and the medium - term inflation outlook further improves, we become increasingly confident that inflation will return to target in a timely manner. consequently, it can soon be appropriate to ease the currently restrictive monetary policy stance, and gradually take our foot off the brake. as a result, policy rates will slowly but gradually move to less restrictive levels. the precise timing, speed and scale of easing will also follow a data - dependent approach, with our projections being a key ingredient. to give you a perspective on the path of policy normalisation based on the march eurosystem staff projections, chart 7 shows optimal policy scenarios. optimal here means that monetary policy tries to minimise the deviations of inflation from target and output from its potential *. the range, in turn, is based on both a set