going into free fall and to limit the immediate impact of the pandemic on price stability. the focus now needs to be on fighting inflation. energy prices, in particular, have surged. but consumer prices in the industrial countries have also risen significantly across the board. and we know from our survey of firms that most companies in germany are planning to raise their prices further over the next few months. central banks need to ensure that the very strong inflationary pressures do not become entrenched. we must therefore take decisive action. in the eurosystem, we are rapidly scaling back our asset purchases. when net asset purchases come to an end – possibly in june – i see the time for an initial interest rate hike soon afterwards – possibly in july – as having come. this could be followed in a timely manner by further interest rate moves. looking further ahead, changes in underlying trends could intensify inflationary pressures. i am talking here about the “ three d ’ s ”. first of all there is deglobalisation, driven by geopolitical tensions and a desire to reduce economic dependencies. second, the decarbonisation of the economy through carbon pricing will probably lead to persistent upward pressure – and not just on energy prices. and demography is the third “ d ” that might entail inflationary effects – as a result of a dwindling labour supply, for instance. the fact is that inflation dynamics have changed dramatically in a relatively short space of time. monetary policy has therefore been refocused in most g7 ( gruppe der sieben ) countries. and monetary policymakers must remain vigilant and potentially take further measures to safeguard price stability over the medium term. because at our meeting, there was no doubt whatsoever that stable prices are essential to the achievement of our long - term objectives.

stimulus to the economy through the interest rate channel. adjustments in short - term interest rates are also transmitted to long - term rates, which ultimately determine investment decisions and decisions about durable consumer expenditure. the expectations hypothesis of the term structure of interest rates is but one mechanism which explains how short - term interest rates may affect long - term rates, namely through an average of expected future short - term rates. while the interest rate channel largely affects loan demand through the price of credit, monetary policy can also influence loan supply through the so - called credit channel. the credit channel proceeds from the assumption that there are frictions in financial markets, such as asymmetric information and moral hazard. a key function of banks is to overcome such information and incentive problems by screening and monitoring borrowers. the credit channel is made up of two sub - channels. the first is the bank lending channel and works through the liability side of banks ’ balance sheets, which in turn triggers certain adjustments on the asset side. thus, an expansionary monetary policy tends to increase loan supply by raising the availability of funds for banks. the empirical evidence on the existence of a bank lending channel in the euro area is rather mixed though. however, the bank lending channel can also work through banks ’ capital positions. cuts to the policy rate and a steepening yield curve can raise banks ’ net interest income, which in turn affects profitability and hence bank capital. the available evidence indicates that this only holds for countries where banks lend predominantly at fixed long - term rates, however. in fact, the opposite effect is found in countries where banks lend largely at floating or shortterm rates. in this context, it should be mentioned that corporate loans in luxembourg are by and large floating rate loans ( or loans with an interest fixation period up to one year ), as are mortgage loans ; only consumer loans are primarily granted at fixed rates. however, asset price rises following a reduction in policy rates may also raise bank capital through positive valuation effects on banks ’ trading books. the second sub - channel of the credit channel is called the balance sheet channel and works through changes in the quality of the borrower. through its impact on cash flows and collateral values, monetary policy can affect borrowers ’ net worth, which is inversely related to their external finance premium. owing to the pro - cyclicality of net worth, the external finance premium is thus counter - cyclical and therefore magnifies the impact of changes in short - term rates on credit availability