##dicted inflation by large margins, even at shorter horizons. from 2021 to 2022 for example, the absolute inflation forecast errors in the staff macroeconomic projections, one quarter ahead, more than doubled, largely owing to volatile energy prices. 1 at the same time, the mix of shocks that emerged from the pandemic and its aftermath – rotations in spending, energy spikes, " bullwhip " cycles in manufacturing, supply bottlenecks, tight labour markets, fiscal expansion and reopening effects – heightened the risk of inflation becoming more persistent. we faced a highly unusual conjuncture of high inflation and declining real wages, but also rising employment. this combination essentially implied a multi - year catch - up process to make up for real wage losses. in turn, this process could have triggered what i referred to at last year's conference as a " tit - for - tat " inflation dynamic. 2 and we faced uncertainty as to how quickly and forcefully our monetary policy response would succeed in bringing down inflation. the ecb had not been through a tightening cycle for more than a decade, and there were reasons to believe that the transmission of monetary policy to firms and households might have changed. 3 so, to calibrate policy accurately, we needed a framework for policy decisions that would work when we had low visibility and would mitigate heightened uncertainty. this is why we built our monetary policy response around the three criteria i referred to earlier : the inflation outlook, the dynamics of underlying inflation and the strength of monetary transmission. this approach made our decisions more robust, as the inflation path we foresaw in our projections had to be validated by data we could observe in real time and extrapolate into the medium term. that, in turn, enabled us to take forward - looking decisions with a higher degree of confidence. and it served us well in practice. the three criteria helped us to map out the remaining climb, allowing us to bring rates to sufficiently restrictive levels to break the persistence of inflation. 4 but also, by guiding us to carefully evaluate the strength of policy transmission, they acted as a cross - check against overtightening. this helped us reach the decision to stop rate hikes after last september. the holding phase we then entered the current phase of our policy cycle – the holding phase – during which we committed to keep rates at restrictive levels for as long as necessary. since the start of this phase, inflation has been declining consistently and our projections have been showing

over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. in this context, the concerns of private investors about seniority will be addressed. furthermore, the governing council may consider undertaking further nonstandard monetary policy measures according to what is required to repair monetary policy transmission. over the coming weeks, we will design the appropriate modalities for such policy measures. let me now explain our assessment in greater detail, starting with the economic analysis. on a quarterly basis, euro area real gdp growth was flat in the first quarter of 2012, following a decline of 0. 3 % in the previous quarter. economic indicators point to weak economic activity in the second quarter of 2012 and at the beginning of the third quarter, in an environment of heightened uncertainty. looking beyond the short term, we expect the euro area economy to recover only very gradually, with growth momentum being further dampened by a number of factors. in particular, tensions in some euro area sovereign debt markets and their impact on financing conditions, the process of balance sheet adjustment in bis central bankers ’ speeches the financial and non - financial sectors and high unemployment are expected to weigh on the underlying growth momentum, which is also affected by the ongoing global slowdown. the risks surrounding the economic outlook for the euro area continue to be on the downside. they relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. downside risks also relate to possible renewed increases in energy prices over the medium term. euro area annual hicp inflation was 2. 4 % in july 2012, according to eurostat ’ s flash estimate, unchanged from the previous month. on the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be below 2 % again in 2013. over the policy - relevant horizon, in an environment of modest growth in the euro area and well - anchored long - term inflation expectations, underlying price pressures should remain moderate. risks to the outlook for price developments continue to be broadly balanced over the medium term. upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term. the main downside risks relate to the impact of weaker than expected growth in the euro area, in particular resulting from a further intensification of financial market tensions. such intensification