26. 07. 2022 inflation and growth : economic policy challenges * encuentro foros de vanguardia pablo hernandez de cos governor * lenglish translation from de original in spanish good afternoon. it is a pleasure for me to participate in this event, organised by la vanguardia. i would like to take this opportunity to explain the ecb ’ s most recent monetary policy decisions, in particular those we adopted last thursday. let me first frame those decisions in the context of the current macroeconomic scenario and the inflationary episode. to conclude my address, i will also briefly describe the role that other economic policies can play in addressing the current challenges. the macroeconomic context the current context is one of extraordinary uncertainty. economic activity in the euro area is slowing, weighed down by the war in ukraine. the economy is being adversely affected by the impact on firms of rising energy and commodity costs and the effects of high inflation on households ’ purchasing power, along with the persistent supply - side constraints, supply chain disruptions and heightened uncertainty. to illustrate this point, according to the flash figure published last week, in july the euro area composite output pmi was down by 2. 6 points to 49. 4, putting it in contractionary territory ( below 50 points ) for the first time since february 2021. 1 overall, these factors are casting a considerable shadow over the outlook for the second half of 2022 and the longer term. at the same time, economic activity continues to benefit from the reopening of the economy ( which is underpinning spending on services, in particular in the tourism sector ), a strong labour market, the support of the savings built up by households during the pandemic and fiscal policy support both at the national and european level thanks to the implementation of ngeu - funded projects. against this backdrop, the eurosystem projections published in june envisaged real gdp growth of 2. 8 % in 2022 ( albeit with 2 percentage points ( pp ) relating to carry - over from 2021 ) and 2. 1 % in both 2023 and 2024. these projections represented a further downward revision. for instance, compared with the december 2021 projections, the gdp growth forecasts for 2022 and 2023 were down by 1. 4 pp and 0. 8 pp, respectively. meanwhile, last week saw the publication of the ecb survey of professional forecasters ( spf ) for the third quarter of 2022, conducted in early july. the

9 % in june, partly reflecting the importance of ukraine and russia as agricultural goods producers. the persistence of industrial supply chain bottlenecks and the recovery in demand, particularly in the services sector, are also contributing to the current high inflation rates. further, the inflationary pressures are spreading to a growing number of sectors, partly due to the indirect impact of the high energy costs across the economy. in consequence, most measures of underlying inflation have continued to rise. the increase in inflationary pressures also owes to the depreciation of the euro exchange rate. for the more immediate future, the projections indicate that inflation will remain very high due to continued pressures from energy and food prices and pipeline pressures in the pricing chain, in addition to the effects of the economic reopening and the global supply shortages. but looking further ahead, in the absence of new disruptions, energy costs should stabilise and supply bottlenecks should ease. this, together with the ongoing monetary policy normalisation, should support the return of inflation to our target. in this setting, the performance of the labour market and inflation expectations are key. unemployment in the euro area fell to an all - time low of 6. 6 % in may. job vacancies across many sectors show robust demand for labour. wage growth has continued to increase gradually over the last few months, but still remains contained overall. most measures of long - term inflation expectations currently stand at around 2 %, although recent above - target revisions to some indicators warrant continued monitoring. the eurosystem projections published in june showed that inflation would remain very high for most of 2022, averaging 6. 8 %, before declining gradually from 2023 to 3. 5 %. it would then converge towards the ecb ’ s inflation target in the second half of 2024 ( 2. 1 % ). the expected decline in 2023 and 2024 mainly reflects an anticipated moderation in energy and food commodity prices in the absence of additional shocks, as embedded in futures prices. in addition, the ongoing normalisation of monetary policy will contribute to the moderation in inflation, with the usual transmission lags. hicp inflation, excluding energy and food, will remain very high until the end of 2022, but thereafter it is expected to decline as the upward pressures from the economic reopening subside and supply bottlenecks and energy input cost pressures ease. the ongoing economic recovery, tightening labour markets and some effects from compensation for higher inflation on wages – which