gap ’, ecb - eiopa staff paper, april 2023 ; and ‘ enhancing the insurance sector ’ s contribution to climate adaptation ’, oecd, policy paper, march 2023. ‘ high - level principles for ppips against natural hazards ’, presented at the end of may in stresa at the meeting of g7 finance ministers and central bank governors. private insurance contracts exploit the opportunities of diversification between uncorrelated risks, and can rely on risk transfer and pooling techniques, with benefits ultimately shared between the insurer and the insured. if well designed and implemented, it is certain, prompt and directly commensurate with the damage individually suffered ; it can provide powerful incentives for prevention. however, if there are no provisions for mandatory coverage, it is subject to adverse selection. moreover, it cannot achieve the redistribution goals that public intervention may instead wish to pursue. a recent study made by the bank of italy together with the university of florence4 looks at hydrogeological events that took place in italy between 2010 and 2018 and their effect on firms survival and performance. in the three years following the event, the affected companies are significantly more likely than others to exit the market ; even if they survive, their profitability declines and staff numbers decrease. insurance can mitigate those effects at the individual level. in addition, the existence of externalities makes underinsurance of such risks also as a matter of public interest. the destruction caused by a natural disaster has consequences that go beyond those directly affected, through the dense network of interdependencies that characterises economies. the swifter availability and granularity of insurance relief compared with that provided by discretionary ex - post public interventions should contribute to reducing these consequences. it is not only insurance that can provide incentives to make businesses and households less fragile and more resilient to disasters. supervisors, for instance, have been insisting for some time that banks should take physical and other nature - related risk into account when screening the financial merits of projects. risk mitigation measures should be a factor in setting conditions for loans and other forms of financing. as is well known, italy is particularly exposed to seismic and hydrogeological risk, including landslides and river floods, as we were sadly reminded yesterday. it also has a 9, 000 - km coastline, of which 3, 400 km, especially in the upper adriatic sea, can suffer coastal floods. yet according to analyses by various research centres

. the exchange rate would depreciate, the output gap would close, and inflation expectations would start shifting higher. core inflation would hit 6 % after about two years. by around this point, growth would slow once again ; there would be no permanent increase in output. interest rates, however, would be permanently higher, given the implicit 6 % target. higher inflation begets higher interest rates. if the country needs long - lasting low interest rates, then we must have lower inflation. this last point is something you should bear in mind whenever you hear someone arguing for a higher inflation target. many of you are students, so it matters for you as much as for anyone else. a higher inflation target would mean higher interest rates. over the short term, one or two years, tolerating more inflation can allow a looser stance. but this effect is temporary. if we decide to tolerate more inflation now, by the time you graduate and go to work, you are going to face higher interest rates. your student loan repayments will be higher. a car payment will be more difficult. a mortgage will be costlier. all this will have real implications for your incomes. page 10 of 14 this does not mean the sarb should avoid all rate cuts. rather, we should avoid cutting if the price of doing so is permanently higher inflation. we can cut rates if we feel confident we can keep inflation under control over time. our modelling framework balances growth and inflation over the medium term using a taylor rule. if the model sees growth underperforming the economy ’ s potential, the rule suggests a looser policy stance. if inflation is simultaneously higher than the target, it compromises, aiming both to hit the inflation target and to move growth back to potential over the forecast period, of two to three years. given this process, the mpc decided to reduce rates at its july meeting, because growth is underperforming and inflation appears to be under control. so this is one responsible way to do rate cuts. you may wonder why we say ‘ growth ’ instead of ‘ employment ’. of course, the two are linked. better growth generally means more jobs. but we don ’ t refer to employment because of technical issues with our employment data, making them difficult to interpret. for example, despite the negative gdp growth in the first quarter of the year, the quarterly employment survey told us that the economy had created an extra 49 000 jobs. that was probably not a