cost for the economy if this led to the need for a stronger and more prolonged restriction of monetary policy. on the other hand, however, the costs linked to the opposite risk may be relevant if “ doing too much ” were to determine an undershooting of the target and possibly even lead to serious debt - deflation phenomena, triggering nonlinear perilous amplifications. in the face of both of these risks, the central bank decisions should continue to be characterised by wisdom and balance and be guided by careful quantitative evaluations of incoming data. when it comes to reducing inflation, a recession is not always inevitable. communicating a strong commitment to bringing inflation down to target in a speedy manner is fundamental, but doing so by minimising the costs for the real economy is not any less important. a cautious approach is also advisable due to a series of other considerations. the first is related to the high level of economic uncertainty and the brainard principle, which states that when the central bank is uncertain about the effects of its actions, it should move conservatively. an exception to this principle is the case of uncertainty around the persistence of inflation : when persistence is high, in fact, a strong monetary reaction may be required to avoid high inflation becoming entrenched in agents ’ mind - sets. while this possibility should be carefully monitored, data on market - and survey - based inflation expectations – including their recent decline at short horizons and their decreasing profile ‒ and the marked deceleration of prices on a 3 - month annualised basis ( fig. 12 ), may call into question the persistence of inflation at high levels in the euro area, reinforcing the arguments in favour of gradual monetary normalisation. the second concerns the “ long and variable lags ” of the monetary transmission process that i have already mentioned. credit dynamics provide signals that are especially relevant in this respect. on a 3 - month ( annualised ) basis, the growth of loans to firms in the euro area was negative in january ( - 1. 3 per cent ) from an almost double - digit expansion in october ( 9. 8 per cent ). although this deceleration is the natural ( and desired ) consequence of monetary normalisation, both its size and speed require caution on the magnitude and time distribution of future interest rate hikes. the potential risks to financial stability also require a good dose of caution. the unprecedented coordinated rises in official rates around the world may create spillover effects that are difficult to quantify

but may not be negligible. financial instability risks are particularly relevant in the economic and monetary union, whose incomplete architecture – especially its decentralised fiscal policy and the delays in completing the banking and capital markets unions – exposes it to a possible fragmentation of financial markets. finally, in the current uncertain environment, models and forecasts should necessarily be taken cum grano salis, in particular when determining the “ terminal ” level of key interest rates. quantitative assessments are still useful, but their insights have to be assessed together with the information that will gradually become available on inflation expectations and on the evolution of wages and profits. * * * the monetary policy tightening started by the ecb in december 2021 has been crucial to respond to the risks stemming from high and rising inflation. even before exerting its effects on aggregate demand, it has operated by contributing to containing inflation expectations, avoiding an increase to excessively high levels. this anchoring of expectations has therefore laid the foundations for preventing the occurrence of wage - price spirals. low and stable inflation expectations, however, do not completely eliminate the risk of “ second - order effects ”. to this end, labour and business in all euro - area countries must continue to behave responsibly. it has to be fully understood that the energy shock is like a tax on the euro area economy, which unfortunately cannot be returned to sender and cannot be circumvented through a fruitless race between wages and prices nor through an excessive and permanent increase in public debt. wage negotiations, therefore, cannot go back in time to when they were purely backward - looking. making up for the loss of purchasing power must, rather, rely on achieving sustained productivity growth, although targeted and temporary fiscal measures to alleviate the burden on more severely hit households and firms should obviously not be ruled out. today, gas prices in europe are returning to more moderate levels and their volatility is declining, setting the stage for the convergence of inflation, over the medium term, to the ecb ’ s target of 2 per cent. in this context, the pricing strategies of businesses will play a central role. in particular, we will have to closely monitor whether, after the pass - through of the higher energy costs observed in 2022, firms will allow final prices to reflect the most recent declines, which would imply a less intense tightening of financial conditions. this will be a key step to achieve a durable reduction of underlying inflation. in this phase, monetary policy should