to see what i have called “ tit - for - tat ” inflation [ 9 ] – with both parties trying to offset any real income losses [ 10 ] – we could see a negative spiral taking hold. monetary policy transmission the ecb cannot allow this to happen. and since profits are ultimately influenced by the business cycle, it is our responsibility to restrict demand enough to prevent such a spiral. that should, in turn, lead to slower margin growth and lower wage demands while reducing pressure in the labour market. but to gauge whether rates are sufficiently restrictive, we need to know how much traction our policy tightening is having – and is likely to have – on spending in the economy. that is why policy transmission is the third element we are looking at. so far, our rate hikes are being transmitted forcefully to bank borrowing [ 11 ] and lending rates – faster even than during previous hiking cycles. for the euro area, bank lending rates to firms currently stand at 4. 2 %, up by 267 basis points since may last year. this is their highest level since january 2009. bank lending volumes are also weakening, leading to a sharp contraction in money growth. from november onwards, monthly lending flows to firms have been negative on average. money ( m3 ) has also seen negative flows, causing its year - on - year growth rate to plunge from almost 12 % in mid - 2020 to 1. 9 % in april this year. and banks report that credit standards are tightening, which heralds lower lending flows to come. in the ecb ’ s latest bank lending survey, the pace of net tightening in credit standards was at its highest level since the sovereign debt crisis in 2011. this is the desired effect of our policy : we want financing conditions to tighten. and, so far, it has not been at the expense of bank performance, with the positive impact of higher rates on banks'interest margins outweighing the negative impact on volumes. but we know that our rate hikes have not yet been fully reflected in financing conditions. and we are also aware that recent financial market tensions may have intensified the tightening by increasing bank funding costs and encouraging more risk aversion. so we need to monitor carefully how this pass - through process is playing out. and if the recent tensions do leave a lasting footprint on markets, a given level of rates would mean tighter financing conditions – and that would have to be reflected in the level at which rates peak. at the same time, there is also uncertainty

will then need to be on bringing inflation to 2 % over the policy horizon. this will in turn require us to design our post - pandemic policy framework carefully and calibrate our instruments properly. we must be clear that, in order to re - anchor inflation expectations, our policy horizon cannot extend far into the future. if we are seen as determined to achieve 2 % without undue delay and have a clear plan to do so by enabling monetary - fiscal interactions, rising inflation expectations will make our task easier. but if we are seen to be lacking determination, expectations will be less responsive and the “ bang for our buck ” will be considerably lower : we will end up spending more, not less, and we may not exit the liquidity trap. we cannot waste the opportunity of having, for the first time in more than a decade, a combination of expansionary monetary and fiscal policies and a global reflationary environment to re - anchor inflation expectations to our target. this has two key implications. first, our forward guidance will be key for embedding credibility and shifting inflation expectations upwards. we are committed to keeping interest rates low until we have seen the inflation outlook robustly converge to our aim within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. and we will continue asset purchases until shortly before this point. this guidance creates a natural window for fiscal action. governments that spend wisely today can be assured that they will not be penalised with a premature rise in borrowing costs. second, we should recognise that what was seen as unconventional in the past is now conventional. in particular, the pandemic emergency purchase programme ( pepp ) has shown the benefits of flexible monetary policies when differences in financing conditions across countries represent a persistent obstacle to the transmission mechanism. we should strive to retain the “ unconventional flexibility ” that has served us well during the pandemic. conclusion let me conclude. the experience during the pandemic has yielded two key lessons. first, we should not be afraid of monetary and fiscal policies working together when interest rates are near the lower bound : in such a situation, a combined policy easing is necessary to close the output and inflation gaps. this does not violate the principle of monetary dominance. it is in fact the way to ensure that a regime of price stability endures and to dispel pessimistic expectations which could cripple monetary policy effectiveness. second, combined fiscal and monetary support has lifted the economy out of