. in situations where there is a risk of shocks becoming larger and more persistent, inflation expectations can de - anchor regardless of whether the shocks are demand - led or supply - led. central banks must then react forcefully to prevent above - target inflation becoming entrenched. this was the lesson of the 1970s, when a sequence of supply shocks caused by rising oil prices ultimately morphed into a lasting inflationary shock. and with central banks at the time being seen as ambivalent about bringing down inflation, people revised their expectations about medium - term inflation. different studies reach different conclusions about the origin of the current inflation episode. ecb analysis finds that, at the peak, supply shocks were three times more important than demand shocks in explaining the deviation of inflation from its mean. 2 other research puts a greater emphasis on demand shocks. 3 but this delineation between supply and demand, while relevant, has not been the most important factor in our current cycle. we needed to base our decisions not only on the source of the shocks, but also on their size and persistence. this was because the shocks were so large and persistent that we faced a genuine risk to inflation expectations. two features could have provided fertile ground for people to lose confidence in the monetary anchor. first, the shocks were large enough to make many households switch their attention to inflation. at the start of 2023, over 60 % of respondents in our consumer expectations survey reported that they were paying more attention to inflation than in the past. 4 second, the inflationary impact of the shocks risked becoming endogenously persistent, owing mainly to the staggered wage bargaining process in the euro area. although there is large variation across countries, the average duration of wage contracts is two years, effectively guaranteeing a drawn - out process to " catch up " with past inflation. 5 we did see some signs that the anchoring of inflation expectations was becoming more vulnerable, especially via a fattening of the " right tail " of the distribution. in october 2022, around four in ten consumers expected medium - term inflation to be at or above 5 % and professional forecasters assigned a 30 % probability of inflation being at or above 3 % two years later. 6 so, monetary policy had to send a strong signal that permanent overshoots of the inflation target would not be tolerated. as a result, we strongly emphasised our determination to ensure a " timely " return to target. our aim was to convey our commitment to ensuring that the period of

that central banks are simply powerless in this crisis? no, but monetary policy cannot resolve this crisis on its own. we also need a strong fiscal response, ideally at european level. most economists agree that fiscal policy is currently the most important instrument with which to counter the crisis. why? the ecb can provide banks with liquidity, but that doesn ’ t necessarily mean that the banks will actually lend to companies that are struggling because of the virus. that ’ s where the government comes in. it can support the economy by issuing credit guarantees, for example. the package of measures adopted by the german government on friday contained guarantees of that kind. other member states have agreed on similar measures. the fiscal response at the international level hardly looks coordinated. is that a problem? absolutely. we need a strong, joint fiscal policy response in europe. this crisis is not limited to individual member states. everyone is affected, and events in one country affect all other countries too. i hope that this is clear to the decision - makers. in terms of monetary policy, we will do our part to prevent fragmentation in the euro area. the border closures and all the different national arrangements we ’ ve seen suggest that it is more like “ everyone for himself ” at the moment. 2 / 4 bis central bankers'speeches the primary goal has to be to contain the spread of the virus. it may be that closing borders is an appropriate step from that point of view. that ’ s something that virologists are best placed to judge. but it ’ s clear that all protective measures come at an economic cost. and that is precisely why we need coordinated action, so that we can avoid deepening the crisis. but not every country can afford that. that ’ s true, and that ’ s precisely why we need european cooperation. what we need now is european solidarity, also in financial terms. that is in the interest of all european countries. is it even possible now to prevent a recession as a result of the virus crisis? we are experiencing a very severe economic shock. supply chains are being disrupted and, at the same time, demand is contracting as governments introduce protective measures : people are travelling less than before and cannot go out to restaurants and bars. falling confidence may also dampen consumption and investment. and if people are not able to go to work, that has an impact on production, depending on the sector. so we are seeing many different effects emerge at the same time across the whole world.