 the Central Bank of Ireland and a member of the Government Council of the European Central Bank for three years, more than since 2019. It has been a fascinating time and it will continue to be a fascinating time. Monetary policy used to be a kind of dull technocratic area. It's certainly not that anymore. So the government will join us today and give us an overview of some monetary policy issues and we'll then stay on and take some questions. So we very much look forward to that and with that can I give you the floor Governor and thank you again for joining us. Thank you very much Dan. Good morning everybody. I'm delighted to be at the Institute of International and European Affairs today to share some views on the outlook for monetary policy. Supply chain disruptions are rapid and strong post-pandemic rebound in demand and war-related energy and food price shocks are contributing to unacceptably high levels of inflation in Ireland and the Euro area. Inflation is far in excess of our 2% target at 9% in Ireland and 10% in the Euro area as a whole in November. Some Euro area countries are experiencing inflation above 20% in part because of a greater exposure to Russian energy imports. High inflation is eroding real incomes threatening resilience and economic stability while tighter financial conditions are increasing the cost of credit and putting downward pressure on asset values. The ECB like other central banks globally has raised interest rates at an unprecedented pace in order to bring supply and demand back into balance and return inflation sustainably back to our 2% target. The main ECB policy rate has increased from minus 0.5% in June to 1.5% in October with further increases likely. As I said at a recent speech at Social Justice Ireland for monetary policy to be effective it has to be credible and credibility and clear communication go hand in hand and with that in mind today I'll make the following points. First to continue on our path to bring inflation back to our 2% target I see a 50 basis point increase in interest rates as the minimum needed at our December meeting. Second how much further do we need to go in terms of interest rate increases in 2023? We have to be open to policy rates moving into restrictive territory for a period. It is premature to be talking about the endpoint for policy rates amid the prevailing levels of uncertainty. And third well most of my remarks today relate to the ECB interest rates. The question of the size of the ECB balance sheet will be part of the policy discussions in December and I want to say one thing about this. There are complex issues involved but the justification for the expansion of the balance sheet to low inflation and the risk of deflation has ended and it is time to look at reducing its size. My remarks are divided into two sections elaborating in the main my first two points I'll return to the ECB balance sheet in future communications but this will be after our governing council meeting in December when as President Lagarde has indicated we will lay out the key principles for reducing the bond holdings in our asset purchase programme portfolio in a measured and predictable manner. Now in July of this year when the governing council started raising rates we emphasised a meeting by meeting approach to policy decisions. This means relying on incoming economic and financial data to form a view of the economic outlook and the appropriate policy stance given that outlook. Of course such an approach is nothing new we always look all the available information before making policy decisions but meeting by meeting helps differentiate from the previous forward guidance based approach which relied on longer term commitments to a given policy stance typically spanning several governing council meetings. Such an approach is clearly inappropriate in the current high inflation high uncertainty economic environment. I could list many types of uncertainty that make the future economic outlook hard to predict but for monetary policy at this time I have in mind broadly three uncertainty in relation to what the future holds uncertainty in relation to how our policy transmits and uncertainty about the extent of structural change that we are undergoing. It is within this context of uncertainty that we are taking monetary policy decisions so for now a meeting by meeting approach is appropriate. So what is the incoming data telling us? Headline inflation measures have continued to increase partly reflecting the delayed pass-through from energy and commodity price shocks based on the recent flash estimates for November two-thirds of headline inflation in the euro area is due to energy 3.8 percent of 10 percent inflation and food at 2.8 percent far above its historical share of around 40 percent but it will be wrong to ascribe our current inflation problems solely to supply shocks. As Philip Lane has shown none energy components of domestic inflation accounting for over one-third of spending are also very high by historical standards driven by strong post-pandemic demand meeting still constrained supply. Given the volatility in headline measures of inflation we also pay close attention to underlying measures of inflation core inflation which strips out energy and food prices is at record high in the euro area at 5 percent. Over 80 percent of the items in the spending basket using to construct the price index are now showing price increases in excess of 2 percent up from just 20 percent of items before the pandemic and 50 percent a year ago. As price pressures broaden across the basket the risks of persistently high inflation becoming embedded rises and the case for tighter monetary policy becomes stronger. High current inflation rates could give rise to more persistent inflation if they lead to inflation expectations rising significantly above our 2 percent target. So what are the potential channels of such inflation persistence via expectations? One is via firm's own price setting behavior which in a bid to preserve margins and in anticipation of high inflation in the future set prices accordingly. Another cost push channel is through wages if higher inflation is expected to persist then workers will understandably look for higher wages to preserve purchasing power and employers may in turn raise their own prices. In the second quarter of this year nominal wage growth in the euro area in Ireland was around 4 percent higher than the pre-pandemic growth rates which were closer to 2 percent in 2018-19 however it remains far below the rate of inflation. To complement official data we also analyze a more timely forward-looking indicator of wage growth based on wages posted in job ads. This shows the hiring wage growing broadly in line of core inflation at closer to 5 percent in both Ireland and the euro area also well above pre-pandemic rates of growth of around 2 percent. This data is telling us two things first the labor market continues to look very tight despite the weakening growth outlook and second as the hiring wage relates to the marginal worker i.e job switches or new hires this 5 percent rate of growth in October likely represents an upper bound for the growth rate of average wages across the economy. We also watch inflation expectations and these have moved up alongside headlight inflation notably and increasing share of forecasters expect higher rates of inflation i.e above 2.5 percent over the medium term. This is a development that needs closely monitoring. If as some have suggested it could be an early warning sign of inflation expectations moving away from our 2 percent target or expectations to become desangered in this way it would make the task of sustainably returning inflation to our 2 percent target far more difficult and preventing it is one of the reasons for the forced monitoring policy response so it's clear that we needed to increase interest rates and it is also clear that it will need to increase further but having raised rates by a lot in a relatively short space of time one challenge now is to gauge how and when we expect such changes in interest rates to impact economic activity. This is the well-known long and variable lag of monetary policy we take account of these lagged effects in our economic analysis forecasting and surveys of firms consumers and financial market participants are useful compliments to hard data providing insight about expectations and future economic behavior. Our policy rate is a short-term rate transmitted via financial markets to longer term rates impacting the cost of credit and asset prices which in turn influence prices via changes in spending and investment plans. Retail interest rates have increased sharply in the euro area during 2022 mortgage interest rates are at the highest level since 2015. Loan volumes have been slower to respond although recent data shows a fall off in new lending for longer term fixed rate mortgages and survey from the data from the bank lending survey also points to a softening of credit demand. While thinking about the next policy decision we also have to account for the three types of uncertainty this is why the medium-term horizon for monetary policy is key with headline and core inflation at 10 and 55 percent in the euro area there is clearly more work for monetary policy to restore price stability so we will take our next decisions meeting by meeting for the time being but we also need to start thinking about what lies ahead when some of this near-term uncertainty recedes and the impact of current supply shocks gradually fade over time. Looking ahead the macroeconomic environment remains volatile and there is some work to do to gain a better understanding of some of the key issues. Here I'd highlight three broad developments which will matter for inflation dynamics and monetary policy in the medium term. First our understanding of the inflationary dynamics related to supply shocks. Second whether structural changes stemming from geopolitical drivers the so-called de-globalization and climate change will prove to have an impact on the dynamics of inflation that is over and above one-off price level effects and third how fiscal and monetary policy will interact in the face of cost of living pressures. The sequence of large supply shocks first COVID-19 related supply chain disruption and then energy and food prices amplified by the aggression against Ukraine's people and communities resulted in inflation that has been far more persistent and broad-based than many had anticipated. We have to ask ourselves why this was the case. For me the monetary policy strategy of looking through supply shocks has not fully withstood the test of the last two years. Supply disruptions in different parts of the global supply chains quickly pass through input prices giving rise to more persistent and broad inflation adding to the desangering risks I mentioned earlier. Some pandemic related supply shocks have receded such as the recent large falls and shipping costs. Food and energy price developments however remain tied to evolution of the events in Ukraine. Over the medium term Europe is unlikely to revert to a dependency on Russian energy. This means that supply will remain constrained until alternative energy sources are secured or developed. There are counter balancing supply and demand factors at play here however the relative sizes of the two shocks matters and there remains much uncertainty around the project paths. This matters for monetary policy as it targets demand. The pandemic exposed the fragility of global supply chains that up to then had prioritized cost reduction while globalization should in theory allow for the sharing of risk internationally a lack of diversification in supply chains created risks of its own. Excuse me even before the war in Ukraine there were gradual shifts away from international cooperation. The backlash in some countries reflects in part the course globalization has taken in particular the perceived uneven distribution of benefits within and across countries. More recently countries have introduced industrial policies based on geopolitical concerns that place a higher weight on security relative to efficiency with the US explicitly pursuing a policy of friend shoring. This type of regionalization of the global economy may have positive effects on output in the short run. However it could also give rise to further inflationary effects in the medium term given the importance of imports from lower priced economies in maintaining low inflation rates in recent decades especially in goods. In fact in Ireland the swing from a more than two decade run of goods deflation to now experiencing substantial goods inflation is one reason for the higher inflation we've seen in recent months. Another consideration for inflation dynamics is climate change. The change in climate has already arrived with extreme weather events becoming increasingly common with impacts on food and supply and prices. Accelerating the green transition is the best way to limit our vulnerability to these as well as to geopolitical events. The impact of the transition on prices remains uncertain in the medium term but will depend crucially on the policies pursued by governments. Policies compatible with stable prices in the medium run would aim to suppress demand for fossil fuels and stimulate investments in and developments of renewable technologies. Moving sooner allows for a more gradual and predictable implementation of these policy changes and would greatly reduce the costs. However the outcomes of the most recent conference of the parties, COP 27, indicates that the risk of a disorderly climate transition remains. A slower pace of transition means that central banks and other policymakers would have to grapple with much larger energy and food price shocks which as we have seen can have larger and more persistent impacts than previously understood. Finally, our fiscal policy response to high inflation is important with consequent implications of monetary policy. While it is appropriate on both economic and social policy grounds to protect vulnerable households from shocks to energy, broad-based measures to support all households will serve to boost demand at a time when restraint is needed. This may necessitate a stronger response from monetary policy makers than would otherwise be the case to bring inflation back to target. It is clear that fiscal deficits in euro area countries are turning out to be larger than originally anticipated in part due to these supports and it is another area that will undoubtedly receive attention from the ECB staff's December forecasts. We also need to be conscious of building in cliff-edge effects, that is if fiscal actions now are merely delaying demand adjustments to a permanently higher price level or equally postponing real wage adjustments into the future. A key question is to what extent the supply shocks we have experienced over the last two years are structural. That is have they permanently reduced aggregate supply to the extent that monetary policy has to work harder to bring demand and supply back into balance. The rapid emergence of above-target inflation around the world has raised concerns that the era of low and stable inflation is coming to an end. Forces driving global growth in recent decades, which included technological advances, globalization and rapid population growth were strongly disinflationary. These underlying forces have not gone away, but they are now being counterbalanced by the large supply shocks we have seen in recent years, future supply shocks that could be coming our way and the strong demand we have seen coming out of the pandemic. The debate on the inflation regime that will shape the long-term will no doubt go through many iterations. Econometric models are the main tool to make longer-term forecasts beyond one year, but they are less well equipped to address turning points, where transitions may be reliably identified only after they have happened. To address this, central banks sometimes draw on unobservable concepts such as neutral or equilibrium rate of interest to help understand where interest rates might end up after all the shocks have faded away. The last 30 years had seen a market decline in the neutral rate, or R star, as it is also referred to. When assessing the star's monetary policy, essentially whether it is accommodative, restrictive or balanced between the two, policymakers often talk about the policy rate relative to R star. Such estimates do give us a framework within which to think about the longer-term structural forces that are driving inflation and an approach to assessing the monetary policy stance. These estimates also give us one perspective on the longer-term drivers underpinning interest rates and a potentially useful way of thinking about the counterbalancing structural forces that are at play. However, in the context of current discussions about the future direction for interest rates, I would also highlight the practical challenges that arise for a policymaker using R star estimates that have been shown to be both highly uncertain, unstable and often overly sensitive to the addition of new data points. I remain cautious about overrelying on R star estimates to guide policy at this time of elevated uncertainty. Central banks can and should communicate about where they see their policy rates in relation to a range of R star estimates, and I emphasize a range rather than a point estimate, not least because it is a useful framework for thinking about structural change and longer-term economic narratives. However, in relation to the other uncertainties I've highlighted, the economic outlook and how our policy is being transmitted to the real economy, given this outlook, we need to pay close attention to the incoming data on real and financial developments that can impact inflation dynamics. So let me conclude. What is over the horizon is the question, the title of this speech. Probably the most overused phrase by central bankers recently has been extreme uncertainty, but that reflects the reality of a period that has seen a global pandemic, the closing down and reopening of major economies, Russia's war and an energy crisis, among other shocks. Amid that uncertainty, one thing is very clear that the ECB is determined to deliver on its price stability mandate, and we will continue to take the necessary steps at our forthcoming meetings. Thank you very much.