 Welcome back to the ECB's Monetary Policy Conference, for one of the highlights of the conference. There were many highlights, but this is definitely one of them. We have the policy panel and we're very happy to have three eminent monetary policy, European monetary policy makers with us. First of all, Anna Brehmann, the first deputy governor of the Swedish Riksbank. Then we will have Ben Broadbent, hopefully online, from deputy governor of the Bank of England, and of course our own Philip Lane, member of the executive board and chief economist of the European Central Bank. So we kind of agreed that each of you will have a short brief introductory remarks to sort of set the stage, and then we'll go into a Q&A session, hopefully also with the audience at the end. So Anna, can I ask you to start? Of course. Thank you for inviting me. It's very good to be here. I feel that I represent the small open economy central bank in this setting. So I'd like to start by just giving you a brief overview of inflationary dynamics, our monetary policy stance, and also the transmission of what we know so far. So if you look at the inflationary dynamics in Sweden, they've been remarkably similar to sort of an average euro area country. So inflation peaked just over 10% in December last year, and now we're down at around 4.7% using CPIF. CPIF is our preferred measure of inflation. It's basically CPI, but with fixed interest rates. So we take out the effects of our own interest rate hikes. HICP for Sweden was at 4.5%. So that's for August. We don't have the September number yet. So in terms of dynamics, I even looked at the energy price developments, and energy prices peaked about 43% in December last year in terms of annual terms, and it was like 44% for the euro area. So the whole developments from energy prices, goods prices, high food prices, and now stubbornly high services prices is very similar to developments that we've seen in the euro area. And of course then, given that the inflationary dynamics and the shock has been very similar, monetary policy stance is also similar compared to Europe. So we're at the policy rate first. It's at 4%. So we did a 25% basis point hike last meeting in September. In terms of QT, we don't do any reinvestments as of the end of last year on a monetary policy portfolio. We have government bonds, covered bonds, corporate bonds, and municipality bonds. So we do just let it run off. We have a relatively short duration, but government bonds have a longer average maturity. So we're actively selling government bonds. We took that decision in February. 3.5 billion SEKA government bonds are sold every month. And at the June meeting, we increased that to 5 billion. So if we keep this pace, the runoff of the private assets and the government bonds will follow the sort of a similar path. And we peaked at about 900 billion in our monetary policy portfolio and will be down at 100 billion by 2026. So it's a relatively fast QT. And then finally, communication. So in terms of communication, we have stressed data dependence like many other central banks, but we do have a policy rate path. We've had that for many years. And in this environment, having a policy rate path has been somewhat challenging, but we decided to keep it. Currently, the policy rate path is indicating that there might be another rate hike at the end of this year, beginning of next year. That's about a 40% probability for another rate hike. And then the discussion right now is whether central banks will do the sort of table mountain matterhorn shape tightening. Our policy rate path very much resembles the table mountain. So we're saying that we'll keep the policy rate path at this level, policy rate at this level or higher for another considerable period of time. So that's the overall monetary policy stance. If you look at the transmission of monetary policy, our overall assessment is that it's been normal during this hiking cycle compared to previous hiking cycles, but there are a few notable exceptions. And if there's one thing that people tend to know about Sweden is that households are relatively highly indebted. So there was some expectations that monetary policy tightening and this front-loading that we did might go through the economy rather fast through financial conditions to demand and then to inflation. What we've seen is more that it's been normal rather than fast the transmission. And there are two factors that I'd like to stress that has been somewhat different compared to what we've seen historically when we've done tightening. And the first one is the pass-through from policy rates to deposit rates. In terms of lending rates, it's been normal, but banks have been slow in terms of hiking the deposit rates. And this might not matter that much, but it matters in the environment we're coming out of a pandemic where households have a lot of excess savings. They don't get any new incentives to save more because banks are so slow in hiking deposit rates. And in addition to that, we have this post-pandemic shift of preferences towards services. So we've seen very strong demand in the services sector being boosted by high excess savings from the pandemic. It's one reading. And the reason why I stress it, because we don't have wage growth to the same extent as the rest of Europe. I'll come back to that later. The other thing that we've seen is the pass-through through the currency. So the Krona has depreciated against the dollar, which is understandable given the Fed tightening cycle. But the Krona has depreciated almost 20% against the euro since the beginning of last year. And in the small open economy, of course, this is a concern when inflation is high. You get an effect on import prices, et cetera, particularly goods and food prices. But you get all the other effects on the economy through demand. The export sector has been doing extremely well. It's slowing down now, but it's still been a boost from a weak currency. And in addition, you get people who want to travel might just stay at home. You get a lot of inflow of foreign tourists. The whole services dynamics has been boosted by the weak currency. And it can't be explained by any fundamentals. In terms of market expectations, any way you look at it, 20% depreciation is not a normal pass-through in this environment. Final comment on inflation expectations. And that's more of the good news for us. Inflation expectations, if you look at long run, you tend to call the medium term. We tend to use long run inflation expectations. They've been stable throughout this whole episode. We have collective wage bargaining. And collective wage bargaining has used the inflation target, the 2% anchor, as the anchor for the whole wage negotiations. So we have had the wage negotiations coming up with a two-year agreement with wages increasing just over 7% accumulative over two years. So that gives us a very good situation in terms of bringing inflation back to target in a timely manner. But it's still hard to explain services prices being so high. They're actually even a bit higher than the euro area. So overall, we've seen normal transmission and monetary policy with a few exceptions. More resilience in the economy than expected given the interest rate sensitivity among households. But overall, normal. And I feel very confident that we will get back to our target within a timely manner. It was the middle of next year. Thank you. Well, thank you very much, Anna, for giving us the Swedish context. So I guess we'll go alphabetically and from smaller to larger. Ben, thanks for joining us. Flor is yours. Thanks very much. Thank you very much for asking me to do and I'm sorry I can't be with you in person. We always count ourselves as a small open economy as well, even if we're large in Sweden. And I'll come back to some of the implications of that in a moment. So we were asked to talk about, in particular, the transmission of policy. I wanted to make a few points in that context. One is an obvious one, which is that no cycle is quite like another. When we estimate these things, we do so over many episodes just because lots of other stuff is always happening. You have to be able to control for those things when you estimate the effects of policy or at least they average out in some ways. But I don't think we should expect any episode to look exactly like some impulse response from our empirical estimate. One obvious example through this episode for Europe, at least, has been these huge durations in energy prices. I don't think it's a coincidence that if you look at the high frequency indicators of activity in Europe, both in the UK and the Eurozone, and I'm thinking it was something like the PMIs, they fell pretty steeply both in absolute terms and relative to the United States. During the first six months after Russia's invasion of Ukraine, when energy prices rose very, very steeply, they then started to improve over the following six months, so say from September last year through to this spring. And then declined again once energy prices started to stabilize and indeed edge up a bit. All we've got other things happening, and that's one pretty obvious thing that's been happening in the background and notwithstanding the blunting effect of fiscal policy, which was considerable. I think these movements in energy prices had material effects and one has to, if not strip them up, at least recognise that. There are now signs, I think reasonably clear signs that monetary policy tightening is having some effect, not least in the shape of demand. In the UK, the most interest rate sensitive bit of demand is always related to housing, spending on consumer durables, housing investment, and those things have weakened quite a lot. Even in aggregate, we've seen weaker demand growth and the beginnings at least have summarised unemployment, which is now up about three quarters of a point from a year ago. It's not unreasonable to attribute those in part at least to tighter monetary policy. What said, I think it does look a bit weaker, but here I'm talking about the effect of policy. Demand has been a little bit stronger than we did expect. Some of that is due to the response of fiscal policy. With SOB, and I just don't think it's easy to tell yet, the tighter policy is either slightly weaker than in the past or somewhat delayed. One reason for the weakness relative to the average estimates is exactly the same as Anna highlighted. When everyone's doing it at once, the currency doesn't go up in the way it would if no one else was tightening monetary policy. It may also be that at least relative to the past in the UK, the fact that mortgage debt is not entirely priced off the spot rate, but instead depends more on two or three interest rates and comes through only when people refinance their mortgage debt. That channel two is slightly delayed. The average mortgage rates on the overall stock of mortgage debt have gone up about 100 basis points only, while the relevant swap ways have obviously gone up much, much more than that. So one might expect that yet to come through. It may also be that that helps to explain some of the differences in demand across either side of the Atlantic. I suspect that part of the reason the US, Europe is weakened in the United States is still the lingering effects of this big terms of trade shock, in particular the rise in energy and food prices, but other things as well. That is now abating. But it's also notable, I think that if you look at interest rates that actually prevail, I gave you a number for the United Kingdom on mortgage debt, the average interest rate has gone up about 100 basis points and will presumably rise further over the next couple of years. It's barely risen in the US. I think it's up about 20 basis points during the cycle and remains lower than it was in say 2019, with much, much longer term debt, US households only have to refinance if they move essentially, and they're choosing not to move house. That has implications for the housing market and maybe the supply side in the US, but it also means that a lot of households have been shielded from the very sharp rise as an interest ratio and long that we've seen over the last year and a half. Anna mentioned the overall path of inflation and the policy. And again, there are differences across countries. Our services inflation has been even higher. But overall, everything has a pretty similar shape to elsewhere. I don't think we are so confident that inflation will be back at target in a year. Our forecast will show it above 4%. Equally, I think over time, the normalization of the terms of trade and the gradual effect of the continuing effect, even if official interest rates weren't to rise any further. And that's an open question. We'll come back to it in the discussion. On our forecast, it will be enough at least to assure that in two years, we expect inflation to come down to the target. I'll leave it there for the time being, Frank. Thank you very much. So let me then turn to Phillip. Okay. Thank you, Frank. And in terms of size of economy, of course, the area is a little bit bigger. And the exchange rate channel is still visible to us, but obviously, it plays less of a role. So let me start with the inflation situation. So October last year, inflation got to around 10% in the area. In September, it was low fours. In our forecast, we have low threes in the last quarter of this year, which is basically stitched in for base effects. Remember, the peak of the energy surge was around August last year. So basically every month now, compared to that really high level, there's a role for base effects. So we have low threes basically in the background. The forecast says we'll be back at 2 in mid-25. And it's important to recognize that the roughly sideways move of inflation next year is basically the result of the lifting of fiscal subsidies. So as both of you mentioned, I mean, fiscal played a really big role, especially at the end of 22 started this year. Countries have basically schedules of when these subsidies will be lifted. And we will see this at the end of this year, early next year. So the headline inflation rate will look like it's not making a ton of progress, if this conjecture is correct next year. But if you like the underlying forces should lead inflation back to target in mid-25. So let me say, I mean, do I think, I mean, if you're super naive, you would draw a graph and say, well, the delta in inflation is already 6 percentage points. The delta in interest rates, you know, we've raised by 450. And look at this amazing contribution of monetary policy. That is obviously not the way to think about it. But what is true and the ECB staff have published assessments of this is if interest rates had not been moved, clearly we would have a very adverse dynamic. Having inflation far away from 2% and very low interest rates would have been a very destabilizing dynamic. So if you like the first contribution of monetary policy was not to make life worse, not to add prostitucality to inflation dynamic by having real interest rates that were too negative. So I think, as you also mentioned, I mean, the fact that inflation expectations over the medium or long term are being anchored, this is fundamental to the assessment that inflation will come back. Let me mention also again in terms of the impulse response of this really big shock last year where we know the labor market moves slowly. So we had a big drop in real wages. And so a fundamental part of our assessment has been we're in a multi-year phase of normal wages growing above their long term steady-stage rate of increase. So in our projections, we have like mid-5 this year, mid-4s in 24, mid-3s in 25. And that is essentially explaining why despite energy inflation now being negative, it still takes time for inflation to come back. Ben mentioned that every episode is different and it's difficult to overstate that point in this case because we have basically have two big reversals going on. One is the reversal of the surge in energy. And we do have to remember, we all think we know a lot about oil dynamics, but the gas dynamic last year was just so unusual. And it has been, I think, a lot has happened to first of all reduce vulnerability to gas prices and second true this really big response in terms of LNG adaptation. The response helps to explain why the economy is not growing very much at the moment, but I think it's been very important. And then a reversal which we have to remember is reversing away from the pandemic. That has different phases. Part of it is, as Anna said, I mean, when there's reopening happened, there was a kind of phase of strong demand for services. I'm interested in what you said about Sweden. And one of the questions for us now is after the summer, which was another good summer, in part because of the fact that the Euro looked attractive against the dollar for American tourists, of course. What we are seeing is this spreading of the kind of multi-titling from manufacturing also to services. So that essentially helps to explain why we do have this downgrade in GDP recently. Okay, let me switch to transmission because we have, I think, different transmission in the Euro area. One big thing which I don't think applies so much to Sweden or the UK is part of what's happened is we were coming out of a kind of atypically super accommodative monetary policy beforehand. And this is not just about the pandemic. It's the years before the pandemic. And it is also the de-anchoring to the downside of inflation expectations. So in the keynote yesterday, Doug Diamond showed these amazing yield curves. So you see, well, what was everyone convinced about before the pandemic? They're convinced of a super flat, maybe some progress, but basically nominal rates probably not rising much above zero. And look where they are now. And I think part of the transmission in Europe is partly that there is a permanent component here. The narrative that we're going to be stuck in a low for long is not there. There is confidence that we're not going to be stuck at 4% either in terms of the policy rate. But the price scene is basically over a number of years, a kind of super gradual return to maybe about two. And that is such a different pathway for interest rates. It makes sense that if you're trying to think about housing markets, investment projects, that's a pretty big impulse. In terms of the mechanics of transmission, I think we see on lending rates. It's mostly in line. It's a bit strong for firms than maybe the historical episode. But maybe I'll emphasize what Lorenzo, yes, in the discussion, emphasized also. In terms of credit dynamic, that really has been quite weak and below what we would have expected, say, last year. And in turn, this helps, this can be reconciled partly because of that long-term change in the interest rate environment, but partly also through the balance sheet policies. Banks and this connects maybe to Viral's presentation yesterday. Banks, if you go back late 21, would have had a kind of vision of a lot of liquidity being in the system indefinitely. And then with the, okay, the telltale roll-off was scheduled, but the broader environment is less liquid than they might have expected. And this is what they tell us. They tell us in the bank lending survey, they are tightening credit in part because of the, if you like, the move in the ECB balance sheet. So I think we see a lot of transmission. The fact we've downwardly revised GDP in the near term reflects that among the many models of transmission we run, the evidence is favoring those with significant transmission. So I'm mindful we need to get the questions and so on. So rather than trying to be comprehensive, let me just stop there. Okay. Thank you very much, Philip. I mean, one common theme, there's many common themes, but one common theme is obviously the assessment of the transmission of the tightening, quite substantial tightening that has taken place. And so I was wondering whether we can dig a bit deeper into that. In particular, one question is, okay, we're seeing some signs, but how much is still in the pipeline? That's obviously will be very important for the inflation outlook. Another question, which I think also Ben already pointed to, there have been many structural changes. Of course, there's all the supply type shocks, but there's also, I mean, changes in financial structure. How have they changed the transmission of monetary policy? And then maybe a third element, which we haven't discussed so much yet, is the role of the labor market, which I mean, in many ways, is kind of the last part of the chain and where we see in our jurisdictions that there's still a lot of resilience. And so how to interpret this resilience in the labor market in the light of, you know, this very significant tightening and also the fact that economic activity has already slowed down. Anna, you want to go first again? Yeah, there's a lot of great questions there. Yeah, just pick and choose. But I thought I could comment a little bit on the timing and how much is left. I think if you look at the tightening cycle, we did our first rate hike in April last year, but the large share of the rate hike was actually last fall. So we're just sort of a normal transmission lag of 12 to 18 months. We should start seeing more effects now. And I think that's exactly what we're doing. What we don't know if there's going to be somewhat non-linearities, because I think if you look at how households are behaving in this tightening cycle, first we were somewhat surprised by the resilience of households, resilience of the housing market, resilience. It's the common patterns in many countries. But I also think that when you're coming from a period of low interest rates for a long time, households and unfortunately our data is not great in Sweden in this respect, but we know that on the aggregate level, households had a lot of savings. They had a lot of wealth in terms of both financial assets in real estate but also liquid savings and savings accounts. And that buffered up a lot during the first hiking cycle. So households had, you know, they'd taken on debt while the interest rates were low but they had also been saving to a large extent. And now when we're tightening, we thought that the transmission would be rather fast because of high levels of debt. We're seeing that having an effect, but it could be that they have resilience towards a certain level and now when we're reaching those levels we might see a larger effect so that there's no linearities when you get over a certain threshold. That's hard to know and it's hard to estimate on historical data because we haven't seen such a fast tightening cycle over the time we really had an inflation target. I expect to see some clear signs of a slow down now in the coming months that we've seen so far. But so far, you know, that has been the wrong side to be on. But now I actually think that we might be seeing some clear signs because the global economy is slowing down but also because that we're reaching with clearly much more in-contactionary levels right now. So I think that the lags have not been, I think the transmission has been reasonably normal but I expect to see it stronger, more clear evidence of the transmission really working. We've seen it through the credit channel but also in terms of the demand from households going forward. Then there's a lot of other things but I'll just stop there and then we can discuss the other things. Okay. Ben, do you want to come in? Well, I mean, given what I've described, what I explained earlier that the average rate of interest, basing households, I'm talking purely about the sort of cash flow effects of policy. When I said to get the number 100 basis points for the mortgage rate, that's out on the overall stock. We think that this normally plays some part. The constrained households arise in interest payments matters. Given that's been slightly lower than in past episodes simply because of the slight lengthening of mortgage debt, I don't think what we've seen with households in the UK is terribly surprising. Consumption has not been strong. What was strong then said when the pandemic-related deposit savings were being run down, measured correctly, which I think is just to compare those with nominal incomes, if you're interested in the effect on the saving rate, I think that's the appropriate denominator. Much of that is gone and as it's dwindled, consumption has been relatively weak. The thing that surprised me certainly has actually been pockets of strength in the economy in business investment. In some areas in particular, business to business services has traditionally probably less sensitive to the interest rate. Like Anna, I wonder for how long they can remain strong. So as I said earlier, I think probably on balance, the economy has been less weak than we're expecting. The shape of it suggests that there are signs of monetary tightening. There's some reason to expect it to have been delayed because of the lengthening of debt, but it's still an open question as to whether it's simply delay or for some reason a smaller overall effect. It does matter for small open economies like ours that the United States has been pretty strong, to be honest, where those questions are more acute therefore. I think there's more of a puzzle as to why the US has not slowed. It's clearly not slowed in the same way through this year as Europe. Given the scale of the tightening in the United States, there's a question there as to why it hasn't and a bigger one than exists for Europe. All right, thank you. So I think in the pandemic there were very different sectoral dynamics. And multi-pass we know also has different effects in different sectors, as Ben just said. So in terms of looking at the data, we probably are going to have a wave of different information which will vary quite a lot across sectors. So this is about rolling slowdowns in different sectors. And there are a few contrasts to the UK experience. For example, manufacturing obviously is bigger for the EU area than for the UK. And so Ben mentioned business to business. My understanding is now the slowdown in manufacturing in Europe also means business to business services have a significant slowdown. Let me mention a few, going back to the overall transmission question, some headwinds and tailwinds. The headwinds is, you know, every week, every month, there are people on fixed-rate loans. They're expiring and they're going to be exposed to the higher rates. Over time, the pass-through to deposits is ongoing. So as more people switch from overnight to turn deposits, the overall cost of funding for banks goes up. So again, in turn, their attitude to lending will also tighten. Over time, in terms of the overall macro environment, some of the tailwinds that were there, such as the still ongoing demand for tourism over the summer, the reversal of the energy shock, and the fact that manufacturing is such a backlog of orders from the pandemic which kept manufacturing going in the opening months of this year. A lot of those are no longer tailwinds. And so it's the interaction of the cost of finance and the overall macro environment. And we are entering a phase now where maybe that will be reinforcing each other. Under the hand, under the hand, the tailwinds, and this is why we do have recovery starting early next year, is as real incomes improve. So with the reverse of the terms of trade shock, with nominal wage increases now being paid and people in your multi-year deals, if you know you're getting this 7% over the next couple of years, and in some European countries it's 10% over the next couple of years, then the consumption dynamic will be reinforced. And then for real estate, one of the open questions is, I think in some markets, once it finds the bottom, because the yield curve, a lot of the adjustment was early 22 in the yield curve. So if you think about the housing market in some countries, it's been falling for a long time, but they don't wait until multi-titling is over to start reinvesting. It's when they think you're at the bottom of the market. And so maybe to be going back to standard patterns, I mean, I think standard patterns, construction, the worst is after about a year, and then it picks up off the floor. It's not back to normal, but it picks up off the floor, where services may be getting worse in year two, having been less affected in year one. So this handover between different sectors I think is relevant. Just to come back to Frank's point about the labor market, this for me is a super open question. We think labor hoarding has been going on, and there's different issues here. One is, if I have a lot of people on staff, is my marginal labor demand going to be pretty weak? Am I going to be so interested at the margin to hire more people if the macro environment... So in turn, the environment for wage bargaining is that the average is at the margin, and if marginal labor demand is weak, that that should help the disinflation. And then second is we have this rebound from the start of next year, which is fairly strong. And so I can imagine a firm holding on to workers in anticipation of that rebound. But if that proves not to be the past, then the kind of transition from being a labor hoarder to being a normalizer of that situation could be quite significant. So I think we will definitely be data dependent in looking at the labor market. But also, the way you phrase it at the end, the labor market is at the end of the transmission chain. It's lagging and so on. So we do also have to remember in looking at that its connection to the overall cycle has a lagging dimension. On this last point, I guess also the structure, the fact that services have been doing pretty well, which are more labor intensive, probably also helps. So the services sector will be an important sector to look at. Yeah, no, but I was thinking about, because you asked both about the structural shifts and then about the labor market. And they might be highly related here. I mean, it's all these sort of dynamics in terms of just the business cycle that we've seen a strong demand for services, they're labor intensive. But if we look at what we're seeing in terms of the structural composition of the different sectors in the economy and the transmission, we do see a relatively fast transmission in terms of construction coming down. We do see demand for exports slowing down, but we don't see any increases in unemployment in those sectors at all. So we clearly see labor hoarding. And we see a structural trend that seems to be relatively consistent among many countries. And that's just labor hoarding, but it's skill, lack of skilled labor. That means that the companies are holding on to labor, but there also seem to be thinking in terms of the structural changes in the economy knowing that they will have to invest in the long term and therefore they're seeing this as a temporary shock. I'm thinking about in terms of our exports, the green transition is creating a lot of demand. You're seeing a boom in labor up north that used to be relatively weak because you get a lot of new industries booming because of the green transition and large investments in those sectors. So I think there is this combination now of the labor market being the last part almost of the transmission in combination with the structural shifts. And on top of that, you have the demographics and the aging with people leaving the labor market, not leaving the labor market and also firms knowing that they have to hold on to the skilled labor that they actually have because it will be so difficult to find new people. So I think those things are interacting. The key thing will be services. We've seen strong demand in services. We've seen people who were outside of the labor force coming in and getting jobs in the services sector. If that starts flowing down clearly, then it might be different just in a few months' time. But otherwise, I think the skills story is quite important. Ben, you want to comment? Thanks, Frank. Just to follow up on that, I mean, the labor market for us has been an intense area of focus and was behaving oddly or at least unusually even in 2021. It was a puzzle to us early that year. For example, that as economies as the UK reopen and employment started recovering, firms drew their employment from, it seems, from the ranks of the unemployed rather than the vast numbers we were reported at least to have been furloughed. We've seen, we saw that year a very significant sort of right-was-or-upper shift in the beverage curve, which also suggested there was some mismatch or the labor market was functioning less well. That was an obvious feature of the economy in the US as well and it was certainly one in the UK. Some of that has started to unwind. We've seen vacancies, numbers coming down and we're at the VU ratio. Equally, I would agree that we're seeing some labor hoarding and we're hearing that from firms as well. That one might make one a little more aware about what will happen to employment going forward. There may be some point at which firms decide that, as Philip said, that demand does not recover in a way that we justify having held on to those people, that it could weaken quite suddenly. The only other thing I'd say is just to back up what Philip said about these being traditionally seen at least as late cycle indicators. And this is a clear risk in both directions, obviously, or policy. Back in the old days, and by the old days, I mean what Mervyn King once called a nice decade before we thought there were such things as supply shocks and we lived in a world that looked or was at least believed to be like the divine coincident in which the monetary policy that stabilized inflation was also the one that stabilized demand. All you needed to explain movements in official interest rates in the UK was demand itself, nothing else mattered. I'm talking about empirical estimates of some kind of response function. As we became more uncertain about supply, policy makers started paying more attention to the labor market on the view that movements and unemployment were a more direct measure of changes in slack and a little bit more reliable perhaps even if there was a delay between those and demand and changes in demand themselves because you weren't exactly sure what was happening to underlying productivity. In the last two years, given this dysfunction in the labor market and the severity, extreme severity in the UK of second round effects, what looks like a lot of real income resistance, which can itself be expressed as a rise in the narrow where therefore paid more attention to wage growth and indeed price growth and the MPC has been reacting to these things. But in the old view, those are all pretty late cycle indicators. And so there are, you know, scenarios in which this embedded inflation has to be responded to further. There are equally ones in which actually the weakness and the real economy accelerates. Those nominal indicators come down but policy doesn't ease as early as it might have done in those earlier episodes because we simply can't be sure what's happening to the supply side and to the natural rate of unemployment and so forth. So we have been in a sense trading off timeliness for information about the economy and responding to, as it rightly called traditionally seem as later cycle indicators but there are risks embedded in that. Thanks. Can I make two points? One is that, you know, Sweden may well be benefiting as an export of green transition technology. That's also visible in the U-area. I mean, the counterfactual where we didn't have the green transition, I think the slowdown would be worse. It is clearly both through the public investment for that, for the green transition but also private investment. It is, if you like, an autonomous source of support for the economy. The thing I meant to say is because I think I would take a different view about the impact of the Fed. So you were both emphasizing, well, multi-policy is kind of less effective because you don't get the appreciation from tightening. And of course, that's also true for us but I think we would think of the dominant fact for two-year head inflation being global tightening slows down the world economy. It cools down commodity prices and also through the long end of the yield curve also rising term premium. So on net, the reason why we think we'll get back to 2% is not just the tightening we have but the global tightening as well. Whereas in the short term, you might get currency effects but for the medium term, I think we do think it plays its role in addition to what we are doing. I very much agree on that. I do think that the global tightening is beneficial and it's contributing to the quick slowdown on some of the supply or better balances between supply and demand that we're actually already seeing in the inflationary dynamics. But I think that from our perspective, we knew that you would get the impulse from import prices through the global slowdown and that would reduce the import prices by getting a 20% appreciation against our largest trading partner in this hiking cycle when our tightening has been at par and in terms of QT doesn't seem to be as important to Marcus maybe a little bit more now going ahead. But in terms of the inflationary shock from a weak currency, we can estimate that. It's always a lot of uncertainty and we have a rule of thumb that 10% appreciation would get 0.5% points on inflation over time if it's sort of a persistence or maybe just 1% point from 20% appreciation. That's reasonable to handle given the tightening but we don't know if the effect of a weaker currency might be stronger positive in this environment because firms use it as an excuse. It becomes a focal point in terms of hiking prices. We've seen it particularly in food prices and also in goods prices. It's a bit difficult to explain that they haven't come down faster given what we see in terms of the global developments and commodity prices. So I just wanted to stress that I agree with you that it's good with the tightening but a small open economy. This tightening has been more challenging because of the depreciation. If I can broaden the issue of the exchange rate which is I guess one financial price that we can use to assess also the stance of policy particularly in small open economies. More generally, how do you assess whether the current policy stance is restrictive enough in the light of of course some of the structural changes that we talked about but also in the light of discussions about where our star may be or may not be whether we will see sort of an increase in our star we have seen already an increase in our star partly because of the need for higher investments but also the fact which I think you mentioned Anna that we not only have the interest rate but there's also QT going in the background so that has I guess an impact on our stance and then in the current context we're sort of moving from the focus on the level of the interest rate to sort of the duration. I think all three of you mentioned that again that also raises questions about how to actually measure the stance of policy. So I was one and then another fact but you've already mentioned that is also the fact that this is in the context of a global tightening so that has also an impact. I don't know who wants to go first. I can start but I can keep it relatively short so we have a lot of internal estimates it's relatively wide range our estimates of our star and we're now sort of at the upper limit is above our internal estimates we haven't been very vocal. I think it's correct to be cautious right now in terms of having a strong stance of what we believe given that there are a lot of changes happening the shock was unusual and on top of that you have structural changes in the economy going on but I think that in terms of what we do and have a policy rate passed that's been had this shape you know front loading and then we stay at a certain level for quite some time that is important given that uncertainty so part of that is risk management. It's important for us given that we don't quite know if our star might be rising over time to say that we aim to be restrictive for quite some time and I could go in much more detail and I can come in later on that but household and there are already several both Ben and Philip has mentioned this but household and firms expectations are very important in this environment so it could be let me keep that one for just a while but I think that it's currently it's really important to ensure that households and firm understand that we're not just very quickly getting back to what they were used to for a long period of time because that in terms of the effects are being wrong it's much worse saying that we will hike and then do quick rate cuts and then end up being wrong about that and having to stay for a high level for a long time compared to saying that we plan on staying at the high level for a long time things end up being better than expected well then that's not as problematic but I think that the uncertainty on our star and that it might be trending up is one of several justifications for saying that we need to be in restricted territory for quite some time Ben, you want to comment? Thanks very much I'm a skeptic about our ability to say what our star is in real time as it were as well yesterday a presentation about it had two different methods which over the long term gave roughly similar messages about how our star had moved but over the last two years one had gone up and one had gone down and around each there was quite a wide range of uncertainty anyway I think what tends to happen with these estimates unsurprisingly is you set policy in response to observable things all the stuff we've been talking about we then look back after the event and say well look such and such a thing happened to our star so I rather doubt it can be a useful independent guide to policy given all these observable things to which you respond and what one wants to do roughly speaking is have a sort of policy reaction rule that is robust in that uncertainty so I've always been a fan of the quote that John Williams has used often from his namesake and economists back in the 30s also called John Williams who said that the usual rate of interest was like faith seen by its works and those works appear after the event not in time of course embedded in any economic forecast whether or not you use some optimal path for policy there is a view about what that is and if you look at our our own forecasts where inflation comes down but it only gets to target in a couple of years also then implicitly what we're saying is the neutral rate of interest over this period is clearly higher than it was before the pandemic but that is a reflection of all the other things we're assuming in the forecast there is no sort of independent information about it the estimates that were done the longer-run estimates before the explanations that economists had for lower star demographic effects of longer lifetimes maybe rising inequality, various things those are relatively slow moving things but over the kind of periods that we think about for setting policy two, three years my view is that those are really useful as I say given what the observables are and in practice when we said earlier this year we thought policy was restrictive it was not because we had some independent a precise estimate of R star and we had suddenly moved above it it was because we thought things happening in the economy again all of those things we've been talking about that indicated that policy was restrictive that we had probably moved above whatever the prevailing level of short-term R star was so that very useful it's a very useful construct but I'm not so sure of what value it can be these independent estimates when you're setting policy in real-time thanks so let me, I mean yesterday morning Marz was saying well I'm going to look at accommodative policy as a real rate below R star and I think we would think where we were before the pandemic was definitely accommodative so what I would say is when you think about the 450 basis points of tightening most of that is moving from being accommodative to being restrictive it's not reflecting changes in kind of the steady-state R star so until now I haven't spent a lot of time worrying about where is steady-state R star is it drifting up, is it drifting down because I think there's arguments on both sides of where R star might be it would become more interesting in a while when we eventually get to the normalization phase when we need to bring rates back down from where they are towards the steady-state then the kind of vision about where we're going to be even then to the extent we go step by step there's a lot of feedback loops and so on even then the uncertainties that have been raised are relevant so this is why I think I mean been referred to is then moving to a different concept which is you have some steady-state but then depending on the shocks you face the interest rate you need not to be adding or subtracting inflation pressure does move around so when we had all of these big shut-downs of the economy the interest rate and then they reopened the interest rate you would have needed to have known inflation pressure would have been quite high and then it's the bottlenecks reverse then that eases to some extent so I think it can be helpful to think about that but in the end restriction is basically in what you see so I think minimal conditions are you seeing inflation falling especially the underlying measure is that yes we are are you seeing there's a cross-check with credit because if you had basically interest rates that the world believed were below where they should be you should see very passive credit dynamics we don't have that so the whole assessment is it looks like we are restrictive what I said earlier on was we think would be low-strees inflation at the end of this year so we need to squeeze out about one percent of inflation to go from low-strees to two then you have to ask okay how long do you hold at four percent in order to do that work and I do think four percent is a restrictive level then it goes to the issue about there are different strategies you can basically as you said the table-mounting approach you can take different approaches to how you deliver two percent but what I would emphasize which I think is in the spirit of what you said is robustness and the robustness of being around four because what we've seen over the summer is this surge in oil prices and yesterday I think it was in actually Jesper's paper as well I think in the presentation it's the interaction of the cost push shock and the monetary policy stance plays a role so we did have an accommodative monetary policy so when you had these cost push shocks there's not much in the prevailing policy to lean against it at four percent at a more restrictive level of demand it's kind of worth thinking about what will be the ability or firms to pass through higher energy bills into prices it's going to be a lot less at this level of interest rates than it was at the level of interest rates two years ago so restriction I think is again exposes a lot easier to calculate than ex ante which is not super helpful I know but I would kind of look at the joint dynamics of credit output and prices and then make it out from us I mean I saw we had actually two questions which are related to real interest rates and our star from the WebEx one by Julian Callow perhaps we can discuss the sharp rise in the term premium over the past month and also whether there is a greater role for analysis and focus on real interest rates on real interest rates in modeling from Ben Nelson do you infer anything from the resilience of many of these economies about so-called neutral interest rates in the longer run I guess this is related to the fact that to the extent that there is this autonomous spending maybe that leads to an increase in the real rate and at the same time makes the economy more resilient anyway I don't know if any of you want to to add something related to this question so maybe it's worth because I mean I think all the models run through real rates so we absolutely think about real rates and so the issue is if it turns out we all hold at more or less current nominal rates for an extended period of time since inflation is projected to be falling we have rising real rates next year on the other hand we also have this projection we'll have rising activity levels there's going to be recovery from the current stagnation so in other words people say well why are you going to keep nominal rates so high when inflation is coming but basically the kind of activity levels in the economy are also scheduled to be going up so the disinflation if you like under the assessment we have does require its consistent rising real rates next year because we do have the recovery and all of this I think is coming from the very basic fact in the end what we have is recovering from very negative supply shocks we're below the maybe unlike the US we're below the kind of pre-pandemic trend there's a lot of recovery needs to happen there's a lot of natural momentum once real income starts to grow and that naturally can be maturizing real rates but having the combination of kind of relatively stable nominal rates and falling expected inflation that's how the model adds up right now is to have that so absolutely to Julian I mean everything we do is filled to true real rates but what I would say is you need to look at those real rates in the full macro model you can't say definitely ex post real rates are some kind of sufficient statistic that tells you everything you need to do the full macro analysis I'd like to just relate it to what we've seen regarding inflation expectations during the shock so if you look at real rates do you look at current inflation do you look at inflation expectations of the medium term or shorter term what goes into your models I highlighted that we are pleased that our inflation medium term inflation expectations have been very stable and that is actually market based and other participants in the economies survey based long term inflation expectations but there's been an enormous variance in inflation expectations across different actors if you look at households firms or market participants and it's also been over different time horizons so it becomes very complicated if you consider the different measures that you can use in this respect and I'm really pleased to see that there's a lot of new research coming out on inflation expectations and how they matter for the transmission of monetary policy because it's still an area where we know little still I don't think anyone in policy making would disregard inflation expectations in any way but I do think that for example we've seen this nice downward trend in inflation expectations market participants and firms but recently we've seen an uptake even though inflation is coming down even though electricity prices come down even though food prices have been stable now for months household expectations short term household expectations are actually starting to go up again I'm not comfortable with that we know that households tend to we know a lot about how households form their inflation expectations we know that they tend to not be that important at least not when inflation is low and stable if you look at the modelling lots of different research but in this environment can we feel comfortable with short term inflation expectations rising for the transmission so I think the question on real rates is important but I think there will be lots of interesting research to be done in this field going forward that help us because we get so much more variance out of this episode Ben do you want to No I think the speakers covered it well I mean obviously we use real rates in the core of our models I mean changes in nominal rates matter but the core model has real rates in it but as Phillip said this comes back to the question of our style there is no single level which is permanently either above which you'll restrict or below which you'll not we had deeply negative real rates across the world for many years after the crisis and inflation in many jurisdictions was below target which is simply a restatement of the fact that our style was low and whether or not this has implications for the long run we don't think is knowable and that was Ben's question it is in the nature of long run things it's difficult to estimate changes over relatively short periods of time and unfortunately even a year of this can't say it's a relatively short period of time is the effect of tightening delayed or is it lower because our style has gone up I mean I I just don't think it's possible to answer that question with any precision okay I think it's high time to open up the floor also to the audience here let's see if there's any questions I don't think I have any other questions from from Webex yes please maybe David first from trial Thank you, David La Pesarita from the Federal Reserve War so I have a question that might be too big but I would like to see what you think about so given the parameters of the conversation that emphasize uncertainty data dependence and thinking about policy and uncertainty about the underlying factors of the economy in the medium to longer run and what's your perspective about what's the implication for the framework of monetary policy are you involved in thinking about the extent to which that might change the way central bank should think about policy going forward given what's been done in the past few years in thinking about that and the second question is informing and communicating policy what's your view on in these kind of context the trade off between remaining the data to understand what the true state of the economy is in making your policy decisions or emphasizing your views on your forecast about how the economy is going to evolve and I was thinking about the trade off between being more discretionary as opposed to making some kind of forecast on those commitments in thinking about policy what's your view on that, thanks a lot I think there was another let's take the two questions Anno Karistinimi from the European Central Bank I wanted to touch upon the Swedish experience with difficult situation with depreciating exchange rate I see that the euro area and the Swedish interest rates have been similar levels I guess this is driven by US that has tightened a lot more also I wonder what are the drivers of this and do you think that we should take better into account the international spilloers in analysis assessments and how do you think that we should do that shall we get some more questions or do you want to first have a go let's just collect some more I have Katrin Arsene Makur yeah I'm Katrin Arsene from ECB and I would have a question so Anna Brenman and you mentioned the Matterhorn Table Mountain comparison for interest rates and I was wondering what are your pros and cons for these different rate paths and how do you think about them especially in light of the current uncertainty, the data uncertainty would it be better to first go up and then down quickly or do you think the Table Mountain is the more attractive path thank you Frank so we haven't none of you really touched on say role of fiscal policies I just wanted to hear your views if you think that the role of fiscal policy can help you to get inflation back to target if to expansionary fiscal stance could be a problem for you or not and then let's take the last one thank you I'm Philippine Kortiman from the European Central Bank questions on how restrictive monetary policy is we heard lots of insights on the real interest rate the natural level and so on not so much on the excess liquidity impact and Anna Brenman mentioned it earlier on in telling that the monetary policy tightening with interest rates had less effect because it was buffered by the highest savings in the first place and now where do we stand on that okay I think that's plenty so who wants to start since there were a couple of questions directed at me I can try to answer them directly in terms of the effects of course the dollar strength is one part of it but it can't explain the weakness of the crone against the euro in this environment and I can tell you that in Swedish media right now and among analysts the key thing is to come up for lots of various explanations for this including going back to communication from the Riks banks almost 10 years back I would say that there are probably a number of factors that could have contributed on the margin one is just that small open economies and our currencies are less liquid so it tends to get hit when there's a lot of uncertainty they tend to be correlated with the stock market you can see similar developments in the Norwegian Crona other aspects that have been put forward is concern about highly indebted households and the large commercial real estate sector it's hard to claim given what we know about the housing market and that the banks don't tend to make any large losses on the commercial real estate they had historically but even there the commercial real estate sector is rather diverse with some corporates heavily indebted and some others have very strong finances and the ones that are weaker seem to be dealing with the issues right now then of course you have the NATO accession and the fact that that hasn't been moving forward with as smoothly as possible there's been some movement in the currency during those days but again you can't explain the trend in addition to that you have the fact that the Crona seem to be used as I went up very early this morning so I'm trying to find the right word in carry trade it's a good funding currency in this environment especially with the dollar because it's correlated with the stock market and on top of that we've seen some positions from CTA's some hedge funds that do sort of the trend movements so it's not only one explanation it's probably likely to be 5678910 that's all been moving in the wrong direction right now if you look at fundamentals very strong public finances long-term growth prospects are good I'm quite certain that we'll see a reversal of this trend but in this environment small open economies as I said they're similar trends like the dollar, Australian dollar New Zealand as well so I think it's more being a small open economy in this kind of environment tends to be a little bit challenging I'll stop there and then I'll let the others answer and I can also more questions Ben? Sure I thought I'd say something about these strategies from the table on hunting that's now the accepted metaphor I mean as Philip said a moment ago these are equivalent in terms of what they deliver to inflation so one shouldn't overemphasize the differences we're targeting inflation and considerations about choosing between them the secondary to that so there's no sort of preeminent strategy in that sense that said we've been in this policy committee talking about this question for a long time it's long be the case that everywhere policy rates are smoother than the simplest of all rules would suggest and you know academics have occasionally attempted to explain why that's the case and it was pretty clear I think in every jurisdiction at least to my mind but in the for much of last year certainly until we reached the stage where central banks were beginning to say they were quote data dependent monetary policy was responding to shocks that we'd already seen over time if you'd asked me at the beginning of 2020 to where we were going I would have said well we're going to end up higher than I'm voting for this meeting and indeed at every meeting we said yes we've just hiked interest rates but unless something pretty weird happens you can expect another hike at the next and introspectively I think I certainly asked myself why are we doing this globally why are we responding only over time to shocks that we've already seen happening I don't think we're so much in that position once we got to a level that we deemed to be we were beginning to see effects of it maybe everyone introduced the data dependent sense that phase didn't last forever several possible explanations one I've always liked is similar at least to an argument that Woodford used that smoother interest rates give you better purchase over 2-3 year interest rates it may also be central banks are reluctant to have very very big rises for financial equity reasons if you buy any of those reasons then you would only at the margin as I say because that's not the primary absolutely sole focus is to get inflation back to target in a sustainable manner and these considerations are secondary to that then you might prefer some sort of table mountain approach on the other hand you might object to that and say well how is that credible is that really a time consistent strategy and were you to see weakening would you be forced to ease prematurely and these are the debates we have about it I wouldn't want to exaggerate the difference between these two strategies but as I say it has always been the case and will presumably always remain the case that central banks prefer not to have very very violent and huge increases in interest rates and if you think the shocks you're dealing with are both big and high frequency that's bound to mean a degree of interest rate smoothing relative to those shocks that's what I'll say let me come to David's original question because the Fed already and we had just concluded a multi-policy strategy review immediately before actually inflation really became very high and really useful all the time I go back and think about this so first of all for the ECB to have declared we were symmetric 2% inflation target I think it's been really helpful because on top of all the uncertainties in the world if there's uncertainty about what we're trying to do doubt have made it worse so that was very helpful it's very helpful that we had a full scale discussion about our policy toolbox and I think there's been complete clarity which remains which is when we're away from the lower bound the active policy stance tool is to raise the policy rate and that the balance sheet is a background tool that we fully take into account we do think has real effects but if we wanted to tighten policy so far the most effective way to do that is to raise the policy rate no question and that holds that the policy rate is and that's been I think very helpful to have that clarity given the fact we have just had this really big runoff of teltrose which is scheduled we have zero reinvestment or APP and so on but it's clear that is in the background and that the stance can clearly be connected so at a technical level all of that helps but I think you were focusing more on the role of the forecast versus the realized data so in the review we did come up with this because already the world has seen many structural shocks the recovery from the global financial crisis and so on had already and a lot of work also the Fed also had a base point you need to hedge your bets you have to have the forecast but it's also wise to kind of condition your policy decision also on the realized part of inflation and I think where we've ended up now where we really mean it and it really does help to say policy depends on the outlook which is both the the base case in the forecast but also the risk assessment around that forecast it depends on underlying inflation even though it has all of the issues that Ben raised about late stage indicators and also the uncertainty about the strength of monetary transmission does mean any forecast run takes a view about how powerful is monetary policy we've not had many hiking cycles the interaction of the hiking cycle with everything else going on you do need that feedback loop so let me come to this issue about at Table Mountain if that's not the official phrase I guess we need to pay royalty to you Bill on this it's for me there's no time consistency question here because each is self validating obviously if you go super high inflation will come down more quickly and you cut more quickly and you get matter horn if you follow a flatter profile inflation returns the target more slowly but equally that means you need rates higher for longer and then as Ben said it doesn't really you get to 2% either way then the question is what are the side effects so what is the path for output the impact on the real economy what is the impact on financial stability and I think and I would say the choice depends very much on essentially how unstable is the situation in particular how confident are you that inflation expectations are well anchored because I think there's a very big research question you were saying about the research one of the really big research questions is the interaction between policy and expectations so if you believe having a kind of sharper policy hike helps to secure expectations then that might push you towards the matter horn on the other hand if you see people they've heard us they've seen us they can see the data falling therefore policy taking into account all the other side effects I mean I think that's relevant for the debate and that answer could probably change over time let me mention one thing on house of expectations which is because we have many countries that gives us a little bit of a kind of laboratory and what I would say on house of expectations they have edged up a little bit but there's a clear country correlation where inflation has come down a lot household expectations are coming down inflation has not come down so much so I think that matters maybe on fiscal our forecast assumes that it will be tidy next year it assumes they will let the subsidies roll off and if they don't do that it will be a positive demand shock if you like which will push up the inflation projection there's still an unsettled debate about the role of fiscal subsidies last year if it kind of reduced the peak inflation rate did that play an important role in calming down expectations and I think that's plausible at Sintra this year we had a study by your colleagues at the IMF so I think the overall debate is ongoing but at the margin if we don't have the fiscal path we assume it will matter okay unless there is one final question I think we are close to the end of this session so let me thank all three of you for a very informative discussion wish you all the best for the future and I'm sure see you soon thank you very much