 Good morning everybody. It's a we welcome you to the money market conference 2020. It's the 70th conference on money market at tech police at DCB. We are honored that we can host experts on the money markets, monetary policy implementation, and also the challenges we will discuss challenges in the monetary policy, the operation of real market. Time management is essential in an event such this one that takes place in person and remotely. We will try to leave enough time for question and answers after each presentations for those that are participating remotely. Please allow us to read out your question. Any question post on the web or in person will be conveyed to the speakers to which it is directed. Maybe with a little lag and all proceedings will be made available on the ACB website. If you have any query, any question or so please address Nina Willenberg, Sebastian, Sebastian, Maria Encio, Stefano Coradine, Anna Samarina or myself. Now, we are also honored that the first speaker opening this conference is Mr. Fabio Panetta. Mr. Panetta has been member of the Executive Board of the European Central Bank since January 2020. And previously he served as deputy governor of the Bank of Italy and president of the Italian Insurance Supervisory Authority. He also served as a member of the board of directors of the BAS and was a member also of the ACB supervisory board. Now, Mr. Panetta is also an accomplished researchers himself with publication in the American Economic Review and the Journal of Finance. Mr. Panetta, without further delay, the floor is yours. Thank you. Good morning everybody and thank you Francesco for this very generous presentation which made me think to my youth when I was in fact doing some research. And let me also thank the organizers for inviting me at this conference. It's a pleasure to be here, although I regret I cannot be there in person. Today, keeping in mind the warning that Francesco just gave on timing, I will deliver an abridged version of my speech. So let me do a little advert, which I never do, but let me do it today. The speech that is published on the website of the European Center Bank is much more comprehensive, is much more articulated. And some of the statements, well actually most of the statements that I will do in my presentation today are explaining further and better motivated in the written version of the speech. But of course for timing reasons, I will condense the presentation. I will also, as you see on the screen, I will be using slides with the charts which are included in the speech. And I wish to thank my colleagues from Frankfurt for accepting to operate the slides starting from the beginning. So let me start. The Euro area is facing a sequence of unprecedented supply shocks resulting from the pandemic and Russia's aggression against Ukraine. These shocks have compounded each other, causing the current spike in inflation. Price prices have broadened as firms have sold to pass higher costs on to consumers and the economy as the economy reopened. As a result, the European Center Bank has accelerated the adjustment of monetary policy to keep inflation expectations anchored. Across the last three governing council meetings, we have increased our policy rates by 200 basis points. This is the fastest rate hike in the ECB's history. Today, I will argue that at present the direction of monetary policy is clear. The direction of monetary policy is clear. A further policy adjustment is warranted in order to keep inflation expectations anchored and stave off certain round effects. However, the calibration of our stance cannot rely on a one-sided view of risks in a highly uncertain economic environment. And it should remain focused on medium-term inflationary developments. We need to bring inflation back to our 2% target as soon as possible, but not sooner. We might otherwise create unintended effects, achieving linear reduction of inflation in the short term, but causing excessive market volatility and a protracted economic slowdown beyond what is necessary to stabilize inflation in the medium term. Implementing the correct policy calibration will be challenging. We will need to carefully consider the resilience of our economy, the implications of global monetary spillovers and emerging threats to financial stability. In the current situation, the direction of our monetary policy is clear. Inflation is too high and will remain above our target for an extended period. Headline inflation reached 10.7% in October, co-inflation is at around 5%. Monetary policy normalization is necessary when repeated supply shocks drive inflation higher for longer. It signals that the central bank will not tolerate the anchoring of inflation expectations. But while the direction of the adjustment is clear, its calibration is not. And the point of normalization depends on the evolving medium-term economic and inflation outlook. The neutral interest rate provides limited guidance here. It is an asymptotic concept that describes the point when interest rates are neither accommodative nor contractionary in a situation where growth is around potential. Inflation is not far from target and no transitory shocks are disrupting the inflation path. But that is not the world in which we find ourselves. Today I find it more helpful to discuss the so-called target-consistent terminal rate. This is the level of the policy rate that if reached at the end of a short normalization phase and then held constant, stabilizes inflation at target by the end of the policy-relevant horizon. Euro-system staff regularly calculate estimates of the target-consistent terminal rate. Recent estimates, which have been commented in a speech by the governor of Banco de España, my friend Pablo Hernández-Tacos, would locate the target-consistent terminal rate in a range between 225 to 0.5%. This is just an indication. Why? Well, because let me stress that such estimates are conditional. Any estimate is conditional on the economic and inflation outlook. They need to be continually reassessed in the light of incoming information. Specifically, we need to navigate a complex set of risks to medium-term inflation. On the upside, we could face the emergence of what I have called ugly inflation. This arises when, above target inflation, the anchors' expectations causing excessive wage and price-setting dynamics that eventually fuel further inflation increases. These are the so-called second-round effects. This risk is mostly driven by high energy prices and they're passed through to prices of other items. Energy inflation is running at around 42%. Energy has been the main contributor to headline inflation for the past 18 months, as you can see from this chart, chart number one. Higher energy input costs have contributed to extraordinarily high food inflation. They have been a key driver of goods and services inflation as shown in this chart, chart number two. And they are contributing to the depreciation of the euro, further reinforcing inflationary pressures, as you can see from chart in a moment in chart number three. This is the chart and the red area is the contribution of higher energy prices to the depreciation of the change rate of the euro. So far, inflation expectations have remained anchored and the risk of an incipient wage price spiral in the euro area has been contained. That said, we need to remain vigilant in view of prolonged high inflation, which increases the likelihood of a pass-through to wage growth. But other forces may increasingly push in the opposite direction and contain the risk of second-round effects. The reduction in real wages and purchasing power is weak in domestic demand. The euro area PMIs and consumer confidence point to a contraction in economic activity in the coming quarters. Financial and credit indicators also point to significant downside risks as shown in chart number four, which you now see. These forces pushing on the downside might be reduced if supply bottlenecks as well as energy commodity and electricity prices continue the recent easing trend that you can see from chart number five and six, respectively. But this easing would also improve the inflation outlook and reduce the likelihood of ugly inflation taking hold. So to sum up, the implementation of monetary policy presents us with a difficult trade-off. On the one hand, ensuring that inflation expectations remain anchored speaks for targeting the upper part of the range of estimates of the target consistent terminated rate. And this range would move higher if upside risks to medium term inflation do materialize. But on the other hand, we need to keep basing our decisions on the latest evidence and factor in downside risks. In recent months, the public debate has stressed the risks of doing too little to curb inflation, since this would require a more painful future adjustment. But this should not make us underappreciate the risk of doing too much. First, we should bear in mind that it takes time before the full impact of our measures is held in the economy. Monetary policy immediately affects market expectations and financial market conditions. Since we started normalizing monetary policy at the end of last year, the one year forward real rates have moved significantly higher as shown in chart number seven. Likewise, 10 year rates have increased by 300 and 250 basis points respectively. As you can see from chart number eight, the numbers refer to the nominal and real 10 year rate. Crucially, however, it takes longer for our decisions to be transmitted to the real economy. The full impact of our measures will likely reach the economy when activity and inflation are already on a declining path. This implies that our tightening will need to end when inflation is still above our target. Second, we need to factor in global monetary policies below us when defining the domestic monetary policy stance. Major central banks are adjusting their policies simultaneously, resulting in the global tightening that you see from chart number nine. If central banks do not fully factor in the effects of other central banks policies, the current phase of global adjustment may give way to a more severe slowdown than anticipated. Previous epitles of highly synchronized global monetary policy tightening have been associated with subsequent global recessions as is illustrated in chart number 10. Such a scenario could have particularly negative implications for the Euro area. Our economy is not only more vulnerable than others to the energy crisis. It is also more open and thus more exposed to a global recession. And because it is less flexible than the US economy, the versing course may be more difficult if demand and production weaken too much. Incorrectly calibrating our monetary policy could also have unintended effects for financial stability. The highly uncertain outlook has increased the sensitivity of market rates to shifts in risk sentiment. In turn, higher rates are exposing the vulnerabilities of certain highly leveraged segments. This market volatility is being compounded by global financial spillovers, as you can see from chart number 11. In the Euro area, an additional source of volatility is the risk of financial fragmentation. The current environment therefore requires us to be prudent in adjusting our monetary policy across all instruments. There are three key considerations here. First, our decisions and communication on the pace of normalization should avoid amplifying market volatility. There is a case for front loading our policy adjustment given the need to keep expectations anchored. But such front loading should remain commensurate to the risks and benefits it creates. And when calibrating our stance, we need to pay attention to ensuring that we do not trigger market dislocation. Second, we must be clear about the sequencing of the normalization process. We should avoid cliff effects, continually monitor the market response and carefully consider the feedback between our different instruments. Currently, our policy rate remains a suitable marginal instrument for normalization. It is the instrument we know best. The size of our balance sheet will be significantly reduced as used as TLTROs mature and banks likely make early repayments after the decision we took last week. We should take the necessary time to assess the combined effects of rate hikes and the facing out of the TLTROs. As we normalize our monetary policy, we should expect bank lending conditions to tighten. What we need to avoid, though, is a sudden stop in the supply of credit to the broad economy. We should ensure that TLTRO repayments have been absorbed before we stop fully investing the principal payments from maturing securities purchased under our purchase programs. And when considering how we would then reduce the size of our bond portfolios, a controlled reduction whereby only redemptions above a cap are not rolled over is preferable to active sales, which may unsettle markets in an already volatile financial environment. Third, we must ensure that the smooth transmission of our stance as we normalize monetary policy. Maintaining ample liquidity in the system will help ensure smooth money market functioning. This will allow us to continue tightly steering money markets through changes in our deposit facility rate. Our investment flexibility and the availability of the transmission protection instruments protect the transmission of our monetary policy to all parts of the Euro area, allowing us to set the appropriate stance. We also need to stand ready to address collateral issues. Collateral scarcity has recently impaired the pass through of our policy rates to repo rates. The change in TLTRO three conditions should help alleviate tensions in the repo market, but we will continue to monitor the situation closely. As recently seen in other economies, an inconsistent policy mix can prove destabilizing. So a successful normalization process requires other policies to be consistent with monetary policy. Well-designed energy and fiscal policies can make a key contribution, a key contribution to dampening short-term inflationary pressures, thereby helping to keep inflation expectations anchored and reducing the amount of monetary title necessary. To take a concrete example, the measures that have been taken to find alternatives to Russian gas, reduced gas demand and refilled gas storage are likely playing an important role in bringing down gas prices. At the same time, energy policies should preserve price incentives and support energy efficiency. And while fiscal policies can cushion the impact of the most exposed and fragile households and firms, it should not hinder the necessary trend reduction of energy demand or add to inflationary pressures. Also, fiscal policies should protect productive capacity, just as excessively high energy demand would risk keeping inflation high for longer, so would slump in economic potential. Let me conclude. We find ourselves in an exceptionally volatile environment with multiple and complex risks for the inflation outlook and the appropriate monetary policy response. We are normally asking our monetary policy to keep inflation expectations anchored and bring inflation back to 2% over the medium term. We must calibrate our monetary policy carefully to ensure that inflation duly returns to target while also guiding market expectations and limiting excess volatility. An evidence-based and adaptive approach will allow us to successfully navigate these risks while avoiding the danger of tripping over unintended effects. Let's therefore mind the step in adjusting monetary policy so we can proceed steadily through the current shocks and bring the economy back to price stability and solid growth. Thank you for your attention and I'm pleased to take your questions. Thank you, Mr. Panetta, for a very insightful and analytical speech. Actually, we have three questions from the audience. So the first question is, can you explain a bit more what you mean with this implies that our tightening will need to end when inflation is still above our target? Shouldn't we always focus on medium-term inflation, given the lack of monetary policy? Second question, what are the factors that you focus on? Can we go on by one? Otherwise, I will forget the questions. This question is precisely because monetary policy affects inflation with a lack that we will likely end our tightening when inflation will be still above our target. We will not continue. I hope we will not continue. I'm sure we will not continue to tighten until we actually see inflation to be at 2%. We will inject in the economy the necessary degree of tightening to bring with the usual lacks inflation back to our target. I hope this explains better my statement. Sorry, Francesco. Second question. Yes. Say, what can you do? What can the ECB do to address collateral scarcity in repo markets? We certainly have very clear the potential adverse implications of scarcity in money markets. And going forward with the necessary time, the reduction of a balance sheet will free collateral. The reimbursement of the TLTROs will be an important step in this direction. And as I mentioned in my presentation, the likely early reimbursement of the TLTRO3 should already alleviate this problem. Okay. The third question is about financial resilience. How would you compare the situation of the financial system in Europe and the Euro area today with respect to before the pandemic? Well, this is a crucial issue. Two remarks. First, the situation of the banking sector, the conditions of banks are certainly much better than they were before the financial crisis. Capital ratios are higher. The profitability of banks has not been affected by the double crisis, the pandemic and the energy shocks. Banks have been in this difficult phase, also supported by a different approach by supervisors. So I think that the banking sector is not part of the problem this time. It is, if anything, part of the solution. But then, after the financial crisis, the response to the financial crisis was to compress the activity of banks. Banks were hyper-trophic, and then the regulatory response was to compress the activity of banks. This has inevitably implied an expansion of the non-banking sector. And we have already seen in other countries close to us that we may not have sufficient visibility on the non-bank financial intermediaries for a number of reasons. Because some of these intermediaries are insufficiently regulated, because they typically operate across borders. Because there is a hidden leverage that we do not understand exactly, because you can build leverage positions through derivatives, through liability-driven investment, as in the case of the UK pension fund. So again, we have a better situation for banks, a situation that we, I'm not sure we fully understand for non-bank financial intermediaries. And this is the challenge we are facing. And then we have the growth of crypto assets that has already been partly absorbed. But also there could be situations and risks that we not fully understand at the moment.