 You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Katie Ranger. Today is Thursday, 14th of April, 2022. It's time for our regular episode with the latest monetary policy decisions taken by the ECB's Governing Council. I'll be back at the end of the episode, but now you'll hear President Christine Lagarde explaining the main decisions in the press conference. Russia's aggression towards Ukraine is causing enormous suffering, and it is also affecting the economy in Europe and beyond. The conflict and the associated uncertainty are weighing heavily on confidence of businesses and consumers. Trade disruptions are leading to new shortages of materials and inputs. Surging energy and commodity prices are reducing demand and holding back production. How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions, and on possible further measures. At the same time, economic activity is still being supported by the reopening of the economy after the crisis phase of the pandemic. Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. Inflation pressures have intensified across many sectors. At today's meeting, we judged that the incoming data since our last meeting reinforced our expectation that net asset purchases and our asset purchase program should be concluded in the third quarter. Looking ahead, our monetary policy will depend on the incoming data and our evolving assessment of the outlook. In the current conditions of high uncertainty, we will maintain optionality, gradualism, and flexibility in the conduct of our monetary policy. The governing council will take whatever action is needed to fulfill the ECB's mandate to pursue price stability and to contribute to safeguarding financial stability. I will now outline in more detail how we see the economy and inflation developing, and will then explain our assessment of financial and monetary conditions. So, turning to the economic activity. The euro area economy grew by 0.3% in the final quarter of 2021. It is estimated that growth remained weak during the first quarter of 2022, largely owing to pandemic-related restrictions. Several factors point to slow growth also in the period ahead. The war is already weighing on the confidence of businesses and consumers, including through the uncertainty that it brings. With energy and commodity prices rising sharply, households are facing a higher cost of living, and firms are confronted with higher production costs. The war has created new bottlenecks, while a new set of pandemic measures in Asia is contributing to supply chain difficulties. Some sectors face growing difficulties in sourcing their inputs, which is disrupting production. However, there are also offsetting factors underpinning the ongoing recovery, such as compensatory fiscal measures and the possibility for households to draw on savings that they accumulated during the pandemic. Moreover, the reopening of those sectors most affected by the pandemic and a strong labour market with more people in jobs will continue to support incomes and spending. Fiscal and monetary policy support remains critical, especially in this difficult geopolitical situation. In addition, the successful implementation of the investment and reform plans under the Next Generation EU programme will accelerate the energy and green transitions. This should help enhance the long-term growth and resilience in the euro area, turning now to inflation. Inflation increased to 7.5% in March from 5.9% in February. Energy prices were driven higher after the outbreak of the war, and now stands 45% above their level one year ago. They continue to be the main reason for the high rate of inflation. Market-based indicators suggest that energy prices will stay high in the near-term and will then moderate to some extent. Food prices have also increased sharply. This is due to elevated transportation and production costs, notably the higher price of fertilisers, which are in part related to the war in Ukraine. Price rises have become more widespread. Energy costs are pushing up prices across many sectors. Supply bottlenecks and the normalisation of demand as the economy reopens also continue to put upward pressures on prices. Measures of underlying inflation have risen to levels above 2% in recent months. It is uncertain how persistent the rise in these indicators will be, given the role of temporary, endemic-related factors and the indirect effects of higher energy prices. The labour market continues to improve, with unemployment having fallen to a historical low of 6.8% in February. Job postings across many sectors still signal robust demand for labour, yet wage growth remains muted overall. Over time, the return of the economy to full capacity should support faster growth in wages. While various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring. Looking at the risk assessment now, the downside risks to the growth outlook have increased substantially as a result of the war in Ukraine. While risks relating to the pandemic have declined, the war may have an even stronger effect on economic sentiment and could further worsen supply-side constraints. Persistent high energy costs, together with a loss of confidence, could drag down demand and restrain consumption and investment more than expected. The upside risks surrounding the inflation outlook have also intensified, especially in the near term. The risks to the medium-term inflation outlook include above-target moves in inflation expectations, higher than anticipated weight rises and a durable worsening of supply-side conditions. However, if demand were to weaken over the medium term, it would lower pressure on prices. Financial markets have been highly volatile since the war began and financial sanctions were imposed. Market interest rates have increased in response to the changing outlook for monetary policy. The macroeconomic environment and inflation dynamics. Bank funding costs have continued to increase. At the same time, so far there have been no severe strains in money markets, nor liquidity shortages in the euro area banking system. Although remaining at low levels, bank lending rates for firms and households have started to reflect the increase in market interest rates. Lending to households is holding up, especially for house purchases. Lending flows to firms have stabilized. Our most recent bank lending survey reports that credit standards for loans to firms and for housing loans tightened overall in the first quarter of the year, as lenders are becoming more concerned about the risk facing their customers in an uncertain environment. Credit standards are expected to tighten further in the coming months, as banks factor in the adverse economic impact of Russia's aggression towards Ukraine and higher energy prices. In conclusion summing up, the war in Ukraine is severely affecting the euro area economy and has significantly increased uncertainty. The impact of the war on the economy will depend on how the conflict evolves, on the effect of current sanctions and on possible further measures. Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. We are very attentive to the current uncertainties and are closely monitoring the incoming data in relation to the implications for the medium term inflation outlook. The calibration of our policies will remain data dependent and reflect our evolving assessment of the outlook. We stand ready to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilizes at our 2% target over the medium term. Those were the decisions taken by the ECB's Governing Council today. If you want to find out more, check out the show notes for the full transcript and the Q&A session with journalists. We'll also link to an easy to understand overview of what we decided. You've been listening to the ECB podcast with Katie Ranger. If you like what you've heard, please subscribe and leave us a review. We'd also love to hear from you, so do share your feedback and ideas with us via social media. Until next time, thanks for listening.