 You're listening to the ECB podcast bringing you insights into the world of economics and central banking My name is Katie Ranger Welcome to this slightly different episode Every six weeks the ECB's governing council takes decisions on monetary policy Determining what should be done to keep prices stable Our president Christine Lagarde explains these decisions in a press conference And from now on you'll also be able to listen to them on this podcast It's Thursday 16th of December 2021 and here is today's monetary policy statement The euro area economy continues to recover and the labor market is improving helped by ample policy support Growth is moderating, but we expect activity to pick up again strongly in the course of next year The latest pandemic wave and the Omicron variant have prompted some countries to reintroduced tighter restrictions Energy prices have gone up significantly And in some industries there are shortages of materials equipment and labor These factors are restraining economic activity and are a headwind for the near-term outlook However, although the public health crisis is still ongoing Many people have been vaccinated and booster campaigns have accelerated Overall society has become better at coping with the pandemic waves and resulting constraints This has lessened the pandemic impact on the economy Inflation has risen sharply owing to the surge in energy prices and also because demand is outpacing constraints supply in some sectors Inflation is expected to remain elevated in the near term, but should ease in the course of next year The inflation outlook has been revised up But inflation is still projected to settle below our 2% target over the projection horizon We judge that the progress on economic recovery and towards our medium term inflation target Permits a step-by-step reduction in the pace of our asset purchases over the coming quarters But monetary accommodation is still needed for inflation to stabilize at our 2% inflation target over the medium terms In view of the current uncertainty we need to maintain flexibility and optionality in the conduct of monetary policy So with all this in mind the governing council took the following decisions First In the first quarter of 2022 We expect to conduct net asset purchases under the pandemic emergency purchase program At a lower pace than in the previous quarter We will discontinue net asset purchases under the PEP at the end of March 22 Second The governing council decided to extend the reinvestment horizon for the PEP It now intends to reinvest the principal payments from maturing securities purchased under the PEP until at least the end of 24 In any case the future roll-off of the PEP portfolio will be managed to avoid interference with the appropriate monetary policy stance Third The pandemic has shown that under stressed conditions Flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of our monetary policy and Made our efforts to achieve our goal more effective Within our mandate under stressed conditions Flexibility will remain an element of monetary policy Whenever threats to monetary policy transmission jeopardize the attainment of price stability In particular in the event of renewed market fragmentation related to the pandemic PEP reinvestments can be adjusted flexibly across time asset classes and jurisdictions at any time This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction Which could impair the transmission of monetary policy to the Greek economy While it is still recovering from the fallout of the pandemic Net purchases Under the PEP could also be resumed if necessary to counter negative shocks related to the pandemic fourth In line with a step-by-step reduction in asset purchases and to ensure that the monetary policy stance remains consistent With inflation stabilizing at our target over the medium term We decided on the monthly net purchase pace of 40 billion euros in the second quarter and 30 billion euros in the third quarter under the asset purchase program the app From November from October 22 onwards We will maintain net asset purchases under the app At a monthly pace of 20 billion euros For as long as necessary to reinforce the accommodative impact of our policy rates We expect net purchases to end shortly before we start raising the key ECB interest rates We also confirmed the level of the key ECB interest rates and our forward guidance on the future path of policy rates This is crucial for maintaining the appropriate degree of accommodation To stabilize inflation at our 2% inflation target over the medium term We will continue to monitor bank funding conditions and ensure that the maturing of Teltro 3 operations Does not impair the smooth transmission of our monetary policy We will also regularly assess how targeted lending operations are contributing to our monetary policy stance as Announced we expect the special conditions applicable under Teltro 3 to end in June next year 22 We will also assess the appropriate calibration of our two-tier system for reserve remuneration So that the negative interest rate policy does not limit banks Intermediation capacity in an environment of ample excess liquidity the governing council stands ready to adjust all of its instruments as Appropriate and in either direction To ensure that inflation stabilizes at its 2% target over the medium term I will now outline in more detail how we see developments in the economy and inflation I Will then outline our assessment of financial and monetary conditions So looking at the economic activity We expect the economic recovery to continue driven by robust domestic demand The labor market is improving with more people having jobs and Fewer in job retention schemes This supports the prospect of rising household income and consumption The savings built up during the pandemic will also support consumption The current fiscal and monetary policy support together with a continued global recovery Should support growth Economic activity has been moderating over the final quarter of this year and This slower growth is likely to extend into the early part of next year We now expect output to exceed its pre-pandemic level in the first quarter of 22 To cope with the current pandemic wave Some euro area countries have reintroduced tighter containment measures This could delay the recovery especially in travel tourism hospitality and entertainment The pandemic is weighing on consumer and business confidence and the spread of new virus variants is Creating extra uncertainty In addition rising energy costs are a headwind for consumption Shortages of equipment materials and labor in some sectors are hampering production of manufactured goods Causing delays in construction and slowing down the recovery in some parts of the service sector These bottlenecks will still be with us for some time But they should ease during 22 Looking ahead we expect growth to rebound strongly over the course of 22 our euro system staff projections foresee annual real GDP growth at 5.1 percent in 21 4.2 percent in 22 2.9 percent in 23 and 1.6 percent in 24 Compared with our September staff projections The outlook has been revised down for 22 and up for 23 Targeted and growth-friendly fiscal measures should continue to complement monetary policy This support will also help the economy adjust to the structural changes that are underway An effective implementation of the next generation EU program and the fit for 55 package Will contribute to a stronger greener and more even recovery across your area countries Let's look at inflation now Inflation increased further to 4.9 percent in November It will remain above 2 percent for most of 22 Inflation is expected to remain elevated in the near term But we expect it to decline in the course of next year the upswing in inflation Primarily reflects a sharp rise in prices for fuel gas and electricity In November energy inflation accounted for more than half of headline inflation Demand also continues to outpace constrained supply in certain sectors The consequences are especially visible in the prices of durable goods and those consumer services That have recently reopened Base effects related to the end of the VAT cut in Germany are still contributing to higher inflation But only until the end of this year There is uncertainty as to how long it will take for these issues to resolve But in the course of 22 We expect energy prices to stabilize consumption patterns to normalize and Price pressure stemming from global supply bottlenecks to subside Over time the gradual return of the economy to full capacity And further improvements in the labor market should support faster growth in wages Market and survey based measures of longer term inflation expectations Have remained broadly stable since our last monetary policy meeting in October But overall these have moved closer to 2 percent in recent months These factors will help underlying inflation to move up and bring headline inflation Up to our target over the medium term Our new staff projections foresee annual inflation at 2.6 percent in 21 3.2 percent in 22 1.8 percent in 23 and 1.8 percent in 24 Significantly higher than in the previous projections in September Inflation excluding food and energy is projected to average 1.4 percent in 21 1.9 percent in 22 1.7 percent in 23 and 1.8 percent in 24 Also higher than in the September projections Turning to risk assessment now We see the risks to the economy out economic outlook as broadly balanced Economic activity could outperform our expectations if consumers become more confident and save less than expected By contrast the recent worsening of the pandemic including the spread of new variants Could be a more persistent drag on growth The future path of energy prices and the pace at which supply bottlenecks are resolved are Risks to the recovery and to the outlook for inflation If price pressures feed through into higher than anticipated wage rises or The economy returns more quickly to full capacity Inflation could turn out to be higher So looking at financial and monetary conditions now Market interest rates have remained broadly stable since the October governing council meeting Bank lending rates for firms and households remain at historically low levels Overall financing conditions for the economy remained favorable Lending to firms is partly driven by short-term funding needs stemming from supply bottlenecks that increase their Expenses for inventory and working capital At the same time corporate demand for loans remains moderate because of retained earnings and generous cash holdings as well as high debt Lending to households remains robust Driven by demand for mortgages Euro area banks have further strengthened their balance sheets Thanks to higher capital ratios and fewer non-performing loans Banks are now as profitable as they were before the pandemic Bank funding conditions remained favorable overall In line with our new monetary policy strategy Twice a year the governing council assesses in-depth the inter-relation between monetary policy and financial stability and Accommodative monetary policy underpins growth Which supports the balance sheets of companies and financial institutions as well as preventing risks of market fragmentation At the same time the impact of accommodative monetary policy on property markets and financial markets warrants close monitoring as a number of medium term vulnerabilities have intensified Still macro prudential policy remains the first line of defense in preserving financial stability and addressing medium term vulnerabilities So summing up the euro area economy Continues to recover despite a slowdown in the near term The sharp increase in energy prices and demand outpacing constrained supply in some sectors are pushing up inflation Inflation will remain above our target for most of 22 but is likely to ease in the course of next year At the same time given the progress on economic recovery and towards our medium term inflation target We can discontinue net purchases under the pep in March But monetary accommodation is still needed Including net purchases under the app and our forward guidance on interest rates For inflation to stabilize at our 2% inflation target over the medium term Check out the show notes for the full transcript of the press conference including the discussion with journalists We'll also link to an easy to understand overview of the decisions 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 love to hear from you. So do share your feedback and ideas with us via social media Until next time. Thanks for listening