Lecture by Isabel Schnabel, Member of the Executive Board of the ECB, at the Ragnar Nurkse Lecture Series organised by Eesti Pank in Tallinn, Estonia
Tallinn, 30 August 2024
(...) Conclusion
I would like to conclude with three implications for monetary policy.
First, incoming data have broadly confirmed the baseline outlook, bolstering our confidence that conditions remain in place for inflation to fall back to our 2% target by the end of 2025.
Second, confidence is not knowledge. History will not judge our intentions but our success in delivering on our mandate. Given that the path back to price stability hinges on a set of critical assumptions, policy should proceed gradually and cautiously.
In particular, the closer policy rates get to the upper band of estimates of the neutral rate of interest – that is, the less certain we are how restrictive our policy is –, the more cautious we should be to avoid that policy itself becomes a factor slowing down disinflation.
In other words, the pace of policy easing cannot be mechanical. It needs to rest on data and analysis.
Third, the world around us is changing rapidly. When the future is as uncertain as it is today, the modal outlook provides a false sense of comfort. Scenario analysis can protect us from falling victim to model uncertainty and overconfidence.
Being transparent about what could go wrong, and factoring this into the decision-making process, can help make policy more robust to contingencies that threaten the achievement of our primary mandate. (...)
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