For example, in terms of subprime mortgage underwriting, this would have included enforcing standards with respect to loan valuation, loan-to-value ratios, household income verification, and the quality of loan documentation. As I have argued before, monetary policy will often, though not always, be too blunt a tool for such tasks. Generally, it will be better to develop and use more surgical instruments designed to fit the particular circumstances. In addition, no matter how effectively we reform the financial system, it seems unlikely that we will ever be able to completely eliminate booms and busts. There will be problems in identifying the boom – distinguishing between what is sustainable and what is unsustainable. There also will be broader and even more subtle obstacles – booms, when they are underway, are typically enjoyable. As a result, regulatory interventions that temper booms normally are going to be unpopular. So in practice even activist regulators may struggle to act early enough and with sufficient force to arrest a boom before it becomes a bubble. This suggests that to make the financial system secure, we are going to have to do much more than just act to temper booms and busts. In this regard, making financial markets and institutions, in their practices and structure, less prone to amplifying and propagating shocks is a critical step. This means, in particular, that regulation should be designed to create incentives that operate over sufficiently long time horizons so that the entire cycle of boom and bust is included.
Moreover, many firms have been able to raise their profit margins in sectors faced with constrained supply and resurgent demand. The energy price shock implies a hit to the domestic economy, which should be absorbed by both firms and workers in order to ensure that it does not lead to a spiral of upward price and wage adjustments. In the baseline of our latest staff projections, headline inflation has been revised down, mainly reflecting a smaller contribution from energy prices than previously expected. We now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong. Inflation excluding energy and food is expected to average 4.6% in 2023, which is higher than foreseen in the December projections. Subsequently, it is projected to come down to 2.5% in 2024 and 2.2% in 2025, as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand. As inflation is projected to remain too high for too long, the Governing Council last week decided to increase the three key ECB interest rates by 50 basis points, in line with our determination to ensure the timely return of inflation to our 2% medium-term target.