The low water levels in the Rhine this summer – for decades a moniker for a successful social economic model that has inspired the very objectives of the European Union – show how traditional sources of economic welfare are being upended by the climate crisis. 2/5  BIS - Central bankers' speeches  At the same time, Russia's terrible war against Ukraine has hardened the EU's determination to make progress with the energy transition. It's true that, in the very near term, the energy crisis will lead to an increase in the use of non-gas fossil fuels. Nevertheless, the likelihood of a transition towards a low-carbon economy consistent with the EU's commitment to reaching net-zero by 2050 has increased. The main message from this should be clear. And it's identical to what I had in my notes for last year, though I will express it even more forcefully today. Climate-related and environmental risks are a source of financial risk. Even if the exact outcome is uncertain, a combination of physical and transition risks from the ongoing crises will materialise. And with global temperature increases drawing ever closer to 1.5 degrees above pre-industrial levels, and the world being on track for a 2.8-degree increase by the end of the century, these risks are increasingly likely to materialise in a disruptive fashion.
Current economic and monetary policy outlook Today, a mild recession in the euro area around the turn of the year is quite plausible, as ECB President Christine Lagarde recently highlighted.1 Today, we face euro area inflation that continues to be far too high, having reached double digits in October. Today, long-term interest rates in the euro area are around 2.5 percentage points higher than when I was first due to speak to you last year. Today, as Bundesbank President Joachim Nagel said just last week, - "muss die Geldpolitik auf der Hut sein".2 Monetary policy must be on its guard. And monetary policy is not just on its guard but is taking action. The increase in interest rates reflects several steps in the monetary policy normalisation which the ECB started in December 2021. These were the phasing-out of our pandemic support measures, the subsequent full phasing-out of our net asset purchases, and three consecutive policy rate hikes across our July, September and October monetary policy meetings totalling an unprecedented 200 basis points. Today, it is not evident that the observed turn in macroeconomic sentiment will substantially alter the inflation outlook, even if a mild recession were indeed to materialise. Against this backdrop, we have communicated that we will continue to promptly withdraw monetary policy support and move policy rates further to a level that is consistent with inflation reverting back to our 2% target in the medium term.