What we will have to monitor carefully in the weeks and months to come is whether there is a further strengthening of this pass-through. If, for example, banks start to apply a larger “intermediation wedge” – meaning that at any level of the base rate they demand a higher compensation for the perceived risk they are taking on when lending – then pass-through will become stronger. So, we will be paying close attention to a range of indicators of credit availability and credit pricing, such as the monthly data on money and credit flows, our bank lending survey and our survey on access to finance for small and medium-sized enterprises. While more restrictive credit conditions are part of the mechanism by which our tightening ultimately reins in excess price pressures and brings inflation back to target, we will make sure that the process will be orderly throughout. Conclusion Let me conclude. Voltaire said “Uncertainty is an uncomfortable position. But certainty is an absurd one.” Faced with new and overlapping shocks, we have no choice today but to deal with uncertainty. But the public can be certain about one thing: we will deliver price stability, and bringing inflation back to 2% over the medium term is non-negotiable. We will do so by following a robust strategy that is data-dependent and embeds a readiness to act, but that does not entertain trade-offs around our primary objective.
As the cut-off date for the projection round was in early March, the forecasts do not incorporate the effects of the recent financial market tensions. Those tensions have added new downside risks and have made the risk assessment blurrier. More generally, many of the assumptions in the projections, such as those on fiscal policies and energy and food prices, are volatile. This implies additional uncertainty around the baseline for both growth and inflation. Some of this uncertainty will recede as the fallout from recent events in financial markets becomes clearer. But faced with overlapping shocks and shifting geopolitics, the level of uncertainty will most likely remain high. To confirm the outlook in our projections over time, we therefore also need to look at additional indicators that can be observed in real time. Underlying inflation To that end, the second input we will be drawing on is the dynamics of underlying inflation. Underlying inflation is not a policy target, but measures of underlying inflation can serve as a complementary cross-check of our forecasting process. Underlying inflation is typically quite inertial and therefore gives us an indication about the persistence of inflation into the medium term. We will be looking to see a sustained downward turn in underlying inflation measures to be confident that the inflation path will converge to our target in the medium term. So far, we do not see clear evidence that underlying inflation is trending downwards. In fact, we see two forces pushing underlying inflation in different directions.