Under this framework and, as I have said earlier, in a setting in which inflationary risks have tended to increase over the last few months, in March we discontinued net purchases under our pandemic emergency purchase programme (PEPP) and we agreed to gradually reduce net purchases under our asset purchase programme (APP). In June we decided that as the three conditions established by our forward guidance for raising interest rates had been met,5 net purchases under the APP would end on 1 July, and we informed of our intention to raise policy rates in July and again at our September meeting.6 In July, we decided to raise all three ECB policy rates by 50 basis points (bp), taking the deposit facility rate to 0%, thus moving out of negative territory for the first time since 2014. This was a larger increase than signalled at the previous meeting, for two reasons. First, the updated assessment of the risks to inflation, which included the materialisation of certain upside risks in the short term relative to the June projections. Second, we took into account the reinforced support for the effective transmission of monetary policy provided by the new Transmission Protection Instrument (TPI), which was approved at that same meeting. Subject to fulfilling established criteria, the TPI will enable the Eurosystem to make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals, to counter risks to the monetary policy transmission mechanism to the extent necessary.
In such cases, maintaining the medium-term orientation in the definition and attainment of the target would be all the more advisable. How is expected inflation over the medium term measured? First, it is important to clarify that predicting inflation over a two or three-year horizon is a very challenging task. Especially in a setting as uncertain as the current one. Therefore, like other central banks, we at the ECB use various indicators of future inflation, such as surveys of professional forecasters and financial market prices, which I will come back to later. Key data in this regard are the ECB staff projections, which in turn draw on a wealth of economic and monetary analysis. As I have said, the latest projections published in September put average inflation in 2024 (the end of our medium-term horizon) at 2.3%, clearly above our target. These projections were based, among other considerations, on a future path of euro area interest rates – implicit in the financial market data available when the projections were prepared (specifically, as at 22 August 2022) – that began with a hike of 50 bp at our September meeting, followed by subsequent further increases.8 Accepting that, in line with our mandate, interest rates will have to rise to a level that allows us to ensure a gradual convergence of inflation to our medium-term target, returning inflation  8  Specifically, the projections were based on short-term interest rates of 0.2% in 2022, 2.0% in 2023 and 2.1% in 2024.