We at the ECB stress this new principle of “optionality”: it means in a risk-management approach that we must broaden our policy space, to be able to respond to a broader spectrum of possible inflation scenarios as Philip Lane explained in a recent interview. The trick is obviously to articulate this increased optionality whilst at the same time giving sufficient predictability to economic agents to reduce the adverse effects of uncertainty. This brings me to my second 2/5  BIS central bankers' speeches  point, sharing some thoughts about the ECB guidance. II. How to provide predictability and optionality for the ECB Predictability – one course and two compasses Let me start with the predictability elements: one course – the inflation target of 2% as set out in our strategy review –; and two compasses – our sequencing and our forward guidance. About the course, our commitment is crystal clear: we will do what is necessary to bring inflation back firmly and durably to around 2% within our projection horizon. This reassurance is key to keeping inflation expectations close to 2% whatever the short-term uncertainties are. We have a duty to do it, we have the capacity to do it, and have no doubt we shall do it. To keep this course, the first compass is our sequencing: we will end net asset purchases first, then raise the key interest rates, before eventually starting to reduce the balance sheet. Uncertainty and speculation about the order in which things will happen is unnecessary and easily avoidable.
Rather than forcing ourselves to act on both instruments almost simultaneously (which could fuel fears of an excessively brutal effect), we could give ourselves more time and consider the latest inflation outlook before deciding about the calendar of rate hikes: a decision that anyway we don’t need to make before our June meeting. Any speculation about this calendar of future lift-off is at this stage premature. The forward guidance on interest rates Let me stress here an important semantic point about our monetary stance: the steps I am discussing here are about the normalization of our monetary policy, not about tightening. It’s still the exit from exceptional instruments and an extremely accommodative monetary policy (increase of the already large assets stock, negative interest rates). It’s the first phase of a gradual return towards a more neutral stance, which we are still far from. Tightening would be another story, going beyond a neutral stance, which is not within our present policy horizon. Let me then remind you of the three state-dependent criteria on our forward guidance: “the Governing Council sees (i) inflation reaching 2 per cent well ahead of the end of its projection horizon; (ii) and durably for the rest of the projection horizon; and (iii) it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term”.