At our last monetary policy meeting, we upheld the assessment that inflation will converge to levels that are below, but close to, 2% over the medium term. Wages are picking up at a pace that is more or less in line with expectations from our models. One thing that has not worked out as expected is the transmission to consumer prices. This pass-through is not working in line with projections. We are analysing this very carefully. But we remain confident that it will eventually do so; we need to be patient and persistent. But what if the economic outlook deteriorates further and more permanently? In our baseline scenario, capacity utilisation will remain high and firms will be in a position to pass higher wages through to higher prices. That would be more difficult if growth remained below potential. Downside risks to growth could then lead to downside risks to inflation in the medium term. We are not at that stage yet, but this will be an important discussion point at the next meetings of the ECB’s Governing Council. But if the outlook becomes gloomier, what will happen then? Will the ECB’s Governing Council be even more careful in continuing on its cautious path towards monetary policy normalisation or could there be another turn towards more easing? I have never spoken about a normalisation of our monetary policy stance. I have always referred to a normalisation of our instruments. There is a big difference.
In such a context there is a risk that the banks could act even more procyclically than they usually do and would amplify the cycle. To be clear, the uncertainties and the economic slowdown have so far not caused banks to tighten their lending conditions or to grant less credit. But we need to keep a very close eye on how this evolves. How will the banks behave if the economic slowdown continues? Would you say that financing conditions in the euro area as a whole have already tightened significantly? Financing conditions have tightened somewhat in recent months, but not significantly, thanks in part to our forward guidance on interest rates. This partly compensates for such effects. But you’re absolutely right, we as central bankers must always ask ourselves whether our monetary policy stance is appropriate for us to attain our objective. And what is your answer at the moment? We have revised our assessment of risks to growth downward. I would say that is a clear indication that the level of alert is higher than before. 2/5  BIS central bankers' speeches  Three quarters of below-potential growth, higher risks and at least slightly tighter financing conditions – what does that signify for the inflation outlook? Is the ECB’s Governing Council losing its confidence in reaching the target of 2% over the medium term? Three quarters of below-potential growth are certainly not good news. But we have a medium term perpective.