We had expected that there would be a recession at the end of 2022, beginning of 2023. However, the economy proved to be more resilient than expected and there was even strong growth in the spring. Now the economy has weakened again. We have a mild form of stagflation. However, the consequences for people are very limited. For example, there are no major job losses. On the contrary: the unemployment rate is very low.

As I said, the economy is weak. So far, there are no convincing signs of a rapid recovery. So there is a possibility that the economy will remain weak for a few more months. But the social costs are low. There is no reason to dramatise the situation.

Inflation is easing. That is very positive news. We have now even had two months with inflation rates below our forecast. That is a positive surprise. However, the inflation momentum is still strong and inflation is still too high. Wage growth in particular is very dynamic. There are still upside risks for inflation towards the end of our forecast horizon in 2025. So things are moving in the right direction, but it's too early for an all-clear.

There are now more strong signs that the core rate has turned the corner and is continuing to fall. The big question is whether the downward trend might hit resistance at around 3% or so. Current wage growth is not consistent with inflation returning to 2.0%. We now have to wait a few months to get a clearer picture, perhaps until spring or mid-2024.

Two or three months ago, we might have considered a rate hike in December or January due to concerns about core inflation. Now we have positive inflation data. Even if one month were to be a little worse again, we would still be in line with our projections. I think it is clear that we will not raise interest rates in December. Beyond that, it all depends on how wages develop. As things stand, I have no problem with waiting until spring or mid-2024.

If oil prices were to suddenly rise significantly and inflation were to rise again, I don't think we could simply look through it. This would come on top of the rise in wages and there would be a risk that higher wages and more inflation would become entrenched.

I think that is very optimistic and it even increases the likelihood that we will have to raise interest rates further. If you look at the yield curve, such speculation reduces the restrictive degree of our monetary policy. The markets also seem to be completely ruling out a further rate hike. However, the probability of this is certainly not zero. My base scenario is that we will not raise interest rates any further, but that we will maintain the 4.0% deposit rate for longer. But I definitely wouldn't rule out the possibility that we will have to do more.

If wage growth remains at a level that is not compatible with the 2.0%, there is unfortunately nothing we can do even if there is a recession. With wage growth of around 5%, we will not lower interest rates – even if the economy shrinks slightly.

It is of course true that when inflation falls, an interest rate of 4.0%, which was not very restrictive or even not restrictive at all when inflation was higher, becomes more restrictive. But that is exactly what we need to get inflation to 2.0%. That is not an argument in favour of lowering interest rates. What we need is confidence that we will achieve our goal in a sustainable way.

Our target is 2.0% and that is what it remains. We will not be discussing a higher target. However, a legitimate discussion is what the tolerance margin around this 2.0% is. We cannot stabilise inflation at 2.0% every year. We shouldn't take major monetary policy action because inflation is a little above or below the target. At times, we have lost a little sense of proportion. In December 2021, we decided on a new round of QE at 5.0% inflation because the medium-term projection predicted 1.7% inflation.

In a way, we have something like that because our target is defined in the medium term.

From today's perspective, we were a little late with interest rate hikes. There were warnings that we should not repeat the mistake of raising interest rates in 2011. There was therefore a "dovish bias" at the beginning. But then we realised that inflation is much more stubborn than we thought and we acted decisively. But now we don't have a hawkish bias just because of the late interest rate hikes. We now simply have four to five years of high inflation. This is potentially dangerous and it is also becoming increasingly costly to return to 2.0%. I think there is now a kind of consensus that we should err on the side of caution before cutting interest rates.

If we keep interest rates too high for too long and inflation ends up going down to 1.7% instead of 2.0%, that wouldn't be a big issue as long as the economy is doing well. However, if we cut rates too early after a few years above the inflation target, inflation picks up again and we then have to do a U-turn and hike more, that would be a big problem.

Sometimes you have to look for consistency: PEPP was a coronavirus emergency instrument. There are still coronavirus infections now. But it no longer has any impact on the economy. And inflation is too high and no longer too low. We have also stopped reinvesting in the APP programme. When I look at our primary mandate to bring inflation to 2.0%, I see absolutely no reason to continue PEPP reinvestments – apart from the fact that we promised to do so. But that alone is not a good argument. That's why I'm in favour of having the debate about ending PEPP reinvestments earlier.

If we continue to reinvest and use PEPP based on this argument, it means that we are not just flirting with fiscal dominance. We are then in fiscal dominance…

… and I don't want to make that assumption. There are some countries in the euro area that have excessive debts and deficits. That doesn't mean that they are on the brink of bankruptcy. But it does mean that they have to reduce these deficits and do so as quickly as possible.

If the markets think that the budget situation of some countries is not sustainable, then I would rather know that now than in a year or two. Most countries have debt with long maturities and low interest rates. So it's better to deal with the problem when it's still manageable rather than when it's no longer manageable.

We are flirting with fiscal dominance in the euro area. And the fact that we have TPI is a clear indication that we as a central bank cannot completely abstract from the fiscal situation. Nevertheless, I stand behind TPI. There may be situations in which there are market developments that are inappropriate and threaten to become a self-fulfilling prophecy. We need to be able to intervene in these situations – under clear conditions and with clear rules. However, I am not comfortable with the idea that we need a structural bond portfolio to ensure that the budget situation of some countries is sustainable. That should not be the case.

Our main instrument are the interest rates. I see an earlier end to PEPP reinvestment more as a question of restoring buffers and of consistency. Inflation is too high. The key interest rates are restrictive. It makes no sense to continue reinvesting. So we should stop doing that. And then all instruments go in the same direction.

We should now start the debate about ending PEPP reinvestments more quickly. And then there is also the discussion about the future operational framework. I wouldn't rule anything out, not even the sale of bonds. If we felt that was the only way to accelerate balance sheet reduction, we would have to look at that. But that would also mean realising the current losses on the bonds on our balance sheet. Our goal as a central bank is not to make profits. Our goal is price stability. But such an approach would not be easy to explain.

I don't see any strong arguments in favour of a higher minimum reserve ratio. We can significantly reduce our balance sheet in order to reduce excess liquidity. And we should be honest: If we increase the minimum reserve, which is currently not earning interest, it's like a tax on the banks. We can do that. But should we? There is also a risk that this will make the future use of bond purchases, i.e. quantitative easing (QE), more ineffective if market participants expect something like this.

We need to provide liquidity to the market in a flexible way. There are various ways to do this. I would leave as much room as possible for price discovery within the financial system. So we should try to leave some room for the interbank market so that we are not so heavily represented in the market that we suppress market signals. This means that I am more open to a demand-driven system, where liquidity is provided on demand, probably through full allotment or through regular auctions so that banks have access to liquidity.

We should at least try. We flood the market with liquidity whenever there is a crisis and then we say: The market is not working. At a certain point, we are the market. But we shouldn't be "the only game in town".

It is not yet clear to me why such a portfolio is needed. The proof has not yet been provided. It also raises political questions and harbours problems. If it is necessary, it should be as small as possible.