Prudent recalibration required: The ECB's response to the 2022 price shocks. Monetary policy challenges 2023

The ECB was not slow to react to the rising inflation, but rather reacted very strongly as the price shocks escalated and the supply bottlenecks persisted longer than widely expected. The ECB raised rates later and less forcefully than the Federal Reserve because the inflation dynamics in the euro area differ significantly from those in the euro area. The U.S. economy was robust on the eve of the pandemic, the unemployment rate had reached historic lows, and the key policy rate was above 2 %, whereas the ECB's policy rate was below zero, unemployment high and the economy still recovering from previous crises. During the post-pandemic recovery, high U.S. aggregate demand boosted global inflation, whereas the European economy struggled to cope with the extensive fallout of the Ukraine war. In themselves, price shocks cannot cause inflation to remain persistently above target. Although wage increases are currently not compatible with the inflation target, monetary policy restriction is not necessary because falling energy prices and lower extra profits should compensate for the slight overshooting of wage and inflation expectations are anchored.