This was the reason the ECB — along with most other central banks — said at the time that inflation was primarily a ‘transitory’ shock caused by supply-side issues. Monetary policy, by contrast, works by affecting levels of demand in the economy, using interest rates to adjust the relative attractiveness of saving and consuming.
“Monetary policy could not bring down energy prices,” said one senior ECB official who was granted anonymity to speak openly. He said the bank made the right call back in 2021 not to raise rates, even as inflation rose to nearly 5 percent.
At a conference in March, Chief Economist Philip Lane argued in a presentation that inflation would have come in only marginally lower had the ECB moved sooner. At the same time, he said, tightening earlier would have inflicted considerably more harm on the economy, depressing output by around 2 percentage points or more well into 2025.
Davide Oneglia, Europe director at TS Lombard, observed wryly that such things have to be taken with a pinch of salt: “Central bankers love counterfactuals and unobservable variables” that look scientifically grounded and are difficult to disprove, he said.
Seeing the inflation shock as temporary was the consensus view back in 2021. And plenty of research ink has been spilled defending it since, not least this landmark piece by Ben Bernanke, the former Federal Reserve chair, and Olivier Blanchard, chief economist of the International Monetary Fund.
When the ECB’s economists, under director-general for economics Oscar Arce, applied the Bernanke-Blanchard model to the eurozone, they found that supply-side factors dominated even more, due to Europe’s greater exposure to energy supplies from Russia.
