Monetary policy and central fiscal capacity in the euro area

The new inflationary peaks reached in the Euro Area (EA) last summer have led the European Central Bank (ECB) to strengthen the restrictive measures it has taken since March 2022. The ECB complemented the end of its net asset purchase programmes by increasing the policy interest rates by 125 basis points in the last two meetings, those of July and September. Also, the ECB signalled that its restrictive policy stance is bound to continue. In her speech at Jackson Hole in August, Isabel Schnabel (2022b), member of the ECB’s Executive Committee, stated that the policy interest rates should be increased until price stability (i.e. an inflation rate equal to 2%) is restored, independently of the growing probability of a recession in the EA. A similar statement was reiterated by the ECB’s President a month later (see Lagarde, 2022c).