ECB’s Panetta: We need to bring inflation back to our 2% target as soon as possible, but not sooner

Medium-term inflation outlook presents clear upside risks.

Further policy adjustment is warranted.

We must calibrate our monetary policy carefully to ensure inflation durably returns to target, while also guiding market expectations and limiting excess volatility.

He of our stance should not rely on a one-sided view of risks.

We must avoid excessive focus on short-run developments and fully taking into account the risks.

The neutral interest rate provides limited guidance here.

We also need to stand ready to address collateral issues.

I  prefer the concept of the target-consistent rate to that of the neutral rate.

Maintaining ample liquidity in the system will help ensure smooth money market functioning.

Ready to intervene in a timely manner to counter unwarranted market dysfunctions, should they arise.

We should ensure that TLTRO repayments have been absorbed before we stop fully reinvesting the principal payments.

A controlled reduction – whereby only redemptions above a cap are not rolled over – is preferable to active sales.

A bigger-than-expected rate increase may heighten volatility and have a stronger impact in the current highly leveraged environment.

We need to pay close attention to ensuring that we do not amplify the risk of a protracted recession.

Our policy rate remains a suitable marginal instrument of normalization.

If these bigger-than-expected increases are interpreted as signalling a higher terminal rate, we could have a stronger impact on financing conditions.

We have a comparatively limited understanding of the effects of reducing the size of our balance sheet.