On Thursday, the ECB published its fresh forecast, which predicts that prices will continue to rise relatively fast also next year.

"The overall outlook is optimistic: the economy is recovering rapidly from the crisis, unemployment is falling to an all-time low and people's incomes are rising," Müller wrote on the blog of the Bank of Estonia (link in Estonian).

At the same time, the sharply accelerated price increase in recent months has been an unpleasant surprise to everyone, and this will also force eurozone central bankers to adjust their plans. The rise in consumer prices hit 8.8 percent in Estonia and 4.9 percent in the euro area in November. Almost half of the rapid rise in prices is due to higher energy prices, but the prices of more and more other goods and services are also rising.

"It is clear that such a rapid rise in energy prices cannot last for long, therefore we are likely to be close to the point where the overall price increase starts to decelerate again. It is also reasonable to expect that as the effects of the pandemic subside and businesses adjust, the supply problems that have pushed up the prices of many goods will ease," Müller said. 

The Estonian central bank governor said that it is not possible for the ECB to directly influence the price of electricity or alleviate tensions in supply chains through interest rate decisions.

"At the same time, the longer the price increase stays relatively fast, the greater the likelihood that it will be passed on to the prices of more and more goods and services. Therefore, the Governing Council of the European Central Bank cannot ignore the accelerated price increase, even if its slowdown again in the near future is to be expected," he said. 

According to the fresh forecast, consumer prices in the euro area will rise by 3.2 percent next year, exceeding the central bank's 2 percent target for most of the year. From there, over the next two years, price growth will slow to close to 2 percent.

According to Müller, the changed inflation outlook requires a change in the monetary policy course.

"Understandably, however, this is done cautiously, as uncertainty about near-term economic development remains high. On this basis, in the Governing Council of the European Central Bank, we decided to reduce the provision of additional support to the economy," he said.

"To this end, we will end, by March 2022, the PEPP bonds purchase program launched to mitigate the impacts of the pandemic and, still before that, reduce the provision of additional support to the economy already in the first month of the year," Müller said.

He said that since the central bank cannot change course too abruptly, it will temporarily increase the volumes of the APP bonds purchase program in the spring, but then reduce them back to their previous levels by the autumn.

"What is important to me is the change in tone in the messages of the Governing Council of the central bank. The acceleration of price increases and the improvement of the economic situation will allow the central bank to reduce the pumping of money into the economy and to clearly set the course towards a 'normalization' of central bank policy. This is already reflected in the expectations of the financial markets that the ECB could start raising interest rates at the beginning of 2023," Müller said. 

He said that in its decision-making, the Governing Council of the ECB is no longer just worried about economic growth slowing down and dangerously low price rises in the long run, but is also prepared to react to the possibility that price growth in the euro area may not slow back quickly to 2 percent. In that case, the Governing Council is ready to tighten monetary policy faster than described above.

"At the moment, given the generally good state of the Estonian economy and the rapid rise in prices, I have to say that the very favorable lending conditions created by the European Central Bank are providing an additional boost to the Estonian economy, perhaps more than needed," said the member of the Governing Council of the ECB. 

On the other hand, according to Müller, it is very rare for monetary policy in the euro area to be ideal for each individual eurozone country, which does not mean that being part of the monetary union is not in everyone's common interest.

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