giovedì 27 febbraio 2020

How long is the medium term? Monetary policy in a low inflation environment

Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Barclays International Monetary Policy Forum

London, 27 February 2020

We are currently living through times of tremendous challenges for the conduct of monetary policy.

Although the actions of major central banks over the past few years have succeeded in easing financial conditions and thereby stabilising growth and inflation, current and expected inflation rates remain stubbornly below target, in spite of years of exceptional monetary policy support.

Subdued price pressures have given rise to widespread scepticism about the ability of monetary policy to bring inflation back to target. While it is widely accepted that central banks cannot fine-tune inflation in the short term, some now even doubt their ability to reach their objective in the medium term.

Today I would like to speak to these concerns by shedding light on some factors that may impede a more forceful and rapid return of inflation to levels closer to 2%, focusing on the euro area.

I will argue that the nature and properties of the shocks that have been hitting the euro area over the past few years require central banks to exercise more patience in reaching their inflation aim, in particular when approaching the effective lower bound. This implies that the medium-term horizon over which the ECB pursues the sustainable alignment of inflation with its aim is considerably longer than in the past.

Communication on the factors affecting the length of the medium term increases the public’s understanding of the ECB’s monetary policy, thereby also reducing the risks of a destabilisation of inflation expectations.(...)

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