While fiscal policy has been forcefully counter-cyclical during the pandemic (including the launch of the innovative Next Generation EU initiative), the capacity of fiscal policy to support aggregate demand dynamics over the medium term is constrained by high aggregate national debt levels and the absence of a permanent central fiscal capacity.
These factors reinforce our strategic assessment that extensive monetary accommodation is required to ensure that inflation pressure builds up on a persistent basis in order to stabilise inflation at two per cent over the medium term. How do we reconcile the current high inflation rate and the subdued prospects for inflation over the medium term?