In this regard, the long period of low inflation could have led firms and unions to become more backwardlooking when setting prices and wages, making inflation more persistent. Or it could also reflect that the lower bound has somewhat affected monetary policy’s effectiveness in dealing with the shocks hitting the euro area economy.
As the euro area expansion proceeds, most of these disinflationary forces should disappear. As a result, inflation should recover to our target of close to but below 2 %, albeit perhaps a little more slowly given the higher inflation persistence. Another uncertainty that warrants a cautious monetary policy approach concerns the level of the natural rate of interest.