Financial and business cycles can potentially be desynchronised, meaning financial imbalances can grow in an environment characterised by relatively muted inflation. And in such an environment, the use of monetary policy to counteract financial imbalances may not be optimal, since it may result in substantial deviations of aggregate output and inflation from their desirable levels.
In this situation, macroprudential policy, addressing financial imbalances, can complement the long-run objective of monetary policy.2 The unconventional monetary policy measures and the improvements to the regulatory architecture have put the euro area banking system in a stronger position to transmit the ECB’s credit impulse to firms and households across the monetary union and to ensure sufficient financing to sustain the recovery – which is exactly what we have seen.