Addressing risks of adverse macro-financial feedback loops Euro area financial conditions have tightened significantly in response to the global outbreak of COVID-19 (slide 1). Financial conditions indices, which summarise our monetary policy stance by considering price movements in equity, bond, foreign exchange and money markets, signalled an unprecedentedly sharp and abrupt degree of tightening in recent weeks.
In a matter of days, the pandemic reversed the previous easing in financial conditions that was consistent with a return of inflation to our medium-term aim. This threatened to unleash a perilous macro-financial feedback loop that, if left unaddressed, would have put at risk the ECB’s price stability mandate and endangered financial stability more broadly.