For illustration, let us consider again the most basic New-Keynesian model without any output/inflation trade-offs. Here, policymakers can completely stabilise the path of inflation and output: they set the nominal interest rate equal to the natural real rate of interest plus their inflation objective. They commit to react to inflation and output gap fluctuations, but these would never occur in equilibrium.
In order to provide an incentive for banks to sustain the current level of bank lending, the recalibrated TLTRO III borrowing conditions will be made available only to banks that achieve a new lending performance target.