In earlier remarks, I argued that in the vicinity of the effective lower bound, attempting to shorten the horizon by further easing financial conditions carries the risk of shifting the balance of the costs and benefits of a highly accommodative monetary policy stance by increasing potential side effects.6 At the current juncture, an important element in determining the appropriate length of the medium term is the risk of second-round effects that may entrench expectations of low inflation and thereby leave permanent scars on the euro area economy. However, this risk is mitigated by the emerging policy response in the euro area. For the first time, fiscal and monetary policy in the euro area are starting to act as true complements, thereby reinforcing each other’s effectiveness and paving the way for a sustainable recovery. Moreover, inflation expectations by households currently signal very limited risks of second-round effects. While financial markets currently price in significant risks of deflation over the next five years (see left chart on Slide 9), households have adjusted their expectations in response to the pandemic very differently: the share of people that expect inflation to increase more rapidly over the course of next year has increased markedly in April, from 20% to 36%, and in May still accounted for 32% (see right chart on Slide 9). So, given the already highly accommodative monetary policy stance, the growing complementarity between fiscal and monetary policy and the high uncertainty regarding secondround effects, our decision appears to be an appropriate and proportional course of action.
Our priority throughout this transition has been to ensure that it has been and continues to be managed in a way that promotes the robustness and resilience of the payment systems, and of wider financial stability. And a considerable amount of work was undertaken to achieve this - by the retail scheme operators, their participants and the NPSO. What we now expect to see: Tangible progress has been made, and this should rightly be recognised. But, as with any journey, we cannot lose sight of the work that lies ahead to deliver these benefits from consolidation. The NPSO’s primary focus should be on completing integration of the payment systems and embedding robustness and resilience within all of its activities, including the New Payments Architecture (NPA) programme. There is still much to do to complete the integration of these systems, from an organisational perspective, but also at the system level; completion of which will allow the NPSO to begin realising the ultimate goal of strategic leadership and higher standards of management and control. For this to succeed, the NPSO’s strategy will need to be realistic and consistent with its objectives and capabilities. It will also need to include an appropriate focus on reviewing and enhancing the activities the NPSO has inherited, to manage its own risk profile, its outsourced infrastructure partner, and risks to the wider system emanating from participants.