Nonetheless, euro area GDP is expected, at end-2022, to still be somewhat less than 4 pp below the level that would have been observed according to last year’s December projections (the latest before the COVID-19 outbreak). 7  Given the exceptional uncertainty over future pandemic-related developments, this baseline scenario has been accompanied by a more favourably defined alternative scenario. In it, euro area GDP would, at the end of the time horizon considered, be slightly higher than was envisaged in December 2019. Another, more adverse scenario was also laid down, in which the negative gap relative to the 2019 reference would be around 9 pp. Inflation fell in August to - 0.2%, and its core component, which excludes energy and food, stood at a very low level of 0.4%. The ECB’s projections point to a gradual recovery in the coming years. At the end of the projection horizon, inflation would stand at only 1.3%, some distance off our related target. Moreover, several factors tilt the risks to economic growth to the downside: uncertainty over how the pandemic will evolve; the possibility of a no-deal Brexit; and a potentially more adverse reaction by unemployment and in the dynamics of corporate start-ups and company failures once the support measures have run their course. In parallel, there has been a progressive appreciation by the euro in recent months. This introduces disinflationary pressures at a time when the euro area inflation outlook is, as I said, for a record low.
The problem is that that commitment means that the central bank is voluntarily breaching its future inflation objective, which may possibly not be credible in advance. 7  Andreeva and García-Posada (2019) estimate the impact of the TLTROs on bank lending policies in the euro area. For an analysis of the macroeconomic effectiveness of forward guidance on interest rates and on future developments in the central bank’s asset portfolio, see Arce et al. (2019). 9 See Eggertsson and Woodford (2003). 8  13  This is what we economists call “dynamic inconsistency”: a central bank could announce today that it will tolerate higher inflation in future in order to stimulate the economy, but once the economy and inflation recover, there would be an incentive for it to breach its initial announcement if it conflicted with its price stability objective. If agents doubt the central bank’s credibility, this type of forward guidance will not be effective in the first place. One way to avoid this problem is by modifying the monetary policy “strategy”, seeking to grant greater credibility and transparency to the central bank’s actions; in other words, to change the way in which the central bank’s objective is articulated and the way that the central bank pursues that objective with the tools available. To date, in their strategic frameworks most central banks have followed variations of inflation targeting, which entails targeting an inflation rate that is close to a specific number (for example, 2%) over a medium-term horizon.