Last week the High Council for Financial Stability alerted on potential risks associated with commercial real estate, especially: “the sharp rise in demand by investors on certain market segments and a high level of prices, in particular office prices in the Paris area”. The HCSF’s assessment will be released for public consultation in the coming weeks. We are ready, when needed, to take action with macroprudential measures, to prevent and mitigate any systemic risks that might arise. In sum, monetary policy is doing a great deal to counter weak inflation and support economic activity – it is our duty and we will continue to do so with steadfast resolve: we are consistent in our objective, ready to act with the right instruments, and alert to any possible risks. However, I would like to stress again that “monetary policy cannot be the only game in town”. Other economic policies also have a crucial role to play. This is precisely what the members of the G20 reiterated in Shanghai on 27 February: “Monetary policies will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth”. Where there is sufficient margin to do so, fiscal policy must support demand – this is not currently the case in France, but it is in other countries in Europe. Moreover, structural reforms remain absolutely vital in France, to encourage creations of jobs and of businesses and thus bring the economy back to full potential.
In normal times, central banks cut their key rates, and this passes through to the yield curve. However, in order to deal with the financial crisis, the ECB like other central banks have brought their key interest rates to very low levels, around zero. This means that our traditional monetary policy tools had to be supplemented by other instruments, known as non-standard instruments, in order to reach our prices stability objective. I will return to this point later. b) What is more with regard to the challenges we currently face, these deflationary pressures create the risk of an unanchoring of expectations, which would make it harder for us to achieve our 2% target again. Indeed, if inflation stayed too low for too long, economic agents may revise downwards their inflation expectations, which would create second round effects. Lower inflation expectations influence economic agents’ price- and wage-setting behaviour, which in turn keeps inflation low. It can even raise the risk of deflation, defined as a cumulative process of falling prices, including those of assets, or even wages and production, as the world economy experienced in the 1930s or Japan partially underwent in the 1990s. Such deflationary dynamics are not at play today. But this risk is the BIS central bankers’ speeches  1  reason why our inflation target is symmetrical. We consider too low inflation to be just as costly as too high inflation. And, therefore, it is more risky for central banks to act too late than too early.