We can choose the combination that minimises financial stability risk. We did it with tiering, or when we excluded the housing sector from our TLTRO lending facilities. For example, when the time comes for a gradual exit strategy, we could calibrate the sequencing depending on the state of financial stability. If, say, corporate debt looked particularly overvalued, and risk premia excessively compressed, and a source of systemic risk, we could choose to reduce the size of our private portfolio quicker and hold more sovereign bonds to manage the run-off of the stock. If the resilience of the banking sector were too affected by the prolongation of low rates, we could modify the tiering parameter. The world we now live in one where the toolkit used by central banks to fulfil their mandate has greatly expanded. As they now have several instruments in their monetary policy toolkit, the old Tinbergen principle may be understood in a new and broader way by incorporating several goals. But how can we then address Benjamin Franklin’s legitimate worry about “trying to please everyone”? Three rules may guide us to avoid excessive expectations. First we, the Eurosystem, must stick closely to our mandate which gives a clear primacy to our price stability mandate, without any change in the Treaty that governs us.
Keeping this inflation objective in mind, allow me to reflect on our current and future monetary policy, and design a reinforcing “equilibrium triangle”: The first corner of this triangle is the flexibility of the PEPP (Pandemic Emergency Purchase Programme). Right from the beginning of the pandemic crisis, the PEPP differed from other asset purchase programs by being more flexible across jurisdictions, asset classes, and monthly volumes. iv Its indicative envelope now reaches EUR 1850 billion. I sometimes hear the suggestion from market analysts to provide a quantitative definition of “favourable financing conditions”, and that we should perhaps even introduce Yield Curve Control on sovereign bonds. I disagree: as we are concerned about financial conditions for all borrowers – not just sovereigns – and different forms of financing – not just market funding, we stick to a multifaceted and holistic assessment. And the assessment of how favourable financing conditions are – while we look both at real and nominal yields – is done in conjunction with the inflation outlook, as explicitly stated in our latest Governing Council. So, we will make informed judgements rather than apply predetermined rules. Not acting automatically does not prevent responding effectively, quite the contrary. Our recent decision to conduct our purchases “at a significantly higher pace” was well noted by markets, and implemented promptly. It limited unwarranted transatlantic spillovers: since the start of the year, 10 year sovereign bond yields have increased by 0,8pp in the US, against 0.2pp in the euro area.