Rather I want to discuss how the MPC is working towards achieving the 2% target. The institutional framework for monetary policy Just as no man is an island, no economic policymaker works completely in isolation. Let me start with a few comments on this observation, starting with the interactions between monetary and fiscal policies. Monetary policy is a potentially very powerful tool, central to achieving stability in the overall price level by steering inflation back to target. But monetary policy is also a pretty blunt tool, ill-designed to deal with the distributional consequences of relative price changes – changes in the price of one good compared with another. Recent experience in the face of dramatic increases in energy prices illustrates this point. 2/8  BIS - Central bankers' speeches  Monetary policy has been tightened to ensure that the impulse to headline inflation coming from higher utility bills does not become embedded in broader inflationary developments. It has weighed against the incorporation of so-called second-round effects in price, wage and cost setting behaviour. In other words, monetary policy has addressed the danger that self-fulfilling dynamics lead to overall price inflation remaining persistently above target, even as the original impetus to inflation from energy prices recedes. By contrast, the fiscal response to energy price developments has been more targeted.
The effect has been particularly significant in countries such as Spain, whose initial fiscal space was less than that of other countries, given its high starting level of public debt and structural budget deficit. 2  This amount – around € billion – could cover a volume of losses equivalent to almost twice the current volume of bad loans in the system, i.e. approximately 8.2% of total lending to the resident private sector. 2  The ECB’s targeted long-term refinancing operations (TLTROs) during the crisis have also managed to prevent liquidity problems in the banking sector and have smoothed and encouraged lending by the sector to the economy. For example, in the June TLTRO III operation, the participating banks received a total of € trillion, a record amount in the Eurosystem’s refinancing operations. These operations continue to be significant and, at the last TLTRO auction, TLTRO III.7, settled on 18 March, € billion were allotted to the participating group of Eurosystem credit institutions. The European authorities with prudential powers adopted, in coordination with the national and international authorities, numerous decisions so that the financial system could contribute to overcoming the crisis. Supervisors thus reviewed their guidelines on capital and liquidity buffers, allowing banks temporarily to operate below the regulatory level set for some of these buffers. Various recommendations on limiting the distribution of dividends were also approved.