Moreover, it is worth noting that since the MPC’s mandate dictates that we should support growth and employment provided that it does not conflict with achieving the inflation target, we are in any case charged with seeking to eliminate that part of the shortfall in nominal demand that is associated with an output gap, or that can be eliminated without generating inflationary pressure. Second, hard-wiring in higher inflation for a while is not without risk. In many economic models – including the one I used earlier – it is only the real interest rate that matters: it is irrelevant whether a lower real interest rate comes about through a lower nominal interest rate or a higher inflation rate. In the real world, inflation erodes the real value of cash, nominal bonds and fixed-interest debts. In itself, that may reduce the impact on demand of the promise to keep policy loose for long. But it is also apt to breed suspicion of a deliberate attempt to inflate away debt burdens, and may thus lead to inflation expectations becoming de-anchored. This is a serious risk: we should not forget the high levels of unemployment in the 1970s and 1980s associated with bringing inflation expectations back under control. Third, maintaining low interest rates even after the economy has recovered carries financial stability risks. My baseline simulations suggest that the period of very loose policy is already quite extended.
b) Why have we decided to do more on 10 March? The comprehensive package that has been introduced by the ECB sends out two clear messages: First, our decisions are guided by our mandate which is to bring inflation back towards our target of 2% over the medium term. We are firmly set on this objective, and we have a broad range of instruments with which to achieve it. In addition to interest rates, we are also acting both on: bank credit easing with the new series of targeted longer-term refinancing operations (TLTRO 2); and on market financing via the extended QE asset purchase programme, to 80 billion EUR per month including corporate bonds. On top of that, we are guaranteeing that we shall continue to do so for as long as necessary – via forward guidance. So, negative interest rates are only part of a much more comprehensive package. We think that they have been effective, but they naturally have their limits. Furthermore, the Governing Council gave a strong signal of its will towards an internationally cooperative attitude, as it decided not to opt for a tiering system exempting banks from negative rates. 2  BIS central bankers’ speeches  Second message: our priority is to promote the financing of the real economy. The goal of TLTRO 2 is not, as some have claimed, to offset the impact of negative rates on banks.