Against this background, I would like to organise the rest of my remarks today around three issues. First, why do we find ourselves in the current, low inflation predicament? I sustain that inflation fluctuations have been somewhat surprising ever since the beginning of the Great Recession. In part, they were the result of adverse exogenous shocks. To some extent however, they were also connected with unwarranted variations in markets’ expectations of the future stance of monetary policy. Second, I will argue that the Governing Council meeting at the beginning of June is important not only for the decisions that were actually adopted. It is important also for the clear signal that we provided about the determination to do more in the future, in the event of additional downward pressures on inflation. I will develop these two points which deal with the way our recent policy decisions will produce effects. The third question is: how would the ECB react, should the risks of a protracted period of low inflation materialise? At this point in time, this is essentially a scenario analysis – and specifically an analysis of a low probability scenario. Outright purchases of a range of financial assets would be effective in this situation, but structural reforms would also be essential to spur economic growth. 3  See Giannone, D., M. Lenza, H. Pill and L. Reichlin (2011): “Non-standard policy measures and monetary developments”, ECB Working Paper Series No. 1290; De Pooter, M., R.F.
The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation.” With this statement, the ECB has left no doubts about its resolve to avoid any downward turn in the euro area inflation developments, because such developments would be extremely harmful. With interest rates at their effective lower bound and persistently timid growth prospects, lower than expected inflation rates would increase the real value of debt, slowing down the deleveraging process of borrowers, both public and private. If a low inflation outlook became entrenched in the expectations of firms and households, the real interest rate would rise, leading consumers and investors to postpone their expenditure plans. A vicious circle of lower demand and lower prices could ensue. How would the ECB react, should the risks of a protracted period of low inflation materialise? But what exactly could the ECB do in the face of a protracted period of low inflation and economic stagnation? As I have already mentioned, the ECB stands ready to deploy additional unconventional instruments, should the likelihood of this scenario increase. The policy response would involve a broad-based asset-purchase programme. The experience of other countries with such programmes testifies that they can be effectively designed.