01.10.2020  The role of the European Central Bank’s monetary policy in the COVID-19 crisis Deusto Business Alumni Meeting Pablo Hernández de Cos Governor  Good morning, ladies and gentlemen. It is a pleasure for me to be able to participate in this meeting organised by Deusto Business Alumni. I would like to take this opportunity to share firstly with you some thoughts on how money monetary policy has helped stave off some of the more serious consequences, at least from the economic standpoint, of the COVID-19 crisis. In the second part of my speech, I would also like to reflect on certain challenges that the gradual reduction in the so-called “natural interest rate” poses for monetary policy conduct in advanced economies. This is an issue which will be particularly significant in the context of the monetary policy review initiated at the European Central Bank (ECB). The monetary policy reaction during the crisis The outbreak of COVID-19 in Europe in late February and early March was a shock of great magnitude which triggered an unprecedented economic impact due to the reduction in both the supply and demand for goods and services. The serious, temporary and global nature of the shock initially required powerful economic policy actions. The objective of this “shock therapy” was to avoid a temporary shock from generating effects which persist over time.
One problem with these compensation strategies is their symmetry, understood as the central bank’s commitment to react equally to below-target inflation deviations (which, as we have seen, are the really problematic ones in the current setting) and above-target deviations; i.e., following a period of above target inflation, the central bank would have to reduce inflation below the target, which would require depressing economic activity and employment. Given that a commitment of this type may not be fully credible, it has recently been proposed that these strategies should be temporary: the central bank would normally operate under a traditional inflation targeting regime, but, in the event of a crisis with low inflation and interest rates close to the lower bound, the strategy would be to compensate in future for the “lost inflation” in this period.11 In recent years, various central banks have initiated monetary policy strategy reviews (including the ECB and the US Federal Reserve). In fact, the Federal Reserve has recently announced the main results of its strategic review, which, among other changes, has led to the adoption of a new average inflation targeting strategy, albeit with an undefined timeframe for calculating the average inflation that is to be stabilised. 11  See, for example, Bernanke et al. (2019).