To achieve the primary objective of price stability, as Christine Lagarde simply and clearly put it, “the (effective) transmission of monetary policy is just as important as monetary policy itself”. And this transmission applies towards all economic players, along all financing channels, and in all countries. 3/5  BIS central bankers' speeches  Thus, as early as the critical phase in March, it was already essential (i) regarding interest rates, to support favourable financing conditions and to contain the adverse effects of strains on the financial markets, (ii) regarding volumes, to guarantee sufficient liquidity for business and households through bank channels, and lastly (iii) to limit the risks of financial fragmentation within the euro area. When we need to meet several intermediate objectives at the same time, we need to expand our range of instruments and strengthen their intensity. Here, economists often refer to the “Tinbergen principle”, but it does not necessarily require strict specialisation with one single instrument assigned to each objective. Our choice at the ECB is more pragmatic: since March, we, like the Fed and the Bank of England, have greatly expanded and strengthened our armoury of instruments and in so doing refuted all those – and remember there were a lot of them only a few months ago – who feared that the central banks were “running out of ammunition”. However, some of our instruments deal with the long-lasting, underlying low-inflation environment that preexisted the crisis – and which has not gone away. It is our “baseline game”, if you will.
These two anchors, which are enshrined in the Treaty, form the legal basis for our action, but, more than that, they are the basis for the confidence that 76% of euro area citizens have in our currency: this is our essential asset. Paradoxically, at a time when the ECB and the Banque de France are doing more than ever before, criticisms are being raised over their mandate, and whether it should be extended beyond price stability to include debt sustainability or the fight against the health crisis, and over their independence, and whether they should be placed “under political control”. With regard to independence, there are sometimes even strange resonances between Karlsruhe and certain debates in Italy or France. I would therefore like to clarify the reasons behind these two anchors and set out precisely what they contain. What does the future hold for price stability? Our price stability mandate is defined as inflation below, but close to, 2% over the medium term. This 2% figure has been the subject of frequent debate, but it represents the equilibrium point in discussions by economists – who all recommend a target of above zero – and is the target currently pursued by all major central banks. Naturally, there is a huge amount of uncertainty over how the economic environment will evolve, but this is probably less true for inflation. Nonetheless, it is important to share a few insights into its possible trajectory.