The measures recently announced by the European Central Bank (ECB), aimed at containing the risk of the euro area running an excessively low inflation rate over a prolonged period, likewise contribute to bolstering the growth outlook for our economy and assisting the adjustment under way. But let us not forget that the crisis – complete with double-dip recession – in the Spanish economy has had a most severe impact on employment and income levels, and has caused a most pronounced setback in terms of real convergence with Europe. Merely restoring pre-crisis levels of well-being will take several years. Evidently, here, maintaining the reform drive is crucial for speeding the process of recovery of the levels of economic prosperity lost due to the crisis. BIS central bankers’ speeches  1  2. Banking sector: situation following the reform  The Spanish banking sector has concluded a far-reaching transformation, entailing the cleanup, restructuring and recapitalisation of the most vulnerable banks, all resulting from the transformation of the former savings banks. The consequences of this reform have been reviewed on various occasions, so I need not detail them here. Allow me merely to summarise the three key elements of the process. i)  Firstly, the reform has driven an intense restructuring and re-sizing of the banking industry, enabling its excess capacity to be corrected. Of note has been the integration of savings banks into existing or newly created banking groups, which has enabled the number of credit institutions to be reduced by over 30.
The natural rate of interest (R*)  The second concept of the interest rate I want to look at today is the natural interest rate. The natural rate of interest is quite an old concept, first posited by Knut Wicksell at the end of the 19  th  Century as the rate of interest at any given time that keeps the price level stable. Wicksell argued that if the market rate exceeded the natural rate, prices would fall; if it fell below, prices would rise. The economics discipline then went on an intellectual journey over the 20  th  Century, first largely abandoning the natural rate  concept in favour of Keynes’ advocacy of fiscal policy for demand management and then returning to monetary policy, albeit in the form of the famous quantity theory of money. By the start of the 1990s, however, the difficulties of targeting the growth in monetary aggregates were clear and central banks turned to interest rates as the principle instruments of policy. Nowadays, we tend to think of the natural rate not so much as the rate that would hold prices stable at any given time but, given frictions in the economy and lags in the impact of monetary policy, as the interest rate that will close the output gap over the monetary policy horizon. However, unlike the trend real rate, the natural rate is a shorter-term concept.