In the baseline scenario, ECB staff projections predict notable downward pressure on inflation arising from the much larger shortfall in aggregate demand than 1/7  BIS central bankers' speeches  supply. As a result, headline inflation is not anticipated to be back on its pre-COVID-19 path by 2022 in that scenario, and underlying inflation is also expected to remain subdued in the medium term (see right chart on Slide 2). Given the unprecedented impact of the crisis on income and consumption, such disinflationary effects are not surprising. But uncertainty around these forecasts is exceptionally large: while measuring economic slack is already a challenge in normal times, it is currently exacerbated by the highly uncertain effects of the crisis on potential output, both in the short and in the medium to long run. In the short run, potential output is severely affected by disruptions in global value chains and social distancing measures, which constrain the full use of capital. Think of the hairdresser who may only be able to use half of his or her physical capacity. Such effects may partly offset the negative effects of weakening demand on inflation even in the short run. In the medium to long run, the impact of the crisis on potential output, and hence on inflation, will crucially depend on the response of firms and policymakers to the challenges we are currently facing. First, some sectors of the economy may never return to their previous size, requiring a large reallocation of capital and labour, also across borders.
These flexibilities allow us to adapt rapidly and without undue stress to new developments and shocks. Among its other virtues, inflation targeting is purported to improve the transparency and accountability of monetary policy and to help enhance the central bank’s credibility. These were also what we hoped the new framework would deliver for us. On the transparency front, the establishment of the Monetary Policy Committee as the decisionmaking body has transformed the way we conduct monetary policy. Today, the public can see what decisions have been taken, by whom, against what objectives, and for what reasons. On the accountability front, we have now learned to operate in the environment where the public expects us to keep inflation within the target range. This makes us extremely conscious of every policy decision we make, which in turn allows us to avoid potentially costly policy mistakes. But perhaps the biggest change is on the credibility front. The way we conduct policy and our track record have helped us to regain any credibility we may have lost following the unsuccessful defense of the baht. Public confidence in the Bank enables us to anchor private-sector expectations about future inflation, which in turn reinforces the effect of our policy. Yet despite all the good things inflation targeting has brought us, it is not a panacea. In other words, there are limits to inflation targeting. An apparent example here is development of asset prices. Also, past successes do not guarantee future success.