There was also very broad agreement with the extent of the recalibration, which was based on technical work carried out by the staff of the whole Eurosystem in our committees. The analysis we did before the inception of our asset purchases, and the evidence accumulated since, give us confidence that the additional measures announced yesterday provide material upward pressure on price dynamics to reach our objective as initially intended. Arguably, the only difference between our current situation and a more traditional situation is that our monetary policy stance is not determined primarily on the basis of just one tool – interest rates – but on the basis of an array of tools, which include also the pace of asset purchases, and forward guidance on both interest rates and asset purchases. But similar to the times when we steered policy primarily through interest rates, we are continuously monitoring economic and financing conditions, on which our policy action is always conditional. If these developments change in directions that make it necessary to respond again, we are of course ready at any time to adjust this array of tools to secure the return of inflation to our objective without undue delay. There is no particular limit to how we can deploy any of our tools. And in this context it is important to recall that we operate under a clear framework of monetary dominance – we are ultimately driven by our mandate of maintaining price stability.
But falls in oil and commodity prices can have a more lasting impact on inflation – and hence become relevant for monetary policy – if they feed into core inflation. That can happen under two circumstances. The first is if price falls are symptomatic of weakening global demand, rather than a boost to global supply. Then, lower oil prices might be accompanied by declining net exports, which could in turn cause firms to cut back on investment and drag down core inflation. This blunts the growth-bolstering effect of lower commodity prices. Imported inflation might also be depressed as foreign producers cut prices in reaction to weakening global growth. The second circumstance is if there is a succession of supply shocks that keep inflation low for a long period and cause firms and households to revise down their inflation expectations. In that situation, low oil and commodity prices can have “second round effects” as lower expectations feed into wage bargaining and price setting, thereby affecting core inflation. Then, the effect of supply shocks becomes more similar to demand shocks. In both cases, central banks end up facing a situation not of a benign supply shock, but rather of an adverse demand shock that, if left unaddressed, could derail price stability over the medium-term. That would call for a more forceful monetary policy response. Importantly, there were signs in the past that such circumstances were present in the euro area.