17.02.2022  The new ECB monetary policy strategy and its implications for the current high-inflation episode The Euro YearBook Pablo Hernández de Cos Governor  Ladies and gentlemen, good morning: It is a pleasure for me to be able to participate in this meeting organised by Fundación ICO, Instituto Español de Analistas Financieros and Fundación de Estudios Financieros. Here at this 2022 edition of the Euro Yearbook, I would like to deliver a few remarks regarding the main aspects of the review of the monetary policy strategy of the European Central Bank (ECB) that was concluded in the middle of last year. I would also like to emphasise why our new monetary policy strategy provides us, in the Eurosystem, with the appropriate framework and tools to handle the high-inflation episode that we are currently confronting. I will structure my remarks today into three parts. First, I will explain why, given the profound structural changes that the euro area has experienced in recent decades, it was appropriate for the ECB to undertake a comprehensive review of its monetary policy strategy. In particular, I will talk about the fall in the natural interest rate that has taken place over the last few decades – in the euro area and in most advanced economies – and how this secular process has imposed some limitations – through the interest rate lower bound – on the conduct of monetary policy.
Finally, an important dimension of flexibility in our monetary policy that we should not overlook is the focus on avoiding financial fragmentation in the euro area, in particular when the impact of the pandemic has been and remains very heterogeneous across countries and sectors. In December last year, we decided to retain this flexibility in the PEPP reinvestment phase, which was extended until the end of 2024. We should now use this  13  flexibility proactively and monitor whether it is sufficient to ensure our monetary policy is appropriately transmitted across the euro area. 4 Conclusions Let me conclude. I am convinced that the ECB’s new monetary policy strategy, which I have briefly sketched in this talk, constitutes a solid basis for the conduct of our monetary policy. This is so, not just looking ahead to the coming decades, but also for coping with the current high-inflation episode. In this respect, I believe that, in a highly uncertain environment, a careful assessment of the implications that current developments have on medium-term inflation expectations is key, and that the optionality and flexibility that we retain should be exercised gradually and predictably. The direction in which we need to head is clear, but we should not draw premature conclusions as to the time frame. The process will be both gradual and data-dependent. Thank you for your attention. 14  References Ajevskis, V. (2018), "The Natural Rate of Interest: Information Derived from a Shadow Rate Model," Working Papers 2018/02, Latvijas Banka.