I will then turn to financial stability, which is essential for the effectiveness of monetary policy (by preserving its transmission channels). Finally, I will talk about economic stability and the way monetary policy, in combination with fiscal policy, can smooth the business cycle and foster a robust and sustainable recovery from the covid crisis. Clearly, these different aspects are closely intertwined: monetary policy, while pursuing its primary objective of price stability, can affect financial stability; fiscal and monetary policy closely interact with each other, as do monetary and macroprudential policy. But for the sake of clarity I will tackle each concept in turn. I. Price stability To achieve the ECB inflation objective, we are determined to maintain, as long as necessary, a very accommodative monetary stance. We continue to stand ready to adjust all of our instruments, as appropriate, including possibly a lowering of the DFR if needed. And to guarantee the full transmission of this accomodative stance, we pay particular attention to ensuring that both bank and market financing conditions remain favourable for all agents (governments, firms and households). This leads us to monitor a large set of indicators, with a multifaceted and holistic approach. Let me add some comments about the recent increase we have seen in long-term rates, following although to a lesser extent the move in the US. This increase has different causes, and hence calls for different reactions and instruments.
Financial stability Lessons have to be fully drawn from the past experiences about the obvious costs of financial crises. History has shown that price stability is not a sufficient condition to ensure financial stability. Furthermore, low-for-long interest rates, in a context of a decreasing natural rate of interest, can contribute to the build-up of systemic risk and financial vulnerabilities, by encouraging excessive risk-taking and financial misalignments.2This matters for monetary policy. Of course, macroprudential policy is the first and main line of defence, and the toolkit has been considerably enhanced in recent years.3 However, it appears that macroprudential tools, although necessary, are not completely sufficient to address the whole range of financial stability concerns. It is my view that central banks should take financial stability into account while setting the course of monetary policy. There is a need to overcome the strict separation principle between monetary and macroprudential policies, and adopt a coordination principle. What does this mean in practice? Let me first dispel two misunderstandings and say what it is not about. It does not mean that financial stability may become a monetary policy objective in itself. The aim here would be to identify vulnerabilities that represent a threat to the price stability objective, either directly or indirectly by impairing the effective transmission of monetary policy in the medium-long term. Also, it does not imply a systematic (mechanical) reaction to financial stability indicators, and it is very different from the “leaning against the wind” strategy.