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.
Against this background, the fact that inflation in the euro area remained persistently below the ECB’s target level during the period that ran between the global financial crisis and 2020 made clear that a comprehensive review of our monetary policy strategy (which was last revised in 2003) was appropriate. 2  To understand why inflation in the euro area remained below target for more than a decade, despite the fact that the ECB maintained a rather accommodative monetary policy stance, one must necessarily take into account the secular decline in the natural interest rate and the limitations that such a decline imposes, through the interest rate lower bound, on the conduct of monetary policy. The equilibrium or natural interest rate (r*) is defined as the real interest rate that simultaneously maintains output at its potential level and inflation stable at its target level. This rate, which cannot be observed directly, can only be estimated, with some degree of uncertainty, using econometric techniques. According to available estimates, the natural interest rate appears to have progressively declined in recent decades in advanced economies and, in the case of the euro area, estimates even place it at negative levels.1 This secular drop in r* is attributed, among other factors, to the decline in trend productivity growth, certain demographic developments and widening inequality. All of these are factors that will have changed the balance between the supply of savings and the demand for investment. And, why is this important for monetary policy? Well, the answer is clear.