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Globally, central banks have been confronted with large and persistent shocks stemming from the financial crisis and the long-term trend decline in the equilibrium real interest rate. These factors have constrained conventional monetary policy space and required a profound expansion of the policy toolbox in order to ensure the effectiveness of monetary policy.
Mr Lane says: “Our forward guidance on interest rates, which makes the evolution of our policy rates contingent on the robust convergence of inflation to our aim, captures our monetary reaction function in the current environment of low inflation and low interest rates. Our forward guidance links the various unconventional monetary policy instruments together within a coherent framework and is proving effective in guiding adjustment in the expected path for policy rates and longer-term bond yields in response to the changing outlook.”
As he has demonstrated, the ECB has been willing and able to calibrate the combination of its unconventional policy instruments in directions and on a scale that gives sizeable support to the economy and continues to support the convergence of inflation to ECB‘saim. At the same time, if fiscal policy were to play a more supportive role alongside monetary policy, it would lead to a faster return of inflation to ECB‘sobjective and contribute to raising the equilibrium real interest rate, thereby alleviating the constraints on monetary policy.
Finally, the long-term trends that are being discussed at this conference give all central bankers pause for thought in terms of their strategy and instruments. In this vein, ECB announced last month the launch of a comprehensive review of its monetary policy strategy, which ECB expect to be concluded by the end of the year.