Together with falling energy and food prices, it explains the bulk of the imported downside pressure on euro area consumer prices. Of course, the euro appreciation may also have reflected other factors, for example changes in attitudes towards risk. Such factors can be expected to produce only temporary effects on inflation, and would therefore not normally require a monetary policy response. Unwarranted fluctuations in markets’ perceptions over the future stance of monetary policy, however, could be a more persistent source of low-inflation risk. In this case, a monetary policy reaction would be necessary to steer perceptions away from unlikely future outcomes. How will our recent policy decisions make a difference? From this standpoint, I believe that there are three clear channels through which the decisions adopted by the Governing Council in June is effective. The first channel is standard and has to do with the expansionary impact of the measures on the real economy and inflation. To gauge the extent of such an impact, it is useful to refer again to the ECB macroeconomic projections and recall that they are conditioned on a number of technical assumptions. These assumptions relate to the evolution of macroeconomic and financial variables, which specifically include market expectations of short-term interest rates and of exchange rate developments over the projection horizon. The conditioning assumptions for the June 2014 projections were computed based on information available on 14 May 2014. Over the past month, financial market prices have adjusted to reflect the ECB decisions in early June.

Vítor Constâncio: Recent challenges to monetary policy in the euro area Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the Athens Symposium ‘‘Banking Union, Monetary Policy and Economic Growth’’, Athens, 19 June 2014. *  *  *  Ladies and Gentlemen, Seven years have passed since the financial market turmoil in the summer of 2007 marked the beginning of the financial crisis and the ensuing recession. These years have been challenging for all central banks. They have marked the end of a long period of remarkably stable, good macroeconomic performance. The widespread adoption of an explicit price stability objective had been conducive to low inflation outcome in an environment of prolonged economic growth. Existing monetary policy strategies – mostly variants of the inflation targeting model, though with notable exceptions at the ECB and at the Federal Reserve – appeared to be adequate and sufficient to attain this goal. Consistently with the Tinbergen principle, the primary objective of price stability was achieved everywhere through a single, conventional monetary policy instrument: a short-term interest rate. The global financial crisis changed this situation abruptly. Since then, some central banks have been endowed with additional macro-prudential instruments and a more explicit mandate to preserve financial stability. While no explicit change in monetary policy strategies has taken place, it is fair to say that there has been a generalised increase in the attention paid to banks’ balance sheet conditions and to the evolution of credit.