governing council had cut the main refinancing rate to 1. 0 %. the main refinancing rate was lowered to 0. 25 % in november 2013, while the rate on the ecb ’ s overnight deposit facility was reduced to zero. the governing council now faced a dilemma : although the economic situation demanded further monetary stimulus, official interest rates could not fall much further. nominal interest rates cannot fall far below zero. otherwise, households and firms would simply withdraw money from the banking system and hold cash. this ‘ zero lower bound ’ is another constraint on monetary policy and one that had not been envisaged when the monetary policy framework for the euro area was designed. in response, the ecb embarked upon a range of non - standard measures. first, following the example of several other central banks, the governing council pushed the overnight deposit rate into negative territory and the rate on the main refinancing operations down to zero. second, the ecb launched, and then extended, an asset purchase programme, pushing down long - term sovereign bond yields and lowering borrowing costs for the private sector as well. third, the ecb began offering banks a series of targeted long - term refinancing operations on favourable terms, aimed at prompting them to lend to the private sector. these measures were aimed at stimulating economic activity, staving off the threat of deflation and pushing inflation back up towards its target of below, but close to, 2 %. these unconventional policy measures have been instrumental to provide additional accommodation to the economy and prevent a self - sustaining fall in inflation. however, although economic activity has firmed, inflation still has not converged with the ecb ’ s objective. underlying inflation pressures remain subdued. the governing council continues to hold that such an accommodative monetary policy stance must remain in place until a sustained adjustment in the path of inflation has been achieved. until now, we do not have sufficient evidence that we have reached this critical point. this brings me to my second proposition. because of the existence of the zero lower bound, it is far easier for monetary policy to fight inflation by raising interest rates than to combat deflation by lowering them. although central banks world - wide have used a range of non - standard measures to stimulate economic activity and push inflation up to the target, in practice, this has proven to be extremely difficult. moreover, as i pointed out earlier, the institutional set - up of the euro area rules out the easiest

grant thornton europe regional meeting what monetary policy cannot do address by dr mario vella, governor of the central bank of malta 24 may 2017 almost ten years have passed since the outbreak of the global financial crisis, triggered by the collapse of lehman brothers in the autumn of 2008. during this period, central banks have become, according to the economist, “ the most powerful financial actors on the planet ”. central banks have often been portrayed as the only institutional players with the knowledge and capability to prevent a global financial crisis from turning into a second great depression, on par with the one seen in the 1930s. and yet, despite this aura of power, central banks are both fallible and constrained. in this address, i would like to touch upon what monetary policy can do and, equally importantly, what monetary policy cannot do. as you know, malta has formed part of the euro area since january 2008. therefore, the central bank of malta no longer formulates and executes a monetary policy of its own. rather, as one of 19 members of the governing council of the european central bank, the governor of the central bank of malta takes part in the formulation of monetary policy for the euro area as a whole. at the same time, the bank is responsible for implementing the council ’ s monetary policy decisions in malta. monetary policy in the euro area aims at price stability. according to the treaty this is the primary objective of the european central bank. in turn, the governing council adopted a more precise, quantitative definition of its objective. it aims for an annual rate of inflation of “ below, but close to, 2 % over the medium term ” as measured for the euro area as a whole. the medium - term orientation of monetary policy is important, because in the short term actual inflation can fluctuate due to temporary factors, such as spikes in oil prices or changes in indirect taxes. at the same time, it is also worth noting that the focus is on the euro area as a whole, and not on particular member states within it. but why should monetary policy focus on price stability? in the view of classical economists, money is neutral. on this view, the quantity of money in an economy affects nominal variables, such as the price level, the exchange rate and the nominal interest rate. however, changes in the money supply have no effect on real variables, such as output, incomes or relative prices. monetary policy has, within this theoretical framework, no effect on the real economy at all.