9 / 12 07 / 10 / 2020 the ecb ’ s monetary policy in the pandemic : meeting the challenge meeting the monetary policy challenge the pandemic represents a significant monetary policy challenge. weak demand and rising economic slack have added to disinflationary pressures in an environment that is already characterised by low inflation. as i set out in my speech at this year ’ s jackson hole conference, chart 9 sketches in a stylised form the challenge the ecb is facing in reaching its inflation aim. chart 9 the future inflation path source : ecb. notes : “ ad ” ( the blue line ) represents the expected inflation path before the pandemic shock. the initial negative impact of the pandemic shock – in the absence of additional monetary policy accommodation – is captured by the downward shift in the expected path from “ a ” to “ b ”. the “ be ” path ( the yellow line ) illustrates a transition path of inflation that is even lower than originally envisaged. by providing additional monetary policy accommodation, the central bank can aim towards the upper region of the “ bcde ” zone, so that the adjustment is closer to the “ bcd ” path. before the onset of the pandemic ( time t ), inflation was expected to rise gradually towards the inflation aim ( “ π * ” ) along the “ ad ” path ( the bold blue line ). the initial negative impact of the pandemic shock on inflation is illustrated by the shift from “ a ” to “ b ”. the monetary policy challenge since the onset of the pandemic crisis can be divided into two stages. in the first stage, the challenge for the ecb is to counter the negative inflation shock caused by the pandemic. one option would have been to simply accept a longer period of low inflation and an even more protracted path towards our inflation aim ( as illustrated by the “ be ” path in the chart ). however, this option is not desirable for a number of reasons. first, it would be very costly. it would imply higher real interest rates, thereby weakening the recovery of investment and consumption. second, it would also be a high - risk option : by tolerating a protracted period of even lower inflation, it might foster a downward drift in inflation expectations that could ultimately become entrenched, making it even more difficult for us to deliver our inflation aim. this is particularly relevant in the current euro area context, with an already long

continue reinvesting, in full, the principal payments from maturing securities purchased under the app for an extended period of time past the date when we start increasing interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. ” [ 7 ] see lane, p. r. ( 2020 ), “ the market stabilisation role of the pandemic emergency purchase programme ”, the ecb blog, 22 june. [ 8 ] gross take - up was €1. 308 trillion in june 2020 and €175 billion in september 2020, and the net liquidity injection considering peltros ( pandemic emergency longer - term refinancing operations ) and tltro ii repayments was €548 billion in june 2020 and €158 billion in september 2020. https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201006 ~ e1d38a1ccc. en. html 11 / 12 07 / 10 / 2020 the ecb ’ s monetary policy in the pandemic : meeting the challenge [ 9 ] see lane, p. r. ( 2020 ), “ the pandemic emergency : the three challenges for the ecb ”, speech at the jackson hole economic policy symposium “ navigating the decade ahead : implications for monetary policy ”, hosted by the federal reserve bank of kansas city. [ 10 ] for more details on the strategy review, see the speech by christine lagarde, president of the ecb, “ the monetary policy strategy review : some preliminary considerations ” at the “ ecb and its watchers ” conference on 30 september 2020. https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201006 ~ e1d38a1ccc. en. html 12 / 12