sabine lautenschlager : low inflation as a challenge for monetary policy and financial stability? speech by ms sabine lautenschlager, member of the executive board of the european central bank, at the parliamentary evening, hamburg, 7 july 2014. * * * summary although low interest rates might have side effects with respect to financial stability, they were necessary for the ecb to fulfil its mandate of ensuring price stability, said sabine lautenschlager, member of the ecb ’ s executive board, in a speech at an event organised by the deutsche bundesbank in hamburg. “ the risks of the rate of inflation being too low over a long period are not to be underestimated, ” she explained. the experience of japan had proven that an unanchoring of inflation expectations could start a downward spiral – consumers and investors could change their behaviour and defer spending. the ecb ’ s governing council had therefore cut the main refinancing rate and had decided on a package of instruments to encourage banks to lend more to corporations and households. excessively low inflation rates made it harder for stressed countries to adjust their economies and regain competitiveness. “ we [ could ] soon find ourselves in a vicious circle in the euro area ”, lautenschlager warned. it would take some time before the measures adopted took effect, especially the instruments designed to increase liquidity, she explained. “ i would expect that to happen next year, rather than this year. ” should inflation rates not increase gradually as expected, the governing council was unanimous in its readiness to decide on further unconventional measures to effectively counter the risks related to an excessively long period of low interest rates, said ms lautenschlager. a broadly ranging programme of securities purchases was basically an instrument that a central bank could use, lautenschlager claimed. but the requirement to be met for such a use had to be very high, because of the significant potential side effects, she said. what was also being discussed was a revitalisation of the market for asset - backed securities ( abss ), which lautenschlager regarded as a worthwhile goal to the extent that transparent and simple securitisations were involved. for such abss, a purchase programme would be possible, but the ecb should only take on liquidity risk and no credit risk. taking on credit risk, for example to encourage lending to small and medium - sized companies, was the responsibility

requires us to shape our communication on the basis of our monetary policy reaction function. in a speech last month i summarised my thinking by saying that we do not want “ to drive like crazy at night with our headlights turned off ”. [ 31 ] the recent financial tensions have made this conviction even stronger. annexes 22 march 2023 everything everywhere all at once : responding to multiple global shocks english 1. the possible consequences that an incorrect calibration of monetary policy could have for financial stability and the transmission of monetary policy are discussed in panetta, f. ( 2022 ), “ mind the step : calibrating monetary policy in a volatile environment ”, keynote speech at the ecb money market conference, frankfurt am main, 3 november. 2. panetta, f. ( 2023 ), “ monetary policy after the energy shock ”, speech at an event organised by the centre for european reform, the delegation of the european union to the united kingdom and the ecb representative office in london, 16 february. 3. the risks of policy normalisation – in particular the interaction between rate hikes and quantitative tightening – are discussed in panetta, f. ( 2022 ), “ normalising monetary policy in non - normal times ”, speech at a policy lecture hosted by the safe policy center at goethe university and the centre for economic policy research ( cepr ), 25 may. 4. panetta, f. ( 2021 ), “ monetary autonomy in a globalised world ”, welcome address at the joint bis, boe, ecb and imf conference on “ spillovers in a “ post - pandemic, low - for - long ” world ”, 26 april. 5. the global supply chain pressure index, developed by the federal reserve bank of new york, decreased considerably in february 2023 and is now below its historical average. this decrease was broad - based across factors but driven mainly by a decline in european and asian delivery times. this latest estimate suggests that global supply chain conditions have largely normalised. 6. see chart 5 in panetta, f. ( 2022 ), “ greener and cheaper : could the transition away from fossil fuels generate a divine coincidence? ”, speech at the italian banking association, 16 november. 7. the ecb consumer expectations survey suggests that euro area consumer inflation expectations have reached a turning point. median expectations for inflation three years ahead fell to 2. 5 % in january 2023, from 3. 0