. i will come back to the maltese situation later. ) the european central bank ( ecb ) has sought to avert a credit crunch and a bank funding crisis via a number of measures, including the two 3 - year longer term refinancing operations ( ltro ) launched last december and february. these have been provided on a full allotment basis and at the average marginal refinancing operations ( mro ) rate over the three year term. these operations have helped to stabilise bank lending to the private sector as well as the banks ’ holdings of government securities. however, the effectiveness of these operations has been reduced, as banks have preferred to place a substantial part of the additional funds with the ecb ’ s deposit facility. bis central bankers ’ speeches in fact, in chart 2, the blue line shows the sharp increases in the volume of bank liquidity provided by the ecb through its longer term operations over the course of the crisis. the red line shows the increases in the volume of funds placed by the banks with the ecb deposit facility. the inflow of funds into the ecb ’ s deposit facility has neutralised a substantial part of the added liquidity. this reflects a persisting lack of activity in the interbank market and a hesitation on the part of the banks to provide more credit to households and businesses. this accumulation of excess liquidity comes at a cost to the banks, currently amounting to 0. 75 % – the difference between the 1 % mro rate charged by the ecb on the ltro and the 0. 25 % paid by the ecb at its deposit facility. in a similar manner chart 3 shows the path followed by various monetary aggregates during the crisis. the monetary base – shown as the blue line – includes mainly bank deposits with the central bank. the base consists of those central bank liabilities that form the foundation for expansion of the money supply – m3, represented by the red line. bis central bankers ’ speeches the sharp rise in the monetary base reflects the scale of the injected liquidity. on the other hand, the banks ’ tendency to hold on to their liquidity has resulted in a growth rate in bank loans ( and investments ) that is considerably slower than that of the monetary base. the result is that the growth rates in bank loans ( represented by the green line in the chart ) as well as in m3 have been substantially slower than that in the monetary base. a return to a fully functioning monetary

edward scicluna : price stability and beyond – understanding the impact of the ecb ’ s strategy review speech by mr edward scicluna, governor of the central bank of malta, at the finance malta conference, valletta, 20 july 2021. * * * the european central bank ( ecb ) recently published its new monetary policy strategy, following a year - long review process that encompassed multiple layers of stakeholders – including the public. all the monetary policy instruments and concepts were minutely examined by both the experts and the governing council. a number of important changes were made as a result of the review – which was last carried out in 2003. the world has changed since then, and central banks – including the ecb – face numerous new challenges. we need to keep in mind that the ecb ’ s primary mandate – according to the treaty on the functioning of the european union – is price stability. however, the treaty does not specify what price stability means. that is where the ecb ’ s monetary policy strategy comes in, which quantifies price stability and in turn helps to anchor inflation expectations. for some time, the ecb saw high inflation as being the red flag. this is why the target has till now been an inflation rate of ‘ close to but below 2 % ’. what has changed since 2003? structural developments have lowered the so - called ‘ equilibrium real rate of interest ’ – the interest rate that is consistent with inflation at its target rate and where the economy is operating at its optimum. this equilibrium rate has gone down – while in tandem the global economy has had to weather several major shocks, from the global financial crisis to the pandemic. now, low inflation rates are being seen as just as much of a cause for concern and as a result, the target has now been set to 2 % – over the medium - term – and the red flags are not only rates above that, but also rates below it. this decision was aimed at the possibility that the persistent low - inflation environment was being exacerbated by ambiguity about the level of the inflation aim and a perception of the aim being asymmetric. this decision was taken after an extensive assessment of the ecb ’ s unconventional monetary instruments, which looked at which ones were effective in raising output, employment and inflation – as well as how they affected each other. the new symmetric target is straightfoward, clear and unambiguous. this means that it will provide a more solid anchor