term inflation forecast far below our objective and a nominal effective exchange rate that has in recent months countered much of our stimulus all lead to the conclusion that there is no room for complacency. we should retain a significant monetary stimulus until we have a sound recovery in place. moreover, we stand ready to recalibrate the foregoing measures, or to introduce new ones were it necessary, to fulfil our price stability mandate, understandably always in a symmetrical manner. it is also crucial to retain flexibility in the application of our asset purchase programmes to head off potential financial fragmentation problems. the other national and european economic authorities must appreciate that, given the uncertainty over the future course of the pandemic and, therefore, over the soundness of the economic recovery, it is essential they maintain their stimulus measures, now in a more selective and targeted fashion. an early withdrawal of these measures would harm the euro area productive system and, potentially, our financial system. the extent of such harm would exceed the potential medium - term costs of retaining the measures over time. and depending on how the pandemic and its economic impact evolve, it cannot be ruled out that such measures may need to be expanded. defining price stability in the context of low natural interest rates in the second part of my address i will take a longer - term perspective and reflect on the changes occurring in the implementation of monetary policy in the advanced economies. in the years prior to the 2007 – 2012 crisis, which in our case coincided with the early years of the ecb, a certain consensus emerged among the advanced economies regarding the role and functioning of central banks. these were designed as independent entities, that is, not subject to direct control by governments, with a clear mandate to ensure stable prices, and also in some jurisdictions, such as the united states, full employment. the price stability mandate is normally articulated as a numerical inflation objective, frequently 2 % or, as in the case of the ecb, a level below but close to 2 %. to achieve its price stability target, the central bank adjusts the general level of interest rates on the funding raised – via bank loans or in the debt markets – by agents in the real economy ( businesses, households and governments ). although the central bank controls the nominal interest rate, it is the “ real ” interest rate – that is, the nominal rate less expected inflation – that is relevant for households ’ and businesses ’ spending decisions. for instance, a nominal interest rate of 2

% when expected inflation is 4 % is much more expansive than a nominal interest rate of 1 % in a noninflationary setting. given that the prices that determine inflation are partly rigid, the central bank may influence the real interest rate by adjusting nominal rates. before the onset of the financial crisis, the central bankers ’ manual prescribed that if the economy is overheating and prices and wages are under growing pressure, the central bank should raise nominal interest rates above inflation expectations, thus tightening real rates and cooling down the economy. and vice versa, in a downturn, with falling prices and rising unemployment, the central bank should cut nominal interest rates, thus reducing real rates and stimulating aggregate demand. conceptually, central bankers sought to maintain real interest rates at a level – known as the natural rate of interest – that would hold gdp at its potential level and would keep inflation stable around its target level. 2 this natural rate of interest is not directly observable the concept, determinants and monetary policy implications of the natural rate of interest are discussed in depth in galesi, nuno and thomas ( 2017 ). and may only be estimated, with some degree of uncertainty, using econometric techniques. 3 in recent decades this natural rate of interest has gradually fallen in the advanced economies. this is attributed both to demographic factors ( such as population ageing ) and to technological factors ( such as low productivity growth ), which have changed the balance between the supply of savings and the demand for investment. in consequence, to stabilise inflation, real interest rates must now be lower than they were two or three decades ago. indeed, in economies such as the euro area, various estimates even place the natural rate of interest at negative levels. 4 this would not be a problem if nominal rates were able to fall as far as was necessary ; for example, with expected inflation of 1 %, to place the natural rate of interest at, let ’ s say, - 2 %, the nominal rate would have to be lowered to - 1 %. the problem lies in the fact that nominal interest rates cannot fall as far as is necessary into negative territory. if the central bank were to impose negative rates of - 5 %, for example, the commercial banks would bear negative returns on the bulk of their assets. this would adversely affect their financial intermediation capacity, with a consequent negative impact on the supply of credit, economic activity and inflation. there is therefore a lower bound on