, the june 2020 projections also include two alternative scenarios, a mild one and a severe one, based on different assumptions regarding the further progression of the virus and the necessary containment measures. both monetary and fiscal policies play a crucial role in supporting the recovery in the euro area. fiscal policies at national and eu level have been crucial in mitigating unemployment risks, bolstering household income and supporting investment by firms. in order to achieve a broadbased recovery, national measures must be backed up by forceful action at the european level. we welcome the new €750 billion eu recovery instrument which consists of €500 billion in grants and €250 billion in loans to member states. the sharp contraction in economic activity is also reflected in the inflation slowdown. headline inflation decreased further to 0. 1 percent in may, from 0. 3 percent in april, mainly on account of the continued fall in energy prices. over the coming months, inflation is expected to be close to zero percent, averaging 0. 3 percent in 2020, before slowly recovering to 0. 8 percent next year and reaching 1. 3 percent in 2022. the inflation projection is also subject to unprecedented uncertainty, with a faster recovery in the mild scenario. financial markets 1 / 4 bis central bankers'speeches euro area financial markets were set in turmoil as the virus spread throughout europe : euro area sovereign bond spreads widened, corporate bond spreads surged and stock prices plummeted. financial markets eventually stabilised, notably on the back of a forceful monetary policy response by the eurosystem. but the monetary accommodation generated by the decline in riskfree rates has only slightly eased the tightening in financial conditions caused by the decline in stock prices and the increase in euro area sovereign and corporate bond yields. the widening of sovereign bond spreads – on account of the macroeconomic outlook and the sizeable fiscal policy responses endorsed by national governments – is particularly troubling from a monetary policy perspective. an effective pass - through of risk - free rates to sovereign bond yields in all countries is crucial because sovereign bond yields are widely used as benchmark rates for pricing financial market instruments and bank credit. evidently, the costs banks face to raise funding in the money, capital and equity markets have notably increased. monetary policy measures tightening financial conditions, combined with an outlook for price stability that had significantly worsened due to the economic fallout of the covid - 19 crisis, prompted the ecb ’ s governing council to take further policy action at its june policy meeting. we decided that the

most effective way to respond would be to increase the size of the pandemic emergency purchase programme ( pepp ). there were two reasons for this. first, the pepp can provide a significant degree of additional monetary easing as it directly affects the benchmark rates used to price financial market instruments and bank credit in all euro area countries. accordingly, expanding the overall pepp envelope by €600 billion will bring us significantly closer to the pre - covid - 19 inflation path over the medium term. second, the pepp safeguards monetary policy transmission to all asset classes and jurisdictions thanks to the embedded flexibility in conducting asset purchases. we also agreed to extend the pepp until june 2021. the projections for the euro area show that inflation will start to pick up around this date. likewise, the other monetary policy measures taken in response to the pandemic such as the targeted and pandemic emergency longer - term refinancing operations ( tltro and peltro programmes ), will run their course through the summer of 2021. finally, we agreed that reinvestments under the pepp will take place until at least the end of 2022 and, in any case, the future roll - off of the pepp portfolio will be managed to avoid interference with the prevailing monetary stance. looking ahead, the governing council will keep re - evaluating whether the size, duration and composition of the pepp remain appropriate as the economic consequences of the covid - 19 pandemic unfold. we stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner. financial stability during the pandemic crisis turning to the stability of the financial system, two opposing forces are now at play : the impact of the coronavirus shock – which was amplified by a range of existing vulnerabilities – and the fiscal and monetary policy response in the euro area. over the last few years, signs of asset mispricing as well as lingering private and public sector debt sustainability concerns had been identified as vulnerabilities to financial stability. in addition, euro area banks ’ profitability had been low, due to both structural and cyclical factors, while non - bank financial intermediaries had grown in size since the great financial crisis, taking on more credit and duration risk. as the coronavirus shock hit the euro area, we observed flight - to - safety phenomena, a surge in volatility and a sharp tightening of financial