##ration of our instruments are adequate to address the evolving shocks i have described and to achieve our objective of bringing inflation back to our medium - term aim in a sustained manner. if we encounter shocks that compress demand and pose additional threats to price stability, our reaction function is clearly spelled out : a policy response is necessary and forthcoming. the second element of a forward - looking policy response relates to how we assess and react to the balance of risks. in this respect, the governing council ’ s view is that the risks to growth are currently on the downside. this expression worries me more today – given the sheer size of the downside risks we face – than it would in less extreme times. moreover, given the disinflationary nature of the covid - 19 shock, [ 4 ] the low inflation expectations and the current levels of spare capacity, i consider a surge of inflation in the medium term above our aim just a remote possibility. as an example, even in a very benign scenario such as the “ mild ” scenario in the latest ecb staff projections – which assumes a rapid evaporation of the pandemic – inflation would reach 1. 8 % in 2022. faced with such a sizeable downward skew, there is a strong case for our reaction function to be asymmetric, as the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst - case scenarios materialising. against this background, macroeconomic policies – above all monetary and fiscal policies – must remain complementary and the support they provide may be needed for a long time. the credit market provides a clear example. our bank lending survey suggests that banks would tighten credit standards considerably if public loan guarantee schemes are not maintained. since there is evidence that these schemes have significantly suppressed the rate of corporate insolvencies, ending them prematurely at a time when even viable companies may face insurmountable financial barriers could lead to a sharp rise in corporate defaults and the associated adverse effects on banks. similar problems would result, mutatis mutandis, from a premature tightening of financial conditions. for as long as the growth and inflation outlook are at risk, monetary policy support will have to remain substantial, and if those risks to the outlook rise, our policy impulse will have to rise in tandem. eu borrowing in response to the common shock will also be key to avoiding any fiscal cliff effects, through its support to both furlou

speech asymmetric risks, asymmetric reaction : monetary policy in the pandemic speech by fabio panetta, member of the executive board of the ecb, at the meeting of the ecb money market contact group frankfurt am main, 22 september 2020 it is a pleasure to speak to the money market contact group today. money markets and central banks have an important relationship which, when it is working well, makes monetary policy more effective. money market prices reflect expectations of our policy and the understanding of our reaction function. they are the first stage in the transmission of our policies to financing conditions for the real economy. so i am pleased to talk to you today about how i see current issues related to monetary policy – and to hear your views in return. the ecb ’ s policy response to the coronavirus ( covid - 19 ) crisis in pursuing our price stability mandate, our policy response to the crisis had three goals. the first was to counter the downward impact of the pandemic on the projected path of inflation. the second was to ensure that all parts of the euro area had access to liquidity, which was crucial for weathering the lockdown. and finally, we sought to avoid damaging feedback loops between financial markets and the real economy, ensuring that other policies could play their full role in addressing the effects of the pandemic, in turn making our own policy more effective. as a result of our policy measures, tail risks have been removed and systemic stress in the euro area has receded ( chart 1 ). we have averted a liquidity and credit crunch, which would have amplified the collapse in activity and caused lasting damage to production capacity. without the ecb ’ s action, the economic consequences of the pandemic would have been dramatic ; we estimate that more than one million additional jobs would have been lost. chart 1 euro area composite indicator of systemic stress ( index ) source : haver analytics. note : see also hollo, d., kremer, m. and lo duca, m. ( 2012 ), “ ciss – a composite indicator of systemic stress in the financial system ”, working paper series, no 1426, ecb, march. latest observation : 21 september 2020. after abruptly tightening in march, financial conditions for the euro area as a whole have since eased, as measured for example by the gdp - weighted sovereign yield curve. fragmentation has receded substantially, as the decrease in the dispersion of sovereign