Philip R Lane: Low inflation - macroeconomic risks and the monetary policy stance

Keynote speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the financial markets workshop of the Economic Council (Finanzmarktklausur des Wirtschaftsrats der CDU), Berlin, 11 February 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

In the period between the end of the Bretton Woods system in the early 1970s and the global financial crisis in 2008, the main challenge for central banks was to tackle excessively-high inflation and guard against its resurgence by counteracting pro-inflationary shocks. More recently, anti-inflationary shocks have dominated and addressing excessively-low inflation poses new challenges. In my remarks today, I therefore plan to focus on the conduct of monetary policy when inflation is below target and explain why the ECB is maintaining an accommodative monetary policy stance. I will also discuss why it is necessary to adopt unconventional monetary policy measures when the conventional monetary policy instrument - the central bank's policy rate - is constrained.

Macroeconomic risks of excessively-low inflation

From a macroeconomic perspective, excessively-low inflation poses several dangers.

One danger is that low inflation that persists over the longer term provides only a small buffer against deflation: if inflation is low, it only takes a relatively small shock to tip the economy into deflation.