Isabel Schnabel: Unconventional fiscal and monetary policy at the zero lower bound

Keynote speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the Third Annual Conference organised by the European Fiscal Board on "High Debt, Low Rates and Tail Events: Rules-Based Fiscal Frameworks under Stress", Frankfurt am Main, 26 February 2021.

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

One of the greatest conundrums and policy challenges of our times is the coincidence of persistently low real long-term interest rates and low inflation.

Even before the coronavirus (COVID-19) pandemic, inflation across many advanced economies had been falling short of central banks' aims for nearly a decade. In the euro area, hopes that inflation would sustainably recover to levels closer to 2% have been repeatedly and persistently disappointed, despite highly favourable financing conditions.

Years of subdued price pressures have raised the spectre of low inflation becoming entrenched in people's expectations. Considering that financial markets believe that real interest rates will remain in negative territory for the foreseeable future, private investors appear to harbour serious doubts about the capacity of the euro area economy to chart a sustainable path towards higher nominal growth.