Pandemic, inflation and monetary policy

Abstract

The profound changes brought about by the pandemic are affecting not only economic activity but also relative prices and, at least temporarily, inflation. These changes must be carefully examined by central banks, keeping in mind that the reaction of monetary policy to fluctuations in inflation is never automatic, but depends in a complex way on the nature of the shocks affecting the economy. In the current context, the Eurosystem will continue to provide the necessary support to the economy as long as the labour market remains weak and the degree of spare capacity remains high. When the time comes, the challenge for monetary policy will be to know how to apply the brakes correctly, without causing tensions, and still being ready to accelerate if it turns out to be necessary again.