While the pace of economic expansion has recently moderated following the strong growth performance in 2017, the economy’s underlying strength is expected to persist and crystallise at a pace of growth above potential in the coming years. Measures of underlying inflation remain generally muted, but have been increasing from earlier lows. The incoming data continue to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases. Overall, prudence, patience and persistence remain the guiding principles for our monetary policy. Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. The protracted period of low interest rates that contribute to the ongoing economic expansion necessary for the continued sustained convergence of inflation has so far not given rise to discernible financial stability risks in the economy as a whole7. In the present environment and at the current stage of the monetary policy cycle, however, it is important to be mindful that keeping rates low for long periods can raise challenges for financial stability further down the road. In this context, activating macroprudential instruments where needed is essential to ensure resilience, contain procyclical behaviours and prevent the emergence of financial imbalances. Macroprudential measures are the appropriate response in situations where signs of financial imbalances are not pervasive.

When the central bank wants to exert downward pressure more directly on long-term interest rates, it can absorb duration risk from the market by purchasing securities of relatively longer maturity. This frees up more risk-bearing capacity for investors, which they can redeploy towards bearing different types of risk, including equity and credit risk. In the aftermath of the financial crisis, restoring risk appetite has been a key condition for stimulating economic activity. And as inflation convergence proceeds only slowly, continued monetary stimulus is still needed today. This begs the question whether the persistent monetary accommodation that is needed for inflation convergence could bring about excessive risk-taking and contribute to financial stability risks down the road. Risks to financial stability can build up when low interest rates interact with distorted incentives in the financial sector, which arise from information frictions in credit markets and externalities that have not been properly addressed by regulation and supervision. Key financial vulnerabilities include excessive dependence on unstable short-term funding, too much leverage, inadequate capital provision for risk exposure and a weak underwriting of loans. Macroprudential policy 2/5  BIS central bankers' speeches  The regulatory and supervisory overhaul that took place in the aftermath of the crisis aims to ensure high-level resilience in the financial system, contain the inherent pro-cyclicality within the financial system and take into account systemic negative externalities and system-wide feedback loops. By design, this should limit excessive risk-taking in the financial sector resulting from periods of accommodative monetary policies.