Indeed, in recent months the markets have lowered their expectations in terms of the growth of European banks’ profits. Low or negative interest rates restrict the unit interest margin banks can obtain. However, from a general equilibrium perspective, they also increase credit, reduce bad debts and raise the value of the financial and real assets banks hold on their balance sheets. As a result, the net aggregate effect on bank profitability in general has so far been positive overall. That said, this effect will foreseeably diminish insofar as the situation of negative interest rates is prolonged over time. Indeed, a positive note regarding the most recent developments in profitability is that net interest income has increased following years of stagnation at low levels. In any event, the decisions adopted by the ECB Governing Council at its meeting on 12 September, including the 10 bp reduction in the deposit facility rate to -0.5%, the resumption of net purchases under its asset purchase programme and the strengthening of forward guidance, have been accompanied by mitigating measures. These include the application of a two-tier system for reserve remuneration, designed precisely to ensure the effectiveness of monetary policy transmission through the bank channel. There is also theoretical and empirical evidence that low interest rates transmit the monetary impulse by encouraging banks and other financial intermediaries to take risks. Fortunately, we currently have various macroprudential policy instruments, which I shall refer to later, designed to mitigate the potential build-up of risks that may affect financial stability through this channel.

As household deposit rates have been sticky at zero, banks’ net interest rate margins have fallen somewhat. But the impact on bank profitability has been offset by the positive effects of easier financial conditions on the volume of lending, and the reduction in loan-loss provisions, as monetary policy has lifted economic prospects. The current wording of our forward guidance reflects exactly this assessment of side effects. And from today’s standpoint, I do not see cause to deviate from the indications we have been consistently providing in the introductory statement to our press conferences. Conclusion So to conclude: we are confident that our policy is working and that the outlook for the economy is gradually improving. As a result, the forces that are currently weighing on domestic price pressures should continue to wane. But even so, we have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook – which remains conditional on a very substantial degree of monetary accommodation. Hence a reassessment of the current monetary policy stance is not warranted at this stage. Before making any alterations to the components of our stance – interest rates, asset purchases and forward guidance – we still need to build sufficient confidence that inflation will indeed converge to our aim over a medium-term horizon, and will remain there even in less supportive monetary policy conditions. 1 On the basis of the underlying government primary balance as a percentage of potential GDP (OECD data).