The Governing Council at its meeting yesterday reaffirmed its intention to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of our net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. This will reinforce the stock effect channel and, as a result, is likely to also help to mitigate abrupt changes in the direction of capital flows. The second factor that may help explain the persistence of cross-border capital flows relates to our forward guidance. By clearly spelling out the Governing Council’s reaction function, and the sequence by which we would adjust our various policy instruments, markets were able to better anticipate our actions based on the progress made towards a sustained adjustment in the path of inflation consistent with our inflation aim. They understood that, even as we were gradually reducing the monthly pace of purchases in response to growing confidence in the convergence of inflation towards our aim, our key policy rates would remain at current levels “well past” the horizon of our net asset purchases. This transparency has contributed to reducing policy-induced uncertainty on the rate outlook, thereby extending the planning horizon of investors and, ultimately, moderating volatility. More recently, the enhancement of our forward guidance in June has provided a similar sense of the direction of the rate outlook in the euro area beyond the expected end of net asset purchases in December.

5/7  BIS central bankers' speeches  ECB forward guidance, and clear communication more generally, may therefore have helped insulate the euro area from unwarranted foreign tightening pressures and comfort its monetary autonomy, at a time where the independence of monetary policies under floating exchange rates and freely mobile capital has been challenged by international financial integration.7 And if communication indeed provides an effective shield, then further changes in our forward guidance, if warranted in the future, may help us remain in control of financing conditions along the policy normalisation path.8  Conclusion Overall, therefore, and with this I would like to conclude, it is fair to say that much clearer communication, not only by the ECB, but also by other major central banks, together with a commitment by central banks to handle changes to the size of their balance sheet with care, have contributed to substantially reducing sudden and sharp directions of change in cross-border capital flows. This is despite the notable divergence in the pace of policy normalisation across advanced economies. As a result, policymakers have been able to pursue their domestic objectives without sending shock waves across global financial markets. None of this is to say that markets are immune to foreign spillovers. In an integrated global financial market, central banks need to calibrate their policies according to their domestic mandates. In the euro area, this means that 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.