Although financial globalisation has brought about improved macro-economic efficiency, via a more efficient allocation of resources and capital, liberalised capital flows, increased competition on financial markets, increased transparency (apart from the recent ENRON episode! ), changes in asset prices have also become more pronounced and have experienced clear misalignments or deviations from their “equilibrium” levels. Moreover, credit seems to have played a greater role in asset prices fluctuations. Initially observed during the “speculative bubbles” of the 1980s and early 1990s, this trend has persisted, if not amplified. Several factors may explain these recent and abnormal patterns in asset prices. I shall give a few examples. ·  First, "short-termism": some market participants may have become more inclined to be mostly preoccupied with their short-term results. This trend might result, in particular, from growing pressure to yield good results immediately. However, these results are not necessarily sustainable. Marking-to-market financial products may also have contributed to this widespread focus on immediate financial performances. This emphasis on short-term performance may result in increased volatility in the price formation process: the shorter the investment horizon of markets participants, the bigger the impact of any new information on prices. ·  Second, herding or mimetic behaviour: mimetic behaviour is of course by no means a new phenomenon on financial markets. Technological developments on markets may however have gradually reinforced this type of behaviour, as participants are under increasing pressure to follow their peers through matching the performance of a benchmark.

In turn, higher real interest rates tend to depress economic activity and bring even lower inflation. This is the kind of spiral, possibly leading to deflation that monetary policy must seek to control and avoid. The process may become even more self-sustaining if it negatively affects inflation expectations. Over the last months, inflation expectations in the euro area have dropped to 1.2% at a one-year horizon and 1.5% at a two-year horizon. More worrisome, long-term expectations – up to now extremely well-anchored around 2% – have been drifting downward. Markets currently expect an inflation rate of 1.8% on average between 2019 and 2024 in the Eurozone. Monetary policy therefore must aim at influencing both nominal interest rates and inflation expectations. This is exactly what we are currently doing in the Eurosystem. Let me explain how. First, on nominal interest rates: Policy rates are now close to zero (%). Negative interest rates have been imposed on the deposit facility. Forward guidance has been used to signal that rates will stay at those levels for a very lengthy period of time. A new liquidity facility, the “targeted very long term refinancing operation (TLTRO)” has been created, with a four-year maturity and, for the first time, a guaranteed fixed rate. Basically, banks are able to get a four-year funding for a 0.15% fixed interest rate. Most recently, the ECB Governing Council has decided a program of private asset purchases, for both covered bonds and ABS.