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.

Banks have improved their capital positions and profitability since the euro area crisis, and the stock of non-performing loans continues to decline at a moderate pace. But further improvements are needed in parts of the banking sector if banks are to achieve sustainable rates of return. In particular, overcapacity and cost inefficiencies weigh on many banks’ long-term profitability prospects. The better performance of some banks within the euro area, and in jurisdictions facing similar economic and financial conditions, illustrates the importance of addressing structural issues. The current interest rate environment has various implications for the resilience of the banking sector. Banks have benefited, and will continue to benefit, from the lower credit risk for borrowers, and from the higher asset valuations associated with lower interest rates and 1/2  BIS central bankers' speeches  better macroeconomic outcomes. This has helped support bank profitability across the euro area since the deposit facility rate turned negative in 2014. However, the negative interest rate policy also entails costs for banks, and these could increase the longer negative rates are in place, the lower policy rates are set and the larger the amount of excess liquidity held by banks. These vulnerabilities could crystallize if economic growth is much weaker than expected, or if weak growth persists for longer than expected. We thus welcome the measures taken by the banking sector in recent years to improve resilience, and support efforts to further strengthen resilience while conditions are benign.