The central bank does not thus attempt to compensate for the previously low inflation with a period of inflation above the target. If firms and households consequently believe that inflation will be very low in the short term and thereafter equal to the inflation target, then the average expectations in the slightly longer term will still be low and under the target. In such circumstances, with a zero interest rate, the real interest rate may still be too high even if the inflation target is credible in the longer term. One way to avoid this disadvantage is instead to have a so-called price level target, or what may also be referred to as “average inflation targeting”. A credible price level target A price level target in the form of a path for the price level, in which the rate of increase in the price level is given by the inflation target, has several advantages compared with a standard inflation target in a situation with a zero interest rate. Unlike an inflation target, a price level target has a “memory” in the sense that lower inflation or deflation during a period of time whereby prices fall below the target path will be compensated for by a correspondingly higher inflation in a later period to attain the price level target path once again. If the price level target is credible, the long-term inflation expectations will be stable, even if low inflation or deflation is expected in the short term.

On the other hand, operators of financial market infrastructures are expanding into the core business of banks. For example, a number of central securities depositories and their participants are providing loans and liquidity facilities. Although this is done primarily to facilitate the settlement of securities transactions, the line of demarcation from traditional financial intermediation is becoming increasingly blurred. Also, by granting remote access or by establishing more efficient connections between the individual central securities depositories, they are offering serious competition to the traditional custodians. Technological progress has been the driving force behind this blurring of roles between financial market infrastructures and banks. Technology has enabled large banks to break into the operational field of infrastructure operators without much additional expenditure. Indeed, they have been virtually obliged to do so, in order to utilise their IT platforms to full capacity and to run them efficiently. On the demand side, the smaller financial institutions also benefit. As they outsource their back office functions to larger banks or specialised institutions, they can better focus on their core business. The infrastructure operators, in turn, are finding themselves in a situation where hardly anyone is willing to pay for traditional transaction services that have taken on a commodity character. Consequently, they are diversifying and providing services that generate a higher added value. Those infrastructure operators that are organised as profit-oriented public companies, in particular, are likely to further intensify competition with the banks in the future. This development is confronting the regulators with new challenges.