central bankers ’ speeches second, the refinancing risk faced by euro area banks has been minimised by giving them reassurance that monetary policy will remain accommodative for an extended period of time. in the course of 2013, this reassurance has taken two forms : conditional forward guidance on the level and direction of our policy rates in the future, and a pledge to maintain the fixedrate - with - full - allotment policy for as long as needed and at least until mid - 2015. these measures proved powerful in addressing the funding risk faced by our counterparties throughout the crisis, as evidenced, for example, by the significant decline in money market term premia. addressing redenomination fear premia, however, is more alien to central banks, and therefore required a new approach. the outright monetary transactions ( omt ) initiative was the innovative instrument that we deployed to remove break - up fears from the market pricing of sovereign credit risk, and promote more regular financial conditions. the initiative proved an extremely effective instrument. it has not only reduced the fraction of sovereign spreads that reflected compensation for the redenomination fears, but also contributed more generally to the improvement in funding conditions for corporates, banks and individuals across the euro area. in sum, non - standard measures by the ecb have helped ease liquidity pressures for the euro area in general, and continue to play a pivotal role in alleviating funding constraints for portuguese banks in particular. and we have seen consistent signs that banks in portugal – again, more visibly than within other stressed countries – are starting to pass the easing stimulus onto their customers, that is, to firms and households. fixing the euro area economic and financial system these monetary policy measures would have been less effective, had they not been flanked by a serious drive toward financial reform. the key element of this ambitious reform agenda has been the banking union. it is probably the most ambitious and encompassing reform of the eu architecture since the institution of the single currency. the successful completion of the banking union should help to address bank funding fragmentation in a more structural way and give concrete support to credit supply conditions throughout the euro area. let me explain why. with the creation of the single supervisory mechanism ( ssm ) centred on the ecb, banks will be subject to a homogeneous set of rules and procedures. this will make the standards for prudential supervision in the euro area more comparable and evenly applied. as a consequence, supervision should act

economy. central banks clearly need to step up their research and modelling capacities to understand their joint impact. but until this happens – and the pace will depend a lot on our broader economic policy framework, which i won ’ t discuss this morning [ 12 ] – central banks are likely to have to navigate in a low - growth, low - inflation environment with the risk of repeatedly failing to deliver inflation in line with their aim. monetary policy in a low - inflation environment what, then, can, or should, central banks do in this environment? let me propose four elements for future reflection : how we define price stability, how we treat inflation expectations, how we measure inflation and how we implement monetary policy. some proposals are more far - reaching than others. but all share one aim : to bring monetary policy closer to the people – to dismantle the veil of effectiveness and to foster acceptance of policies and instruments that too often are used as scapegoat for shortcomings and deficiencies elsewhere in our public policy apparatus. rethinking the definition of price stability consider first the ecb ’ s definition of price stability as inflation rates of “ below, but close to, 2 % ”. a simple answer to the current challenges would be to lower the inflation aim. if my dissection of the current inflation drivers is vaguely on the right track, then it is clear that this strategy would be wrong on many levels. it would misjudge the current low - inflation episode as permanent and thereby dismiss the lessons of history on the slow pace of diffusion of new technologies. [ 13 ] it would create perilous time - consistency challenges for central banks when inflation eventually transitions to the new steady state. and it would shift a disproportionate share of the macroeconomic adjustment burden onto workers as, even more so than today, shocks to euro area economies would have to be accommodated by lowering nominal wages. not the best way to foster support for europe and its single currency! raising the aim is similarly misguided. why raise an aim that you have failed to achieve in the first place? i come at this debate from a different angle. if we communicate that we aim to maintain inflation at, say, 1. 9 %, then we should not be surprised if the public expects us to control inflation up to the first decimal point. it significantly raises the bar for maintaining the credibility of monetary policy, particularly given how little the public actually knows about inflation and monetary policy. we