##eu was a strong vote of confidence in europe ’ s ability to act. ngeu is a symbol of a europe capable of handling crises decisively together. it likely has sustainably lowered the risk of fragmentation in the euro area – contributing to lower bond spreads. second, the future debt burden depends on average yields, not just current interest rates. before the pandemic, many governments locked in low interest rates by issuing long - term bonds. the average bond maturity of euro area countries rose from around six to eight years ( slide 8, left - hand side ). therefore, a large part of outstanding debt still benefits from low interest rates ( slide 8, right - hand side ). finally, the third factor behind low risk premia is the current high risk appetite displayed by investors in global financial markets. the risk premia for european corporate bonds have fallen sharply since the beginning of monetary policy tightening, while equity markets are booming, likewise largely due to the falling risk premia ( slide 9 ). the resilience of asset prices can probably be explained in part by the fact that excess liquidity remains high. the ecb and other central banks have adopted a gradual and cautious approach to balance sheet reduction as going too fast could cause disturbances in financial markets. such constraints, which may restrict the central bank ’ s ability to act, need to be carefully examined as part of the proportionality assessment when asset purchases are being considered as a monetary policy instrument. that said, the gradual and predictable approach to balance sheet reduction contributed to a smooth exit that also benefitted from favourable market conditions. recently, the record volume of government bond issuance has met with strong demand in financial markets. the bid - to - cover ratios, a measure used to gauge demand relative to supply in bond markets, have consistently increased since the start of 2023 ( slide 10 ). given the anticipated peak in interest rates, investors were keen to lock in the attractive yields over the long term. as the eurosystem reduced its presence in sovereign and corporate bond markets, notably foreign investors returned as yields in the euro area had become considerably more attractive ( slide 11 ). in some member states, domestic households also played a significant role as purchasers of government bonds. the ecb ’ s withdrawal from asset purchases was thus supported by favourable macroeconomic and global conditions. smooth transmission of monetary policy supports price stability in june 2022, however, when the ecb ’ s governing council announced its intention to increase interest rates for the

area convincingly demonstrates that the ecb has by no means deviated from its price stability mandate as predicted by the fiscal dominance theory. within a short period of 14 months the ecb raised interest rates, sometimes in big increments, by a total of 4. 5 percentage points ( slide 3, left - hand side ). it also began to swiftly reduce its balance sheet, mostly by phasing out targeted longer - term refinancing operations ( tltros ) as well as by ending net asset purchases and then reinvestments under the asset purchase programmes ( slide 3, right - hand side ). critics may argue that the monetary policy response was too hesitant at first. it was not until 12 months after inflation exceeded our 2 % target that interest rates were raised for the first time, in july 2022. however, two facts are worth bearing in mind here. first, the monetary policy turnaround started as early as december 2021, with the announcement of the end of net purchases under the pandemic emergency purchase programme ( pepp ). [ 2 ] so financing conditions started to tighten well before the first interest rate hike ( slide 4 ). second, the hesitation to act needs to be seen in the context of a decade of very low inflation and heightened uncertainty due to reoccurring waves of the pandemic. central banks only gradually became convinced that the repeated errors in forecasting inflation suggested a sustained increase in inflation that warranted a strong monetary policy response. the most important evidence of the ecb ’ s credibility can be found in the development of longer - term inflation expectations. at first, the ecb welcomed the increase in inflation expectations towards its inflation target of 2 % ( slide 5, left - hand side ). however, inflation expectations soon began to overshoot that target, with both market - and survey - based indicators pointing to an increasing risk of deanchoring. for a while, a significant part of respondents were expecting medium - term inflation rates well above the inflation target ( slide 5, right - hand side ). in the meantime, however, expectations have returned to the vicinity of our medium - term inflation target of 2 %. the broad stability of long - term inflation expectations disproves the theory of fiscal dominance. it rather suggests that our monetary policy response has strengthened the confidence households, firms and market participants have in the ecb ’ s commitment to bring inflation sustainably back to our 2 % target. this was a remarkable