be treated with due caution, and judgement based on experience remains an essential part of the policymaking process. we should avoid making unwarranted statements about points in time too far into the future over which we have little true visibility. it also means that policy decisions not only should be based on the most likely outcome predicted by models, but should also take into account the balance of risks. there are times when the risk of inaction far outstrips the risk of action, and the prudent course is to act with vigour. introducing asset purchases to stave off the risk of deflation is one recent example. but there are also times when the balance of risks lies in the opposite direction, and prudence dictates that policymakers should be more circumspect. future challenges for monetary policy on that note, while i believe that the forces already at work should in due course bring an end to the need for asset purchases, it is a matter for the ecb ’ s governing council to decide on the exact timing of such a move. our approach should evolve in tandem with our improved expectations for developments in the real economy and ensure that our mandate for price stability is fulfilled over the medium term. let me instead spend a few moments considering some of the risks we face in implementing our policy over the coming years. i should also add at this point that these risks are likely to grow the longer our asset purchase programme continues. the first risk relates to the subsiding deflationary headwinds i have already mentioned. could it be that our current monetary setting is suddenly too accommodative? in short, because of the uncertainties and imprecisions involved in measuring slack and inflationary pressures in the economy, we might find ourselves behind the curve without realising it. hence, through the long and variable lags of monetary policy, we will end up with inflation above the rate consistent with our price stability mandate. this would require a sharp correction of the monetary policy settings in years to come. yet such a correction of interest rates would pose risks to the financial sector. banks could be hit hard as funding costs rise faster than interest income on outstanding loans. the second risk is a related one, in that these factors could have already unwound, and inflation could turn out much higher than we expect over the course of 2018. we would find ourselves behind the curve – and realise it – but the optimal monetary policy response would involve us having to

inflationary pressures and limits to the lags have been constant for the last six month. why then have we reduced our purchases before without there being a substantial adjustment in inflation? the decision to reduce the monthly rate of purchases rests on two factors. the first involves understanding how the stimulus provided by our asset purchases evolves over time, and the second relates to the relationship between output and inflation. the recessions caused by the global financial crisis and the sovereign debt crisis required significant monetary stimulus to counter the large degree of slack in the economy and ensure that inflation remained consistent with our price stability definition. monetary policy also had to 1 / 5 bis central bankers'speeches react to a number of headwinds, which reduced the impact of a given level of interest rates on economic demand. some, such as an ageing population and the slowdown in measured productivity growth, 1 are longer term in nature. others were more temporary. the process of deleveraging pushed up desired saving, uncertainty weighed on investment and a prolonged period of low inflation threatened to de - anchor inflation expectations, with a risk of outright deflation. but as the ongoing recovery gains momentum, the influence of these temporary headwinds is fading. fears of deflation have dissipated. in these circumstances, unchanged monetary policy parameters would in fact imply an unwarranted increase in monetary stimulus, and when one looks at the 10 - year german government bond yield since the summer one might conclude that, despite fewer purchases, we had eased our monetary policy, a step which does not correspond to our plan. a further reason why the governing council elected to scale back our monthly purchases is that, as the size of our portfolio increases, the marginal impact of a given level of purchases increases. owing to our already large bond holdings, the free float of securities is now substantially lower than when we began our programme in 2015. this increases the relative share of our purchases in the market, and therefore the impact of those purchases per billion euro spent. in other words, a slower pace of purchases today can have an equivalent effect on yields as a higher pace yesterday. moreover, as the stock of bonds rises, our reinvestment needs rise in tandem and we have to increase our gross purchases – that is, our net purchases plus our reinvestments ; and do that in an environment of lower new borrowing in most euro area countries. this means that, even with a slower pace of net purchases, the eurosystem will still have a substantial presence in