peter praet : how does monetary policy secure price stability over the medium term? intervention by mr peter praet, member of the executive board of the european central bank, at the 4th european technical consumer goods retail summit, berlin, 30 march 2017. * * * the origin of the global financial crisis in 2008 the global economy faced a calamity unparalleled since the second world war. the crisis had been preceded by a mood of over - optimism in several advanced economies. expectations about future income were at odds with slowing underlying growth, giving rise to an “ expectations gap ”. in the euro area, expectations were reinforced by a revived sense of economic prosperity that was associated with the introduction of monetary union. firms were borrowing against their future income expectations in some countries ; households and governments were doing likewise in other countries. also, considerable financial liberalisation and deregulation had taken place which made debt accumulation easier. in the euro area, this was compounded by increased financial integration which led to a substantial rise in intra - euro area cross - border flows. as banks acted as intermediaries in both debtor and creditor countries, they too had become overexposed. when the cycle did turn, central banks were confronted with a multifaceted and pernicious challenge. the “ expectations gap ” had left a number of economic agents overindebted and in need of balance sheet repair. overextended banks needed to deleverage. and with this, a socalled balance sheet recession ensued. monetary policy responses to the crisis the euro area crisis evolved in three main phases, each of which required a different monetary policy response. the first phase was an abrupt liquidity crisis triggered by the turning of the global financial cycle and the subsequent collapse of lehman brothers. banks suddenly became very uncertain about the underlying health of other banks and stopped lending to each other. consequently, global central banks stepped in with forceful and coordinated interventions to provide essential liquidity to the banking sector. without this response, the financial system would have collapsed and a far deeper recession would have occurred. this phase of the crisis had profound effects on the banking sector – effects which in the euro area were not addressed as swiftly as in other jurisdictions due to the incompleteness of its institutional set - up. sovereigns needed to support their national banking sectors even though they lacked the fiscal capacity to do so, aggravating the link between banks and governments in the euro area. this paved the way for the

. 8 %, while bank loans to non - financial companies have increased by 3. 1 %. as overall financing conditions have eased and credit growth increased, improvements in the euro area ’ s economic performance have followed. indeed, the current recovery is showing considerable resilience, which to a large extent reflects the fact that domestic demand is the primary driver of growth. at the same time, there are encouraging signs that both global growth prospects and world trade are strengthening and may well act as tailwinds to further support the recovery. monetary policy is playing a central role in supporting consumption : lower interest rates are ensuring favourable borrowing conditions and encouraging households to bring forward durable consumption as well as firms ’ investment. consumption of durable goods has rebounded in recent years, and especially in countries where credit was previously very tight. while investment has responded more slowly, monetary policy is helping create the conditions for a stronger investment revival through its overall effect on the economy. the euro area cyclical recovery is gaining momentum, broadening across sectors and countries. while the economic outlook is now better than it has been for many years, downside risks remain, albeit less pronounced than they once were. the firming of the recovery has not yet translated into a durable strengthening of inflation dynamics. headline inflation has increased, but for the most part this reflects rising energy and food price inflation. underlying inflation pressures continue to remain subdued. according to our latest projections, inflation is expected to move towards levels below, but close to, 2 % over the forecast horizon. we are not yet sufficiently confident that inflation will converge to levels consistent with our aim in a durable manner. inflation dynamics still remain reliant on the very substantial degree of monetary accommodation which prevails. against this background, the governing council has reaffirmed its monetary policy stance, including its forward guidance, in order to secure a sustained convergence in inflation towards our aim objective. 1 the first tltros took place in september 2014. in september 2014, the ecb announced the launch of the cbpp3 and the abspp. 2 for more details see “ the transmission of the ecb ’ s recent non - standard monetary policy measures ” ecb economic bulletin, issue 7 / 2015. 4 / 4 bis central bankers'speeches