many factors. at this stage, there is still a significant degree of labour market slack and weak productivity developments that keep a lid on wage growth. 2 / 3 bis central bankers'speeches furthermore, the process of setting wages is to some extent backward - looking in a number of euro area countries, reflecting formal and informal indexation mechanisms. 3 additionally, the timing of wage negotiations plays a role. wage negotiations often have a multi - year horizon ; given that headline inflation remained below 1 % for 38 consecutive months until december of last year, it is going to take some time for an increase in headline inflation to translate into second - round effects on broader inflation. moreover, weak wage growth could also reflect previous downward wage rigidities : difficulties in reducing wages during the crisis may result in a slower upward adjustment of wages as labour market conditions improve. 4 just as our monetary policy measures have effectively underpinned the economic recovery, they have also prevented the prolonged period of disinflationary pressures from turning into a sustained period of deflation. in fact, the accommodative monetary policy stance appears to be increasingly visible in developments in inflation expectations, which are showing signs of reversal from previous flat or negative trends, while also reflecting changes in the global environment. for example, market - based measures of euro area inflation expectations have been trending upwards since early september, while survey - based measures of inflation expectations continue to signal an increase of inflation. so while we are certainly seeing a firming, broadening and more resilient economic recovery that will in time translate into a durable increase in inflation, we cannot ignore the fact that one of the main forces behind the upward inflation trajectory that we expect to see over the medium term is monetary policy itself. the economic recovery and the outlook for price stability are still predicated on the very favourable financing conditions that to a large extent depend on continued monetary policy support. therefore, we need to look through the volatility in short - term data resulting from transitory factors in order to assess whether progress towards a durable and self - sustaining convergence in the path of inflation has been sufficient. with this aim in mind, the governing council reaffirmed at its last meeting that the asset purchase programme will continue until the end of december 2017, or beyond, if necessary, and in any case until we are sufficiently confident that inflation converges towards levels below, but close to, 2 % over the medium term and that this process will not reverse under less supportive monetary policy

shifts are of course taking place in all advanced economies. but since productivity growth in the services sector is often lower in the euro area, it constrains our aggregate productivity more. yet this picture is not necessarily a cause for pessimism. for a start, it suggests that there is quite some scope for productivity catch - up through adopting digital technologies. so the debate that is currently raging among us economists about whether the great waves of technological innovation are now over is, for the time being, less relevant. [ 20 ] for the euro area the key question is how to create the conditions for more firms to move towards the productivity frontier. bis central bankers ’ speeches what is more, the secular shift from manufacturing to services can be consistent with higher productivity if resources are well allocated. in fact, there are very large differences between the most and least productive firms within each sector, even more so than across sectors. this implies that, even in a services - oriented economy, aggregate productivity can still be improved. so the euro area faces a twin policy challenge : to get more firms in each sector to the productivity frontier, and to get more labour and capital to those productive firms. and crucially, this would not only boost output, but also employment and wage equality, since labour would be concentrating in firms that are both growing and demanding higher value skills. to achieve this there are, in my view, three policy priorities. first is addressing the structural barriers to knowledge diffusion within europe. this has many facets, but critical are policies that increase trade openness and facilitate firms ’ participation in value chains, as well as a competitive business environment that favours the adoption of superior managerial practices and organisational structures. [ 22 ] the most powerful “ quick win ” we could make here would be to complete the single market, especially in services, since that would automatically accelerate diffusion from the european frontier where we already have many world leading industries. for firms to integrate effectively into the single market, however, they need to be able to scale, which is why the second priority is to create the conditions for the most productive firms to expand quickly and attract resources. this depends on well - functioning product and labour markets, a financial system that channels capital to dynamic firms, and policies that prevent resources from becoming trapped in unproductive firms, such as efficient judicial systems and bankruptcy laws. change of that nature creates opportunities, but it can also be perceived as threatening for individual workers. so adequate social safety nets have to be