, could have led to a dangerous and unwanted credit squeeze. however, i must emphasize that the ecb ’ s ability to control liquidity and to maintain price stability remains intact : we will have the possibility to adjust the interest rates and, if necessary, we have at our disposal a range of tools to actively absorb the excess liquidity when needed. another unusual feature of the present situation is the prevailing extreme risk aversion ( see slide 5 ). spreads between “ sure ” and uncertain returns have exploded to very high levels and the valuation of productive assets reflects the reluctance to invest in anything perceived as risky. for example, the stock market has shown surprisingly little confidence despite of relatively low p / e ratios in many sectors. overreaction? ( slide 6 ) all in all, the present situation marks a spectacular reversal of the behavior which was seen before the crisis. then, liquidity preference was low as it was believed that most assets – bonds or stocks – could be easily converted to cash at any time in deep and continuously open markets. risk premiums were also very low, because investors believed in the continuation of a favorable macroeconomic environment – dubbed great moderation – and because they trusted in the optimistic assessments dished out by the credit rating agencies. then it turned out that the great moderation was actually based on an unsustainable borrowing by american households and european governments and many others, on a too highly leveraged financial system, and that the optimistic credit ratings of many borrowers and structured debt instruments were actually based on faulty assumptions. the markets have a tendency to be carried away by the prevailing sentiment. in the years of prosperity which preceded the current crisis, the markets were exuberant, as alan greenspan famously said, and now they seem to be stricken with almost incurable pessimism and doubt. it is also in the nature of the market economy that the market sentiment is to a large extent self - fulfilling – in the short term at least. so, negative expectations can lead to lack of investment and a rush to quality which in turn harms the real economy and that again feeds back to the markets. it may well be – i think it is likely – that the present skepticism is an overreaction just as the exuberance of the years leading to 2008 was an overreaction. there seems to be a lot of momentum which is independent of the deepest fundamentals in these swings of mood. the negative psychology shows now in the exceptional level of risk

something to keep in mind in all postmortems of the recent poly - crisis years. looking at the latest policy decisions, progress in lowering inflation has enabled us to make three 25 basis - point cuts to interest rates since june 2024. the most recent cut was unanimously decided last thursday, as we now have greater confidence that inflation is converging towards 2 % on a sustained basis. disinflation in the euro area is well on track. all in all, a soft landing seems plausible in the euro area. however, growth is expected to remain sluggish, as shown in the right - hand graph. the growth outlook has weakened quite clearly in the past few months, which could also increase disinflationary pressures. based on the current outlook, and as our rates still are at the restrictive territory, the direction of rate changes is clear. the speed and scope of rate cuts will depend on our overall assessment of the trend in three variables : the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. slide 7. reflections on the ecb's next strategy review in 2025 based on the experience of recent years, the symmetric, medium - term 2 % inflation target has served us well. it has provided a clear anchor and enough pre - calibrated and meaningful flexibility in terms of both the timing and instruments of policy. we have not had to take the drastically contractionary policy actions that the old target might have 3 / 7 bis - central bankers'speeches implied. and we didn't need to show volckerian stubbornness, with all respect to him, thanks to the fact that inflation expectations remained well - anchored. thus, in my view, the inflation target itself does not need to be revisited now. as the saying goes, don't fix it if it ain't broke. however, we do need a deeper understanding of inflation dynamics and the secular trends that are transforming the operational environment of monetary policy, such as geopolitical fragmentation, climate change, labor market transition and other structural drivers of the natural rate of interest. geopolitical tensions have risen substantially with russia's illegal war in ukraine, the tragic war in the middle east, and china's strategic aims, both technological and military. trade wars, protectionism and geoeconomic fragmentation are the byproducts of these tensions, and so are the diversion and relocation of global value chains. key questions for central bankers are, how significant are