of thumb to form their short - term inflation expectations. and current inflation seems to be the most widely used heuristic in this respect, making some degree of inflation persistence a natural and inevitable phenomenon. developments over the past year, however, mark a clear and visible departure from past regularities. as you can see on the right - hand chart, a growing gap has emerged between the inflation expectations of market participants on the one side, and households and professional forecasters on the other. this is not about differences in the level, which – as i have argued before – may not mean much. this is about different dynamics, with the two - year moving correlation between market - based and household expectations dropping from 0. 8 in the summer of last year to below 0. 3 in june, the lowest level in nearly nine years. so, unlike the situation in late 2014 and early 2015, when inflation expectations fell sharply across the population, and when we launched the asset purchase programme, today households are much less sceptical about the future. this raises two important questions. the first is what happens to inflation if financial market participants and households hold diverging views on the future direction of inflation. 5 / 13 bis central bankers'speeches the second question is why we are seeing this divergence in views, and whether it is temporary or likely to persist. let me try to answer each of these two questions in turn. which expectations matter most? existing research casts some doubt on the macroeconomic relevance of professional inflation forecasts, including those of financial markets. there are three related strands in the literature that suggest that household inflation expectations are often better predictors of future inflation outcomes. 13 the first is that financial market participants are not particularly good at predicting future inflation. i ’ m not claiming that central banks are particularly better. you can see this on my next slide. but as you can see on the following one, financial market participants repeatedly failed to correctly project even the very near - term outlook for inflation in the euro area. 6 / 13 bis central bankers'speeches there are two sides to this finding. one is the automatic stabilising role that market - based inflation expectations play despite, or precisely because of, their poor track - record in projecting inflation. as market participants react in real time to any news potentially relevant for the medium - term inflation outlook, they support the monetary policy transmission process : they tend to frontload accommodation when inflation risks are skewed to the downside, and they tend

that – all other things being equal – a quick, “ good ” deleveraging tends to bring about an earlier recovery. in the euro area we have largely avoided the worst form of deleveraging, thanks to ecb interventions to provide liquidity to banks at key moments of the crisis, notably our move to unlimited liquidity provision in 2008 and our two longer - term refinancing operations ( ltros ) in late 2011 and early 2012. in this environment banks have made progress in deleveraging bis central bankers ’ speeches and restructuring. however, as late as last year there was still uncertainty as to the true extent and quality of this deleveraging. this was shown by persistent investor doubts about bank asset valuations, and low credit growth for the real economy. it was in this context that the creation of the ssm became critical. the ssm provided a catalyst for the clean - up of the banking system to take place more quickly and more comprehensively than would otherwise have been the case. why was this? introducing a joint supervisory framework requires us to conduct a thorough health check of bank balance sheets, using harmonised methods, so that any legacy issues are recognised, and that all banks enter the new supervisory regime with sound levels of capital and liquidity. we are currently conducting this comprehensive assessment in cooperation with national supervisors. to illustrate its scale, the total amount of risk - weighted assets ( rwa ) being reviewed amounts to €3. 7 trillion, or just below 60 % of total rwa for the 128 participating banks. the nature of the assessment, which includes an asset quality review, is conducive to achieving the “ good ” type of deleveraging. it will shed light on the composition and valuation of bank assets, which ought in turn to trigger fresh equity raising where appropriate, and a carving - out of assets where necessary, either by selling to the market or via “ bad banks ”. raising equity and strengthening balance sheets is in the long - term interests of bank shareholders, even if it implies an initial dilution of their claims. in fact, the cleaning - up of bank balance sheets does not need to wait for the end of this assessment. the best outcome is one where banks are forward - looking and take any corrective action before the end of the process. and indeed, we have seen in many cases that banks have revised asset valuations, raised equity and disposed of assets. bank balance sheets declined by around 20 percentage points of gdp