inflation is estimated, in both cases, to be around 1. 9 percentage points cumulatively for the period between 2016 and 20204. all this has also been facilitated by two further factors. the first is the strengthening of banks ’ balance sheets since the crisis, with cet1 ratios for significant banks rising by 580 basis points above their 2008 levels. the second is the improving the debt sustainability of both firms and households. corporate and household indebtedness are now back to their early 2008 levels. developments in the inflation outlook the key question then becomes how quickly stronger demand will translate into rising prices. both the ecb staff projections and those of other international institutions suggest that inflation is moving in the right direction, over the medium - term horizon that is relevant for monetary policy. the latest ecb projections foresee a pickup in headline inflation from an average rate of 1. 4 % this year to 1. 7 % in 2020. this is the latest in a sequence of projection vintages with relatively similar end - points. this stands in contrast with the disinflationary period from 2012 to 2015, where we saw continuous downward revisions to the inflation profile from one projection round to the next. but there are reasons why we still need to firm our confidence in this forecast. in particular, the performance of underlying inflation remains subdued compared with previous recoveries. looking at a broad range of measures of underlying inflation, we certainly see an upward shift relative to the lows of 2015. but most measures have yet to show convincing signs of a sustained upward trend. this is relevant because underlying inflation provides the slow - moving trend that exerts a pull on 2 / 6 bis central bankers'speeches wage - and price - setting in the medium term. measures of underlying inflation can therefore provide information about the medium - term “ attractor ” to which headline inflation will gravitate once short - term shocks have faded out. 5 there are two factors that might explain why the reaction of underlying inflation to a strengthening economy is slower than in the past. first, the responsiveness of inflation to slack has weakened in recent years – a phenomenon we have seen across advanced economies as they recover from the crisis. comprehensive analysis by the eurosystem suggests this disconnect should be temporary, as cyclical forces linked to the crisis have been the main driver. 6 but it is still uncertain how persistent the effects of these forces might be. second, the degree of slack itself is uncertain. even if slack is now rec

mario draghi : monetary policy in the euro area speech by mr mario draghi, president of the european central bank, at the ecb and its watchers xix conference, organised by the institute for monetary and financial stability, frankfurt am main, 14 march 2018. * * * over the past year, the ecb has progressively recalibrated its asset purchase programme. we have thereby tuned our monetary policy stance to the changing pitch of the recovery – what i have previously termed “ accompanying the recovery ”. 1 during this time, the economy has developed even more strongly than we expected and confidence in the euro area has increased. but it is not because real growth is strong that we can declare the job done. there is a very clear condition for us to bring net asset purchases to an end : we need to see a sustained adjustment in the path of inflation towards our aim, which is a headline inflation rate of below, but close to 2 % over the medium term. thereafter, our monetary policy will have to be calibrated so as to ensure that inflation continues along this path. while we are now more confident than in the past that inflation is on the right track, risks and uncertainties remain. for this reason, even once the outlook becomes less dependent on net asset purchases, monetary policy still needs to be patient, persistent and prudent to guarantee the return of inflation to our aim. developments in the real economy the economy has been growing consistently above current estimates of potential growth, by more than a percentage point last year. all euro area confidence indicators are close to their highest levels since the start of monetary union, even if the latest readings came in slightly below expectations. and there are signs of pent - up demand for both consumption and investment that still needs to be satisfied. for consumption, one useful indicator is the gap between essential purchases, such as food and rent, and non - essential ones, such as electrical goods and holidays. non - essential purchases – which make up around 50 % of household spending in the euro area – tend to be postponed during recessions and then to catch up as the business cycle advances. 2 such purchases are currently only 2 % above their pre - crisis level, compared with 9 % for essential ones. this implies that discretionary household spending still has scope to support the expansion. business investment is also gathering steam as uncertainty in the euro area recedes. it now stands 7 % above its pre - crisis level and surveys point to continued strong investment