modesty in times of uncertainty monetary policy after the crisis business economists ’ annual dinner ( london, 29 november 2017 ) speech by klaas knot introduction good evening everyone. thank you for inviting me here to share my thoughts on monetary policy. we stand at an important turning point, 10 years after the global financial crisis began to unfold. during the crisis, monetary policy stepped in with unprecedented measures. at each new turn of the crisis, we as the eurosystem took action and designed new policy measures where necessary. these measures proved successful. now, a broad - based economic expansion is taking hold across the euro area. as the economy is enjoying robust growth, it is giving us the opportunity to take a step back from the crisis mode. against this background, tonight i want to elaborate on the following. the current inflation outlook poses no threat to price stability. despite undershooting its inflation aim in the near - term, the ecb is thereby fulfilling its mandate. this is thanks to a combination of monetary policy measures, including the asset purchase programme, which has achieved what could reasonably have been expected. the slow inflation convergence towards our medium - term objective is due to global supply factors largely outside the realm of central banking. in this situation, continued monetary expansion is not a free lunch. unconventional monetary policy is more intrusive than conventional monetary policy. it creates deeper market distortions that can generate misallocation and financial stability risks. as long as the standard economic relation between domestic slack and inflation, the so - called phillips curve, fails to assert itself, adding ever more stimulus makes our policy increasingly procyclical, reinforcing these risks. i therefore want to argue for modesty in monetary policy - making. we need more emphasis on the medium - term orientation of our inflation objective. patience is thereby of the essence. absent deflation risk, a full phasing - out of net asset purchases from september 2018 onwards is warranted. our communication will have to shift accordingly, from net asset purchases and incremental stimulus towards reinvestment and preservation of broadly accommodative financing conditions. a quick look back let me begin by taking a quick look back. the euro area has endured some rough times. in the aftermath of the global financial crisis, the euro area weathered a sovereign debt crisis and a severe recession. these developments affected financial market actors, households, firms and governments. in an attempt to soften the impact of the crisis, the ecb took

there were clear indications of a systemic financial crisis. the provision of central bank liquidity for a period of three years relieved some of the pressure initially. but only for a short time. the markets soon realised that this measure had pulled the knot between the public sector and the banking system tighter rather than loosening it. there is no way round the need for reform and restructuring. government bond purchase programmes increase the level of interdependency, and firewalls are no substitute for the restoration of solvency and investor trust. to return to my original metaphor : neither is an effective means of untangling the knot. this can be achieved only through economic adjustment, through structural reform and through balance sheet adjustment – action is required here from national governments and banks in equal measure. since the outbreak of the financial crisis, the banks have made considerable adjustments. legacy assets have been scaled down and balance sheets shrunk. however painful this may have been for individual institutions, it was right and necessary. but the banks cannot afford to stand still. there are new challenges they have to confront. in particular, margin pressure and increasing competition in domestic business come to mind. recapitalisation : a “ sword ” to cut the knot? adequate capital buffers strengthen the essential resilience of the financial sector. the risk of contagion is reduced. if a systemic event occurs, such buffers create room for manoeuvre before risk assets and lending have to be cut back. therefore, to win and retain trust, banks need to be sufficiently well capitalised. i ’ ll make no bones about it : a level of capitalisation that just meets the minimum supervisory requirements would fall far short of what is needed, in my view. i believe it was the uk economist charles goodhart who told the following tale to illustrate the dangers of minimalist compliance. bis central bankers ’ speeches a weary traveller arrives at a rural railway station. to his delight, he sees exactly one taxi waiting there and asks the driver to take him to his destination. to his amazement, the taxi driver tells him, “ i would love to take you there but cannot, i ’ m afraid. ” “ why not? ”, he asks, flabbergasted. “ there is a local bye - law that says a taxi has to be here at all times. ” “ but a taxi is here. ” “ ah yes, but if i take you home, there would no longer be a taxi waiting