the financial sector. banks could be hit hard as funding costs rise faster than interest income on outstanding loans. but it may also be the case that the impact of these factors has already been felt, and inflation could turn out higher than we expect over the course of the year. we would find ourselves behind the curve – and realise it – and we would have to adjust our forward guidance. this forward guidance was put in place to stabilise market expectations and to enhance the effectiveness of our asset purchases. we do so by indicating that interest rates will rise only when we are well past the horizon for asset purchases. prolonging asset purchases pushes out market expectations of a rate rise and pushes down interest rate expectations across the entire curve. of course, the effectiveness of our forward guidance also relies on our credibility. 3 / 5 bis central bankers'speeches in effect, forward guidance is a promise not to react to short - term data outturns in the future so as to persuade markets to expect interest rates to remain low. but if we offer guidance that extends too far into the future, it risks unduly tying our hands. this is a particular risk at present since, as i mentioned earlier, future increases in interest rates need to be gradual. moving late could result in policy remaining too loose for too long. the time will come this year to make further gradual adjustments to our monetary policy stance in line with our confidence in achieving our objective ; market expectations are appropriate in this regard. we should then certainly reflect at length on the degree to which we wish to pre - commit ourselves. the second risk for monetary policy relates to the side effects of low interest rates. our measures have considerably improved financing conditions for households and firms, and have unblocked the flow of credit. yet easier financing conditions may encourage investment in projects that are only profitable at low interest rates, and such loans risk turning sour as interest rates rise. indeed, banks and investors may be tempted to “ search for yield ”, without being adequately recompensed for the risk they are taking on. our mandate is to deliver price stability. ensuring financial stability risks are adequately contained is the role of banking supervision and macroprudential policy. while there is no evidence at present of asset price bubbles in the euro area, there are some notable localised pockets, such as in commercial real estate, and signs of “ search for yield ” behaviour. the financial crisis showed how such risks can interfere with the smooth operation of monetary policy through

have selected as a topic for this hearing, euro area inflation rose to 3. 0 per cent in august and we expect it to rise further this autumn. nonetheless, we continue to view this upswing as largely temporary. a range of factors are currently pushing up inflation. chief among them are the strong increase in oil prices since around the middle of last year, the reversal of the temporary vat reduction in germany, and cost pressures arising from temporary shortages of materials and equipment. the impact of these factors should dissipate in the course of next year. although underlying price pressures have edged up over the summer, this is consistent with the opening up of the economy, which remains some distance away from operating at full capacity. as a result, the september ecb staff projections foresee annual inflation at 2. 2 per cent in 2021 then moderating to 1. 7 per cent in 2022 and 1. 5 per cent in 2023. while inflation could prove weaker than foreseen if economic activity were to be affected by a renewed tightening of restrictions, there are some factors that could lead to stronger price pressures than are currently expected. for example, if the temporary shortages of materials and equipment constrain production more persistently than we currently foresee, they could feed through more strongly along the pricing chain. persistently high inflation could also result in higher than anticipated wage demands. but we are seeing limited signs of this risk so far, which means that our baseline scenario continues to foresee inflation remaining below our target over the medium term. favourable financing conditions are essential for the economy to continue its recovery and for inflation to converge durably to our target. we saw market interest rates ease over the summer but recently they have reversed this decline somewhat. however, bank lending conditions have remained very accommodative. overall, this has left financing conditions for the economy remaining very favourable. thus, following a joint assessment of the inflation outlook and financing conditions, the governing council decided earlier this month to set a moderately slower pace of net asset purchases under the pandemic emergency purchase programme. we remain entirely committed to preserving 2 / 4 bis central bankers'speeches these favourable financing conditions, which are necessary for a robust recovery that will restore inflation to its pre - pandemic level. financial stability considerations in our new monetary policy strategy i will now turn to the second topic which you have selected for this hearing, namely the risk of financial dominance. financial dominance occurs when central banks delay the removal of monetary