parcel of the market ’ s equilibrating process to guide the economy to a sustainable growth path. but mas will be vigilant to the risks that these price developments can set off second - round price effects if left unchecked. the appropriate monetary policy response thus depends on the nature and persistence of the shocks that are affecting prices. herein lies the monetary policy challenge : how do we distinguish between the relative importance of demand and supply factors in driving cost and price increases in the economy? on one hand, there could be a risk of keeping policy too loose and unhinging inflation expectations. on the other hand, stamping out inflation aggressively could forestall the important signalling role of relative price adjustments, as well as add to transitional costs, including the negative impact on growth. let me illustrate with the example of ongoing changes in our labour market. while the shift in foreign worker policy is necessary to allow for a more efficient allocation of resources and a more productive workforce, the latter will take time to come to fruition. during this transitional phase, business costs are likely to rise somewhat as a result of tight labour market conditions, before productivity gains catch up to offset the cost increases. in the short term, the prices of some consumer services – especially those with high labour content – can rise and indeed, have increased in the early months of this year. bis central bankers ’ speeches reflecting these considerations, the tighter monetary stance adopted by mas in april 2012 was a calibrated move to facilitate the ongoing supply - side adjustments, while anchoring inflation expectations. the policy stance was aimed at keeping the economy on an even keel with gdp growth expected to come in at 1 – 3 % this year. we expect that headline and core inflation will ease gradually through the year, but along a somewhat elevated trajectory. over time, the cumulative appreciation of the exchange rate will temper the pace of price increases in the economy. mas is firmly committed to our objective of price stability over the medium term, even as productivity improvements arising from the significant economic restructuring will help to prevent higher costs from fuelling strong price increases. to ease the immediate burden of price and cost pressures faced by households and businesses during this period of transition, the government has implemented a wide - ranging package of relief measures. these include targeted utility rebates that directly alleviate the higher cost of living for households. similarly, smes received a one - off cash grant in this year ’ s budget to help offset higher business costs. implications for asset

the general collateral ( gc ) pooling repo curve as well as yields on euro area treasury bills and notes have further adjusted. woodford, m., 2001, “ monetary policy in the information economy ”, paper presented at the federal reserve bank of kansas city economic symposium at jackson hole ( 30 august – 1 september ). for a review of the impact of non - standard monetary policy on money market functioning, see monnet, c. and m. bech, 2013, “ the impact of unconventional monetary policy on the overnight interbank market ”, reserve bank of australia 2013 annual conference volume on “ liquidity and funding markets ”. bis central bankers ’ speeches the eonia has regularly been set in negative territory since 28 august together with stable trading volumes ( the average daily eonia volume from january to june 2014 was € 26. 1 billion and was € 28. 9 billion since june ) ( slide 5 ) and homogenous transmission to closely substitutable market segments, such as gc pooling repo, are evidence that a large fraction of unsecured money market transactions can take place at negative rates without hampering market functioning. this reflects an effective and well - coordinated preparation of market participants since the ecb first mentioned the possibility of bringing the dfr below zero. the fact that money market trading volumes did not fall ( they actually rose ) is remarkable given the fears some observers had expressed, informed by the japanese experience of the 1990s, on the potential impact on market functioning of a negative dfr and of very low policy rates more generally. will the transmission of lower short - term rates to a lower cost of credit for the real economy be as smooth? while bank lending rates have come down in the past in line with lower policy rates, there is a limit to how cheap bank lending can be. the mark - up that banks add to the cost of obtaining funding from the central bank compensates for credit risk, term premia and the cost of originating, screening and monitoring loans. the need for such compensation does not necessarily fall when policy rates are lowered. if anything, a central bank lowers rates when the economy needs stimulus, which is precisely when it is difficult for banks to find good loan making opportunities. it remains to be seen whether and to what extent the recent monetary policy accommodation translates into cheaper bank lending. 11 another concern with lowering rates is that it may contribute to the instability of the financial sector. while this can be a valid concern, in