well as improving labour market flexibility. iii / - short - term policy challenges and responses the main challenge, of course, is low and declining inflation, with inflation expectations in the euro area drifting downward at short to medium - term horizons. this prevents adjustments in relative prices, – an important mechanism to eliminate gaps in competitiveness – and increases the risk of outright deflation, should a negative shock occur in the future. strangely, in the euro area, growth and inflation are moving in opposite directions. as growth accelerates, inflation keeps going down. this “ disconnect ” in the philips curve is puzzling. we must look, then, at the broader picture. euro area economies have attracted strong capital inflows over the recent months, with two opposite effects on financial conditions : first, easing through lower long - term interest rates. and, second, an appreciation of the euro exchange rate. it ’ s not clear whether the overall effect is positive. while nominal conditions are more accommodating in euro area than in the us, real indicators point to a more restrictive stance. we may see a perverse feedback loop develop, with low inflation, increasing real rates, capital inflows and exchange rate appreciation mutually fuelling each other. the financial economy may be heading towards a bad equilibrium that would threaten the real economic recovery. the situation called for an appropriate policy response and, as you know, the governing council has agreed last thursday on a strong package of four significant measures : first the refinancing and deposit rates have both been reduced – bringing the deposit rate into negative territory for the first time. this should encourage financial intermediaries to actively put their cash balances at work both on credit and asset markets. those cash balances themselves will be significantly boosted as : bis central bankers ’ speeches second, the ordinary regime of unlimited liquidity provision has been extended to the end of 2016. third, the eurosystem will conduct a new set of targeted longer - term refinancing operations. this exceptional liquidity will be provided at long maturity ( up to four years ) and a guaranteed fixed rate, a clear sign that monetary accommodation should persist for a very long time. finally, the eurosystem is actively preparing to buy asset based securities that will help channel monetary accommodation and ease financial conditions to private non - financial borrowers, especially smes. bis central bankers ’ speeches

points of gdp – from - 0. 6 percent in 1996 to 4. 3 percent in 2004 – as saving moved up and investment decreased. however, this development was offset by declines in the balances of some other euro - area countries, including france, italy, and spain ; the decreases were mostly associated with higher investment rates. data on saving, investment, and current account balances for countries other than the united states are drawn primarily from the international monetary fund, world economic outlook database, april ( www. imf. org / external / pubs / ft / weo / 2007 / 01 / data / index. aspx ) ; in some cases, data are drawn from national sources. i have noted the expansion of the u. s. current account deficit and the associated increases in current account surpluses abroad over the 1996 - 2004 period. a third key development in that period was a sustained decline in long - term real interest rates in many parts of the world. for example, the real yield on ten - year inflation - indexed u. s. treasury securities averaged about 4 percent in 1999 but less than 2 percent in 2004. the difference between the nominal long - term treasury yield and the trailing twelve - month rate of consumer price inflation, another measure of the u. s. real interest rate, showed a similar pattern, falling from about 3. 5 percent in 1996 to about 1. 5 percent in 2004. similar movements were observed in other industrial countries : in the united kingdom, the real yields on inflation - indexed government bonds fell from an average of 3. 6 percent in 1996 to just below 2 percent in 2004 ; in canada, the analogous figures were 4. 6 percent in 1996 and 2. 3 percent in 2004. real interest rates measured as the difference between government bond yields and consumer inflation also fell in germany, sweden, and switzerland. however, in japan, real interest rates remained low throughout the period. in sum, considering the 1996 - 2004 period, we have three facts to explain : ( 1 ) the substantial increase in the u. s. current account deficit, ( 2 ) the swing from moderate deficits to large surpluses in emerging - market countries, and ( 3 ) the significant decline in long - term real interest rates. many observers have focused on the expansion of the u. s. current account deficit in isolation and have argued that it is due largely to domestic factors, particularly declines in both public and private saving rates. but accounting identities assure us that