yves mersch : monetary policy in the euro area - solid expansion with timid price pressure contribution by mr yves mersch, member of the executive board of the european central bank, to the eurofi magazine, submitted on 21 march 2018 and published on 26 april 2018. * * * the euro area economy currently is solidly expanding and the upswing is broad - based. recent data indicate that in the near term the economy is likely to expand even faster than had been expected. the monetary policy measures introduced since 2014 have effectively supported growth and employment, with real gdp growth expected to remain consistently above potential growth in the coming years. in spite of the favourable growth dynamics, underlying inflation continues to be subdued. while our policy measures have been successful in preventing the disinflation of 2014 from spiralling into deflation and are contributing to an improved inflation outlook, an ample degree of monetary accommodation remains necessary to secure a return of inflation rates towards levels that are below, but close to, 2 % over the medium term. looking ahead, the evolution of monetary policy will be firmly guided by the outlook for price stability. in this regard, the transition towards policy normalisation will begin once the governing council assesses that there has been a sustained adjustment in the path of inflation. such a judgement will be based on three criteria for inflation : convergence, confidence and resilience. convergence implies that headline inflation will need to be on track to reach levels below, but close to, 2 % within a medium - term horizon. the governing council will also need to have confidence that the upward adjustment in inflation has a high enough probability of materialising and that it can do so on a sustainable basis. thirdly, resilience, it will need to be ensured that the sustained adjustment in the path of inflation will be maintained even without additional net asset purchases. in fact, confidence has recently risen and convergence is being confirmed – partly because the temporary decline in the inflation rate has been weaker than our internal calculations had predicted when we had reduced the purchasing program from eur 60 billion to eur 30 billion. more resilience will follow eventually. still, patience and persistence with respect to our monetary policy is required. the former is necessary as it takes time for price pressures to build - up and the latter reflects the fact that the pick - up in inflation still needs to be supported by the prevailing monetary policy stance. once the governing council judges that progress towards meeting the three criteria is sufficiently advanced, our net asset purchases

second. after the committee issues the updated sound practices later this year, it will be incumbent upon banks to properly implement them and for supervisors to follow up to ensure proper implementation and adherence. 3 ) strengthening other risk management practices the third area to which the basel committee attaches high priority is the strengthening of other risk management practises. as i have indicated, there is a need to strengthen various aspects of firm - wide risk governance and management practices. let me mention two specific areas, namely valuations and stress testing. valuation practices for complex trading assets have been a destabilising factor over the course of the crisis. when markets for financial instruments do not function properly, it is difficult to determine a fair value. also, market participants have had a notable lack of confidence in firms ’ disclosure of exposures to structured products, processes for valuing positions, and the timely and accurate recognition of losses. this translated in a marked decline in financial firms ’ share prices. recent financial disclosures are helping improve the situation but more needs to be done. with close cooperation from risk managers and other professionals, the committee is carefully analysing how to help put valuation practices on a sounder long term footing. this is a topic the committee is deeply concerned with, given the growing share of exposures that have been subject to mark - to - market valuations and which then flow through to earnings and capital. disciplined fair valuation practices and clear sound practices can help make firms more resilient to stress. but poor practices can create major vulnerabilities for individual banks and for the financial system. furthermore, it also is critical that banks improve their firm wide stress testing practices. the turbulence has made clear that firms need to aggregate all exposures to a particular risk driver or related drivers and subject them to stress, also taking into account second round effects and the response of other market participants. this is particularly relevant since funding and market liquidity are increasingly linked. in addition, additional forward looking measures of risk must be applied when we see rapid growth in new products or markets, which have not been subject to an economic or financial market downturn. firms must develop the governance and infrastructure to carry out rigorous stress tests that identify where the major vulnerabilities and firm - wide concentrations lie. and there needs to be a clear impact on risk taking and appetite. the committee will be taking a close look at the lessons of the turmoil, how the current range of bank stress testing practices stacks up, and where