interest rate abo ve zero, it canno t set that rate far belo w this thresho ld, because then ho useholds would simply hold o nto cash – thereby receiving a 0 % interest rate – rather than save at negative rates, and banks wo uld start co nverting their electro nic reserves – yielding a negative return – into currency. banks can o ffer depo sits at zero rates to avo id this risk of ‘ financial disintermediation ’, thus absorbing the adverse impact o f negative interbank rates themselves. in the lo ng run, this may reduce banks ’ pro fitability, which may h amper the bank mo netary po licy transmissio n channel. when the central bank has pushed interest rates do wn as far as it can, we say that the interest rate has reached its effective lo wer bo und ( elb ). by buying government bonds and other securities in the secondary market – an assetpurchasing policy often referred to as quantitative easing ( qe ) –, and through targeted longterm lending to commercial banks. let me now recall briefly how each of these policy instruments works. i will start with asset purchases. the ecb launched its asset purchase programme ( app ) in september 2014. the purpose of asset purchases ( i. e. buying bonds from euro area governments and other public sector entities and from the safest corporate issuers ) is to decrease longer - term interest rates. conventional interest rate policy moves the short - term rate on interbank markets, but medium and long - term rates also have a bearing on investment decisions, be they buying a house or purchasing new machinery. long - term rates are the sum of three components : the expectation of future short - term rates, the term premium and the default premium. asset purchases affect each of these components in different ways. first, the signalling channel, by which bond purchases often signal to markets the central bank ’ s commitment to engage in expansionary monetary policy. this adjusts market expectations about the future course of short - term interest rates, which in turn affects longterm rates. second, investors demand a term premium over expected short - term rates. this is because long - term lending is inherently riskier than short - term lending, as short - term interest rates ( and, hence, the opportunity cost of long - term lending ) may perform quite differently to what was previously anticipated by market participants. by p

expectations. inflation expectations in normal conditions, longer - term inflation expectations should be unaffected by transitory shocks, which typically dissipate over the medium term. however, recurrent shocks leading to a protracted period of low inflation can be misinterpreted as a lasting decline in trend inflation, and could jeopardise public faith in the central bank ’ s commitment or ability to deliver on its objective. as a consequence, the shocks can become entrenched in expectations. in such cases, firms and households become more attentive to past inflation outcomes and less attentive to the inflation norm or central bank inflation target when forming their expectations about future price developments. to the extent that these expectations enter wage and price - setting decisions in 3 / 5 bis central bankers'speeches the economy, low inflation may become self - reinforcing : observed disinflation translates into a downgrade of inflation expectations, which in turn feeds back into lasting disinflation. evidence on the evolution of inflation expectations during the crisis indicates that this scenario was a concrete risk that the euro area was facing in mid - 2014. for instance, staff estimates suggest that market - based longer - term inflation expectations became more than 1. 5 times more sensitive to macroeconomic surprises than they had been in pre - crisis times. by contrast, if longer - term inflation expectations are well - anchored, they do not respond to shorter - term macroeconomic developments. instead, they remain entirely determined by the inflation objective that the central bank has committed to attain. but, especially after the oil price shocks in the second half of 2014, most measures for the sensitivity of inflation expectations have edged up. 6 the observation of a weaker anchoring of inflation expectations, in principle, is consistent with different interpretations. it might reflect doubts either with regard to the central bank ’ s commitment to pursue its objective, or with regard to the central bank ’ s ability to achieve its aim. available evidence tends to favour the latter interpretation : the sensitivity of inflation expectations has increased more at shorter maturities, which is indicative of agents expecting that it will take longer for the central bank to bring inflation back to levels consistent with its objective ; at very long maturities, by contrast, the increase in sensitivity was contained, which may reveal that agents have never quite lost faith in the intention of the central bank to respect its mandate. this evidence has crucial implications for monetary policy : many forces have combined to bring strong downward pressures to bear on the euro