peter praet : opening remarks – " money markets, monetary policy implementation and central bank balance sheets " speaking points by mr peter praet, member of the executive board of the european central bank, at the ecb workshop on " money markets, monetary policy implementation and central bank balance sheets ", frankfurt am main, 6 november 2017. * * * introduction it is my pleasure to welcome you to this year ’ s edition of the ecb´s workshop on “ money markets, monetary policy implementation and central bank balance sheets ”. i would like to make some remarks on the role that money markets, monetary policy implementation and central bank balance sheets have played in our recent monetary policy decisions. the october monetary policy decision at its october meeting, the governing council decided to extend its net asset purchases within the asset purchase programme ( app ) at a monthly pace of €30bn for nine months until the end of september 2018, or beyond, if necessary. the governing council re - iterated that it expects the key ecb policy rates to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. this decision was taken against the backdrop of the solid and broad - based economic expansion which the euro area continues to experience. our monetary policy measures have been effective and are reflected in recent economic developments. deflationary risks have disappeared. some measures of underlying inflation have ticked up over recent months, but have yet to show more convincing signs of a sustained upward trend. overall, inflation developments, despite the solid growth, have remained subdued. importantly, the convergence of inflation towards our aim remains conditional on a substantial degree of monetary policy accommodation. a “ sustained adjustment in the path of inflation ” is the principal condition that has guided, and will be guiding, the calibration of our asset purchase programme ( app ). an extension of the programme was warranted by the continued need for a substantial amount of monetary policy accommodation to ensure the desired inflation convergence. when considering the appropriate calibration of the app there were three important dimensions to consider : pace, horizon and optionality. as regards the first dimension, pace, the brighter economic prospects have increased our confidence in the gradual convergence of inflation towards our aim. this called for a lower pace of purchases. second dimension, horizon : we have always emphasised that monetary policy needs to be persistent and patient for underlying inflation pressures to gradually build up. this speaks in favour of a sufficiently long horizon of additional net purchases

. the longer horizon also anchors short - term interest rate expectations for a longer period, thereby reinforcing the governing council ’ s forward guidance on policy rates. 1 / 4 bis central bankers'speeches the third dimension is optionality : retaining the option to re - calibrate the app if warranted is consistent with the forward guidance on the app. key channels of the app there are two key channels through which the app operates. the first is the extraction of duration risk, which propagates through portfolio rebalancing. the second key channel is the signalling channel on interest rates. the duration risk channel and the signalling channel correspond to the two components of the long - term interest rates through which a central bank can seek to influence the level and shape of the yield curve : the expectations component and the term premium. how does the app influence the term premium? by accumulating a portfolio of long - duration assets, the central bank extracts duration risk from private hands, frees up risk bearing capacity in the markets, spurs a rebalancing of private portfolios towards the remaining securities, and thereby lowers term premia and yields across a range of financial assets. duration extraction is thus the catalyst for the portfolio rebalancing channel, which is the main mechanism by which easing through quantitative interventions is then transmitted further through the economy. now, what matters in particular for term premia is the entire stock of duration which the central bank removes from the hands of price - sensitive investors by taking this stock of duration on its balance sheet. as a result, the continued monetary support from assets purchases is not only provided by the additional net asset purchases, but also by the sizeable stock of already acquired assets and the forthcoming reinvestments. the second key channel is the signalling channel : the expectations component of long - term yields reflects market expectations of the future path of the policy - controlled short - term interest rates. in this respect the sequencing embodied in our forward guidance gives significant strength to the signalling channel. the sequencing firmly anchors expectations for short term interest rates. the governing council expects the key policy rates “ to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases ”. the role and function of money markets for the signalling channel to operate it is essential that the monetary impulses are transmitted through money market rates. in this regard let me make a number of observations. fragmentation first, for monetary policy impulses to be transmitted through