is long enough to be consistent with a central bank ’ s capacity to control inflation, taking into account the typical transmission lag. the horizon should be short enough for the public to be able to assess the performance of the central bank in delivering its inflation goal. at the same time, too long a span of time obstructs accountability. however, the definition of the medium term cannot be reduced to a fixed interval : it must be interpreted as state - dependent. a demand shock that pushes inflation away from its desired level and output away from potential in the same direction calls for a policy horizon as short as the typical transmission lag : the policy response to such a shock is faster and stronger than otherwise. by contrast, if the economy is hit by persistent supply - side shocks, for example, the medium - term interval can stretch well beyond the standard transmission lag of monetary policy. furthermore, a medium - term orientation implies that inflation can deviate from our aim in both directions, so long as the path of inflation can be expected to converge back to the objective. maintaining a medium - term orientation is facilitated by a credible commitment to the inflation goal, such that inflation expectations remain well anchored even during a prolonged phase of inflation deviation. one piece of evidence on how expectations are formed is provided by a recent special questionnaire in the ecb ’ s survey of professional forecasters ( spf ), in which participants were asked about the factors that inform their longer - term expectations, meaning four or five years ahead. 13 the responses indicated that trends in inflation emerged as a substantial driving factor, and it is fair to assume that such trends build to a very large extent on historical and thereby backward - looking data on actual inflation. however, the ecb ’ s inflation objective has remained the most important factor informing the longer - term expectations of spf participants. given that trends in actual inflation have clearly weakened in recent years, the role of the inflation objective as an anchor of expectations has been brought more strongly to the fore. one sign of this is the looser association in recent times of longer - term inflation expectations with the average of actual inflation calculated cumulatively over the history of monetary union ( chart 10 ). while this average ‒ and the same holds for averages taken over shorter time spans ‒ has come down over the period of low inflation, longer - term expectations have declined to a much lesser extent. this suggests that participants have not been overly extrapolative in forming their expectations about inflation. 15

real economy, it may also entail rising risk taking in the current market environment. we are closely monitoring two developments in this context : first, non - bank financing activity is growing, in particular in higher credit risk corporate financing, where indebtedness is already higher. second, as institutional investors are searching for yield, they may amplify the cyclical underpricing of risk, potentially also taking on more leverage and liquidity risk. in the euro area investment fund sector, we have observed increasing liquidity risk for some time. this reflects a falling share of holdings of liquid government bonds and a fall in cash holdings across the sector. we have recently witnessed cases in which funds holding considerable amounts of illiquid assets ( woodford, h2o and gam – all ucits funds ) faced severe difficulties in dealing with large - scale outflows. these cases had no systemic repercussions – partly because the outflow triggers were idiosyncratic and partly because the market environment was benign. in a more broad - based market downturn, though, we would be concerned that a repricing of financial assets could trigger sudden and large redemptions from these funds, possibly resulting in forced asset sales, which could amplify stress in less liquid markets. this would have wider implications in the form of impaired market liquidity and possible spillovers to the real economy. while leverage in the euro area fund sector is low on average, there are also pockets of high leverage among some types of alternative funds, and these need to be monitored closely. even if leverage of ucits funds is not excessive, it can still add to the procyclical selling of assets if a fund tries to keep its leverage constant during periods of stress. i hope that gives you a good perspective on our current assessment of financial stability risks. i look forward to hearing your own views on these and other vulnerabilities for the euro area financial system. 2 / 2 bis central bankers'speeches