asset price inflation and monetary policy keynote speech by yves mersch, member of the executive board of the ecb and vice - chair of the supervisory board of the ecb, at the celebration of investas ’ 60th anniversary luxembourg, 27 january 2020 introduction the outlook for euro area economic activity and inflation at present warrants the highly accommodative monetary policy implemented by the ecb through our package of policy measures. nonetheless, the governing council remains attentive to the potential side effects of those measures. monitoring and analysing those side effects is part and parcel of the governing council ’ s ongoing monetary policy assessment and our recently announced strategy review. indeed, the prolonged period of substantial accommodation and the unconventional nature of our measures call for vigilance on the efficacy of the policy measures and might affect the strategic calibration and the appropriateness of the monetary policy stance. this vigilance is particularly warranted in the light of some signs that monetary policy is encouraging increased risk - taking and contributing to elevated asset price inflation and income inequality. to my mind, this raises two concerns for the long - run efficacy of our measures, which i wish to discuss today. the first is the contribution of stretched asset prices to vulnerabilities in the financial system, which may in turn trigger future crises. the second is the part they may play in creating a disparity between public perceptions of inflation and official measures. that disparity can undermine public support for our unconventional measures and eventually erode trust in the ecb. risk - taking and asset prices there is substantial evidence that monetary accommodation incentivises financial firms to increase risktaking behaviour. with looser policy, banks lend more to riskier firms, a tendency that is even more pronounced among banks with a high share of retail deposits in periods of negative rates. [ 2 ] lower interest rates also lead to higher leverage for investment banks. greater risk - taking extends beyond the traditional banking system. when non - bank financial institutions ( for example pension funds and insurance companies ) target a certain nominal rate of return, an environment of lower overall returns means they have to “ search for yield ” – in other words, acquire riskier assets to maintain nominal returns. we are already seeing some signs of increased risk - taking by non - banks such as pension and mutual funds. this increased risk - taking channel is in part an intended aim of monetary policy. greater lending by financial institutions supports consumption and investment, generating activity and inflationary pressures within

people may suspect that there is some vested interest behind such rumours. needless to say, the media ’ s role will, on the whole, tend to be negative in this channel. the third type is marked by the ‘ survey effect ’. it is not uncommon for the media to undertake opinion polls or surveys and these could have methodological and other problems in terms of reflecting the true picture. these surveys have a tendency to influence the perception of markets and sometimes the general public. in such a case, the contribution of the media would depend on scientific methodology adopted, transparency of assumptions, and objectivity in presentation of the results. adequate care is a pre - condition to ensure a positive effect through this channel. the fourth is the ‘ interpretation effect ’, where media tries to interpret the stand taken by policy makers or markets or corporates. the interpretation effect may be positive or negative depending on professional skills as well as commitment to objectives. responsibility and accountability would be key to ensure positive effect through this channel. in brief, it is my submission that the media ’ s responsibilities are not confined to its shareholders or to its subscribers, but extend to the larger segment of the public. in this sense, the challenges and dilemmas before the media are perhaps no less than those before the central banks. it is also fair and appropriate to recognize that media itself faces several dilemmas. for example, there are pressures to be the first to report – a race to be the number one. there are incentives to be distinctive. they have several stakeholders to cater to. they may or may not have ideological predilections. but as far as the rbi is concerned, the media has been very fair and i find it a pleasure, inspiration and education to interact with the media. it is great fun to share my confusions and dilemmas with all types of media – which are amongst the best and the brightest in india. before concluding, it is essential to appreciate that communication policy is not merely about explaining or getting a feedback on policy, but may include elements of influencing the policy direction itself. a central bank does this through several channels, including research publications and speeches. as dr. i. g. patel, an eminent statesman - scholar and one of my distinguished predecessors said in 2004 : “ communication is not just about transparency. it is also about education, guidance and steering things in the right direction. in this, the central bank can be an honest broker between the government and the public and even the parliament.