based weakening of aggregate demand that derails our baseline scenario of a moderate recovery. another cause could be a substantial positive supply shock that, given the current low level of inflation, loosens the anchoring of mediumterm inflation expectations. unlike the other contingencies, the objective here would not be to defend the current stance, but rather to increase meaningfully the degree of monetary accommodation. hence, the limited margin for manoeuvre that remains over short - term interest rates would not be sufficient. this would be the context for a more broad - based asset purchase programme. ultimately, all these contingencies point to the same conclusion : in order to fulfil its mandate, the governing council is committed – unanimously – to using both unconventional and conventional instruments to deal effectively with the risks of a too prolonged period of low inflation. opening up the ecb ’ s decision - making in spite of these efforts to enhance transparency, and their observable effectiveness, there is little doubt that our simpler understanding of monetary policy in the past will not readily return. policymakers are operating in a more complex and heterogeneous environment. structural breaks and model uncertainty imply that the regularities of the past can no longer be relied upon. this in turn means that judgement plays a greater role in decision - making. yet, judgement always involves trade - offs, which are important for the public to understand and for policy - makers to be accountable for. and while trade - offs exist in normal times, in crisis conditions they become both more complex and more consequential. for example, each of the unconventional measures that i discussed above could be effective in addressing specific impairments in monetary transmission and risks to price stability, but could also have side effects that need to be considered. this is why last august i reported that the governing council felt a need for a “ richer communication of the rationale behind its decisions ” so as to give a sense of the discussion that has taken place. the governing council has since been reflecting on the publication of for more details see lecture by m. draghi, “ a consistent strategy for a sustained recovery ”, at sciences po, paris, 25 march 2014, http : / / www. ecb. europa. eu / press / key / date / 2014 / html / sp140325. en. html. bis central bankers ’ speeches some record or account of its policy deliberations. i would like to share with you my views on this

challenges : to reduce uncertainty about our future policy intentions and to clarify our reaction function in unusual circumstances. let me explain. first, forward guidance enhances transparency through two channels. it gives guidance on the expected level of future interest rates, conditional on the outlook for price stability. and it reduces uncertainty about that level by strengthening communication on our reaction function. specifically, we have communicated that, given low inflation and broad - based economic weakness, we expect interest rates to stay at present or lower levels for an extended period of time. this communication has indeed had the overall effect of lowering longer - term rates and partly insulating euro area money markets against developments elsewhere. forward guidance has also reduced uncertainty related to our reaction function. implied densities extracted from euribor options and used to gauge expectations of the forward ois rate show that the dispersion of short - term rate expectations has declined to levels closer to those observed in early may 2013, after we cut interest rates. the sensitivity of money market forward rates to macroeconomic data releases has declined as well. and note that by cutting rates in november last year we followed up words with actions, which effectively strengthened our forward guidance. we have also recently helped further clarify our reaction function by laying out some contingencies that would warrant a monetary policy reaction. these contingencies illustrate well the multiple dimensions of our reaction function, both as regards the risks to price stability, and as regards the array of instruments we have at hand to deal with those risks. one contingency would be an unwarranted tightening of the policy stance. such a change in the policy stance could emanate from at least three sources. first, a need for action could emanate from renewed tensions in short - term money markets to the extent that these are propagated to the medium - term curve, in particular in an environment of receding excess liquidity in the euro area. this is distinct from the type of short - term money market volatility we saw towards the end of last year that was associated with technical factors. second, a tightening of the policy stance may arise from developments in global bond markets that unduly spill over to the interest rate term structure in the euro area. so far our forward guidance has managed to decouple euro area forward curves somewhat from developments in the us. third, the policy stance may also be affected by a continued appreciation of the exchange rate. the exchange rate is not in itself a policy target, but