converge back to levels closer to 2 %. in practice, this means that by clarifying our reaction function in this way, markets were able to better anticipate our actions, thereby enhancing the effectiveness of policy by frontloading the required accommodation. this has not always been a gentle ride as i will explain in a minute but i think it is fair to say that the state - contingent leg of app forward guidance has supported and continues to support the important price discovery function of markets. overall, therefore, the combination of time and state - contingent forward guidance has been highly instrumental in supporting powerful portfolio rebalancing effects and a compression of term premia, and in turn has led to a broad - based easing of financial conditions. i think the evidence speaks for itself. euro area bank lending rates to firms have fallen by some 80 basis points since we started purchasing covered bonds in october 2014, a step which was succeeded shortly afterwards by purchases of asset - backed securities ( abs ) and government securities. ecb analysis attributes a significant portion of this fall to the workings of our asset purchase programme. 11 and effective forward guidance on and implementation of the app may have also helped to 4 / 10 bis central bankers'speeches reinforce forward guidance on rates – a channel famously labelled the “ signalling ” channel. the argument goes that large - scale bond purchases would be perceived by markets as preventing policy - makers from raising rates quickly, as this would cause losses on central banks ’ balance sheet. in other words, central banks purchasing assets “ put their money where their mouth is ”. at the same time, i will not deny that communication on policy intentions has been, and remains, challenging and that we cannot always be sure how our forward guidance works. much of the challenge arises of course from the fact that communication is not a one - way street as i alluded to before. there is an interaction between central bank communication and financial markets which creates a well - known risk that financial conditions would become de - anchored. paul samuelson famously compared the central banker who reads too much from movements in the bond markets to a monkey who “ discovers his reflection in the mirror and thinks that by looking at the reactions of that monkey – including its surprises – he is getting new information ”. 12 let me explain by giving you two concrete examples. the first one refers to our decision of december 2015, when we announced a substantial package of policy measures, including a six - month extension of the app, a 10 basis point cut in the

economy is most likely headed over the policy - relevant horizon. this type of forward guidance is sometimes termed “ delphic ” 7, because, like the oracle of delphi, it basically consists of a forecast, in this case a forecast by the central bank of how the economy will likely evolve. but our forward guidance is also intended to clarify our reaction function. the reaction function maps the economic environment into our instrument space. to put it simply, it relates what w e think will happen to what we will do if it happens. to continue with the greek mythology theme, this means there is also an “ odyssean ” element to forward guidance : like odysseus tying himself to his ship ’ s mast in order to resist the songs of the sirens, it conveys a commitment to react in specific ways to the contingencies that might arise. an extreme form of odyssean forward guidance, which i will not discuss today because i believe that it is not consistent with our mandate, would consist in committing to an unconditional interest path, irrespective of contingencies. this is how far theory goes. in practice, and applying the distinction between delphic and odyssean guidance to the ecb ’ s rate forward guidance, when we say that we “ expect interest rates to remain at present or lower levels for an extended period of time … ”, we convey both our assessment of how we see inflation most likely evolving over the policy - relevant horizon and how we intend to map this outlook into the level of our key policy rates. 2 / 10 bis central bankers'speeches you can now easily see that our rate forward guidance entails two key components : a structural component that corresponds to our reaction function – our monetary policy strategy – which is firmly anchored in our primary mandate. in today ’ s world, where central banks make use of different instruments, our reaction function also includes the mapping of any desired monetary policy stance into instruments, such as policy rates and asset purchases. think of it, ideally, as a finely tuned machine that we constantly feed with our assessment of the likely future path of inflation, which itself is the variable component, for it evolves as a result of the incoming data stream. the same two components – a structural and a variable one – also apply to our forward guidance on the asset purchase programme ( app ), which contains three main elements : first, clear delphic communication on expected volumes and the purchase horizon, currently “ until