or the start of a cumulative process. a good operational approach to procyclicality would look at all amplification mechanisms which provoke ( or allow ) the financial system to deviate durably or permanently from its predetermined path ) so that the trend itself may be affected in the short or medium run. quote from frbny economic policy review issue on systemic risk ( november 2007, page 26 ). see haldane ( 2009 ). this has been luminously shown by danielsson and shin in their seminal article on " endogenous risk ", based on the now famous parable of the millennium bridge. what are the mechanisms at work? analytically, it is useful to distinguish between procyclicality of capital and procyclicality of leverage. procyclicality of capital is easy to understand. when conditions are good, financial institutions are profitable and their strong capital base allows them to take larger positions in the markets. this mechanism has been amplified by mark to market accounting 4. in a mark to market environment, an increase, for instance, in asset prices quickly translates into stronger capital for financial institutions. this, in turn, triggers additional demand for assets and a further increase in their prices. this kind of " inverted demand curve ", where demand increases with prices, potentially creates powerful feed back loops. procyclicality in leverage is more subtle. it has been shown that financial institutions'balance sheets expand and contract with the economic cycle 5. many different mechanisms are at work : • first, risk management techniques : tools used to measure and value risk, such as var are naturally and strongly procyclical, especially when constructed with very short data series. risk management practices hardwired to valuations ( such as margin calls ) strongly amplify fluctuations in leverage and may lead to fire sales and " one sided " markets. • another mechanism 6 relates to the dynamics of short term money markets : when liquidity is perceived as abundant, there is strong incentive for dealer - brokers to engage in maturity transformation through strongly leveraged positions. • finally, risk appetite itself moves along the economic cycle. animal spirits obviously play a role. also, valuation gains and losses may encourage risk taking or trigger sharp pull - backs. should procyclicality be avoided? not necessarily : • financial stability is not an end by itself. it only helps if it is conducive to better macro economic performance. volati

inflation with some lags. the estimated transmission lags of monetary policy in the literature vary from one year1 to more than two years2. at the current juncture several factors may bring us closer to the upper range : the current tightening cycle started from exceptionally low levels of real interest rates. it is only from the end of 2022 that we achieved positive real rates at all maturities – but we are now clearly in restrictive territory. the proportion of fixed - rate long - term loans is particularly high by historical standards. this is welcome for financial stability, especially for mortgages. but as a result, the pass - through of higher policy rates is more gradual. 1 / 3 bis - central bankers'speeches the origin and sectorial composition of inflation matters. the current surge in inflation does not primarily originate in overheated demand but in supply shocks. this has implication for the transmission lags. ( i ) the rise in the price of commodities and input costs was at the root of inflation. their pass - through to producer prices and subsequently to cpi inflation might be asymmetric, faster and more complete on the way up than on the way down. it implies that the current decline in energy and input costs may not fully translate yet into lower inflation. ( ii ) services inflation, in part fuelled by wage developments, has gradually but steadily surged over recent quarters, and is likely to become the dominant source of inflation in the euro area. historically, services are the most persistent and important component of both headline and core inflation, and their share in consumption increased significantly in the last decades. they are less directly sensitive to interest rates ; the dampening effect of monetary policy on aggregate demand will be felt, but it will take more time. what conclusions can be drawn for monetary policy? a. in the usual alleged time lag of one to two years for monetary transmission, our economic situation is presently closer to the upper range. and hence the commitment i reaffirm today to bring inflation back towards 2 % by 2025, is consistent with the full transmission of the monetary tightening at work until summer 2023. b. against this backdrop of significant transmission " in the pipe " and still to come in real economy, a deceleration in the size of the policy steps ( from 50bp to 25 bp ) was wise and cautious. we obviously keep our hands free, but we add the capacity of observing and monitoring the pass - through of our massive past hikes. persistence is