. 5 % this year, before declining to 1. 3 % in 2014. these levels are historically very moderate, and remain in the lower part of the range of values that the ecb ’ s governing council has identified as consistent with the ecb ’ s quantitative definition of price stability. bis central bankers ’ speeches that said, inflation expectations continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 % over the medium term. and the risks to the outlook for price developments are expected to be broadly balanced. finally, monetary and, in particular, credit dynamics remain weak. the annual growth rate of loans to the private sector has remained well in negative territory ; and the pace of contraction has actually accelerated over recent period. certainly, weak loan dynamics can largely be explained by the current stage of the business cycle but we have to be attentive to alleviate structural and supply - side factor that may hamper credit provision. the significant improvement in the funding situation of banks since the summer of 2012 has partly offset supply - side restrictions. but it will be some time before the more permissive funding conditions faced by many banks will be turned into an active spur for credit creation. the strategy of euro area policy - makers against this background, how should policy - makers respond to the still fragile macroeconomic recovery? in my view, we need a three - pronged strategy : first, monetary policy has to remain consistently supportive of the baseline outlook and mitigate the risks that surround it. our price stability mandate is sufficiently precise to keep us concentrated on that mission. but preserving monetary accommodation is a necessary but not sufficient condition for the recovery to take hold. a second essential ingredient is that countries continue the adjustment of their domestic policies in a way that removes structural impediments to their economic potential and fosters long - term fiscal sustainability. monetary accommodation can accompany and facilitate such regime shift in economic policy. but we know it can never replace it. third and equally important, europe has to continue the reform process in its banking sector. sound finance is part and parcel of a dynamic economy and banks remain a major conduit of finance in the euro area. hence, we must establish conditions that align incentives of individual financial institutions with those of society. let me explain the measures that european policy - makers are taking in each of these areas : monetary policy ; fiscal and structural adjustment ; and banking reform. monetary policy let me start with monetary policy. as you know, the

##ter, monetary policy needs to be more aggressive. let me add that, beyond technological changes, additional liquidity demand factors also stem from regulatory change, fragmentation and the fact that the banking union is incomplete. i will consider how technological change affects the following three broad channels of monetary transmission, without focusing on the consequences structural changes will have for the operational framework : 1. how policy rates affect market interest rates and financial conditions. 2. labour markets and the non - accelerating inflation rate of unemployment ( nairu ). 3. price - setting and the phillips curve. financial innovations have the potential to impact the way the economy is financed a change from bank - based to market - based financing has been taking place for some time in the euro area, partly related to financial innovation. this has led to firms having a more diversified financing structure and has improved their resilience to shocks emanating from the banking system. at the same time, corporate exposure to volatility in market rates has increased. fintechs can lead to further bank disintermediation, but also financial deepening, by allowing otherwise constrained households and firms to borrow. 4 in addition, fintech can strengthen unregulated lending activities, posing challenges to financial stability. this might affect the transmission mechanism, although how it will do so is not yet clear. labour markets and the nairu the possible disruption from technological change is likely to be felt in labour markets. email, videoconferencing, secure vpn5 connections and outsourcing across countries all enable services to be provided from a distance, and permit a greater degree of flexibility in working practices – a massive socioeconomic shift. in the labour market the internet enables more services to be offered with less intermediation at 2 / 5 bis central bankers'speeches lower prices. fragmentation of labour time is shown in the diverging results of compensation per employee and compensation per hour worked. for some workers this is a positive development, allowing them to participate in the workforce where previously they were excluded. 6 for others, the greater individualisation can lead to insecurity, affecting households ’ income. more individualised roles can also weaken the power of collective bargaining to maintain the labour share of income. 7 while the productivity - enhancing aspects of digitalisation might tend to raise potential output growth, the effects operating through labour and capital are more uncertain, and might even work in different directions. there may be some substitution of labour for capital, with possible repercussions