of cabbages. but, when an economy is hit by inflation, all the prices would rise simultaneously, so both carrots and cabbages seem to be equally profitable. this would confuse the producers who would now be unable to make any choice between the two products. hence, the much desired relative price change does not occur, when an economy has been hit by inflation. instead, the absolute prices start to change and such changes do not provide the price signals for allocating resources. fifth, continued inflation distorts the balance sheets of companies, especially the balance sheets of financial institutions. companies may record profits in nominal terms, but a large part of such profits are eroded in real terms by inflation. when profits are adjusted for inflation, companies would find that their performance has not been so spectacular as has been depicted by the amount of rupees they have earned. in fact, their real position has pushed them backward to a lower level. sixth, inflation very forcefully hits the vulnerable groups with a weaker bargaining power. such categories include housewives, students, pensioners and workers whose salaries are not linked to inflation. it would lead to continuous agitation by these groups creating social and political dissension. the country, instead of using its resources for investing in long term growth generating projects, would have to spend its energy and resources for solving such social issues. thus, inflation is the unrivalled public enemy number one. who should take the blame for inflation? it is ironical that practically everyone in the society should take blame for a continuously high inflation in an economy. this is because everyone, even in a very little measure, would have contributed to facilitate inflation to raise its ugly head. it happens when people of a country believe that they can have a higher standard of living without working harder or producing more. inflation in the long run is directly related to the amount of money which people would have for buying goods and services. when that quantity of money is in far excess of the quantity of goods and services, the general price level has to move up in order to facilitate the required volume of transactions. hence, the magic solution for keeping inflation in check has been the production of money exactly in line with the production of goods and services in the economy. any violation of this golden rule, for whatever the justifiable reason, would pave the way for the long run inflation to peep into the system. in this context, the central bank has an inalienable responsibility to take all the

back towards 2 % and ensure the firm underpinning of inflation expectations. the monetary policy response so how have we responded? our response has certainly been unconventional, in the sense that our measures are unprecedented – but it is far from unorthodox. we have responded in a way that any central bank with a strict price stability objective would do. it has essentially involved three overlapping steps. the first step, as i said, was to lower overnight interest rates all the way to their effective lower bound – including below zero for the deposit facility. but once we reach this point, and if inflation is still too low and more monetary stimulus needed, the central bank has to adopt new instruments to fulfil its mandate. the next logical step to ease monetary conditions is to influence more directly the term structure of interest rates, which we did by introducing forward guidance in july of last year. we have recently re - affirmed our forward guidance that key policy rates will stay low for an extended period of time in line with the subdued outlook for inflation. and in the targeted long - term refinancing operations ( tltro ) programme we have backed this up, by providing term funding over up to four years at a very low fixed rate. as a result, the level of the forward interest rate curve in the euro area is currently uniformly lower than it has ever been – and also lower for instance than at any point in the us since the start of the financial crisis. both these steps have in common that they operate through steering current and forward money market rates. however, once the margin for manoeuvre here becomes exhausted – that is, overnight and near - term money market rates are both at the lower bound – a third step becomes necessary. if further monetary stimulus is needed, central banks need to by - pass the money market and intervene directly in other asset markets to affect, through prices and quantities, the various transmission channels of monetary policy. speaking in amsterdam earlier this year, i clarified the circumstances under which the ecb would need to resort to asset purchases to increase meaningfully the degree of monetary accommodation. in what i called the “ third contingency ”, i referred to a broad - based weakening of aggregate demand that would threaten our baseline scenario of recovery and / or a loosening in the anchoring of medium - term inflation expectations. and this is the point the ecb has reached with the governing council ’ s decision to initiate purchases of asset - backed securities ( abs ) and