we are now seeing signs that monetary policy is once more gaining traction across the euro area, in particular via the bank lending channel. on the funding side, bank funding conditions have eased considerably since mid - 2012. interbank counterparty risk has fallen, as evidenced in the sharp decline in the spread between secured and unsecured money market lending. and benchmark interest rates, notably sovereign yields, have been responding much more homogenously to our rate reductions. on the lending side, the transmission of our interest rate decisions to bank lending rates is still uneven across euro area countries, but the dispersion has narrowed considerably. our latest bank lending survey also confirmed a stabilisation in lending conditions, with improvements highly concentrated in stressed countries. in short, we have reason to be optimistic that our accommodative monetary policy is feeding through to the real economy and, as such, can help prevent damage to potential growth caused by a prolonged period of economic weakness. yet it is also clear that low interest rates cannot raise growth on a structural basis. what is crucial to actually lift productivity is credit being allocated where it is most productive. let me therefore turn to the issue of financial sector repair. financial sector repair there is considerable empirical evidence that a strong driver of aggregate productivity growth is “ churn ” between firms – less productive firms exiting the market and new innovative firms entering, or existing firms reallocating resources to more productive sectors. 3 the job of the financial sector is to ensure that credit allocation supports this process. however, what seems to have happened, at least in parts of the euro area, is that banks with weak balance sheets have retarded this process. one recent study found that larger banks have reallocated credit away from riskier firms, preventing new entrants, while smaller banks have engaged in so - called ever - greening of loans, inhibiting firm exits. 4 weak banks also appear to have slowed down sectoral reallocation. to give just one example, despite the recent improvements in cost and price competitiveness in greece, the sectoral allocation of credits has not substantially shifted towards export - oriented firms. 5 this suggests that banks in certain euro area countries are not facilitating sufficiently the shift towards more productive sectors. financial sector repair therefore has to be at the core of any policy to raise euro area growth potential. and to ensure that lending is directed towards productive activity, in my view there are two policy priorities. the first is to strengthen bank balance sheets

that global growth will be slightly higher this year compared to the last. hope and confidence are important factors and recent improvements in business and consumer sentiments may well translate into higher investment and consumption. a shift in the macro policy mix in the us, away from excessive reliance on monetary policy towards a bigger role for fiscal support, is to be welcomed. a well - designed fiscal policy can provide some modest stimulus in the short - term but more importantly help to augment the productive capacity of the economy in the long term. a successful outcome could encourage other advanced economies to seek a better balance between monetary and fiscal policies. 6 / 7 bis central bankers'speeches some caution though is warranted. there remains considerable uncertainty as to the actual policy changes in store. they may not pan out as expected. there are serious downside risks on immigration and trade policies. political uncertainties are on the rise, especially in the eu, which has to contend with brexit negotiations and elections in france and germany. populist movements are on the rise in many parts of the world. they could precipitate a more radical shift in policies that could in turn dampen confidence and investment. finally, i have not said anything about the singapore economy. i will leave that to mti ’ s annual economic survey, the report of the committee on the future economy, and the budget statement – all happening next month. suffice to say : the singapore economy is expected to continue on its modest pace of expansion this year. gdp growth is likely to come in the 1 - 3 % range. modern services – including finance, business, and ict – will be supported by continued growth in the region and our growing status as a hub. our trade - oriented industries should benefit from the mild upturn in global and regional electronics. in fact, the strong showing in the last quarter of 2016 indicates that the singapore economy retains the capacity to ride on cyclical upswings in demand for our exports. that is not to say that all is well. economic restructuring remains work - in - progress and we need to do more to raise productivity growth. singapore will not be immune to the global tightening of financial conditions, volatility in capital flows, and potential stresses in the regional corporate sector. but our macro fundamentals are sound and we will weather these storms. and as we continue to invest in the future – in skills, in technology, and in infrastructure, we will emerge a stronger and more dynamic economy. 7 /