and transfers – which may add to inflationary pressures – or on public investment and debt sustainability. as many of the sources of inflation today are on the supply side, government policies that lift supply and redirect investment to where it is needed are necessary to support sustainable growth. the pace of rate increases the second consideration in responding to current inflation is the pace of rate increases. when inflation is high for a long period of time, an important role for monetary policy is to ensure that inflation expectations remain anchored as the shocks work their way through the economy. if expectations become de - anchored and trigger a wage - price spiral, it can lead to inflation becoming persistent even after the shocks disappear. raising interest rates has a mechanical effect on demand and inflation, and thereby on inflation expectations. but when interest rates are starting from unusually low levels, rate hikes are more powerful if they also create signalling effects that influence expectations directly. in this context, especially compared with the traditional focus on 25 basis - point increments, adjusting the pace of rate hikes is a key tool to signal our determination to fulfil our mandate and keep inflation expectations contained. and moving faster at the start of the hiking cycle clearly conveys our commitment to bring down inflation to our medium - term target. at present, inflation expectations remain relatively well anchored across a range of measures. but there are two reasons why it would be unwise to take this for granted. first, the shock is severely affecting the prices of those consumption items, such as groceries and petrol, that have the greatest influence on households ’ inflation expectations. [ 15 ] the ecb ’ s consumer expectations survey shows that, since february this year, both mean and median expectations for inflation three years ahead have risen by around 1 percentage point. second, we are seeing a rapid change in the economic environment, with inflation switching from being very low to being extremely high. history suggests this can leave a scar on expectations. for example, research finds that differences in inflation expectations between people from the former east and west germany can largely be explained by the lasting effect of the inflation shock after reunification. this contrasted strongly with the perceived norm of zero inflation in the german democratic republic and seems to have led former east germans to over - adjust to an environment of rising prices. this imperative to anchor inflation expectations helps explain why, over the last two policy meetings of the ecb ’ s governing council, we raised our key interest rates by 125 basis points in total. this is the fastest

mario draghi : addressing the causes of low interest rates introductory speech by mr mario draghi, president of the european central bank, at a panel on “ the future of financial markets : a changing view of asia ” at the annual meeting of the asian development bank, frankfurt am main, 2 may 2016. * * * the mandate of each central bank is phrased in strictly domestic terms. but in an open and integrated international economy, the challenges we face are often fairly similar across jurisdictions. over the past few years, one particular challenge has arisen across a large part of the world. that is the extremely low level of nominal interest rates. today, 18 % of the global economy, weighted by gdp, operates in an environment of negative central bank policy rates, and the proportion rises to 40 % if we include countries with zero to 1 % rates. very low rates are not innocuous. they put pressure on the business model of financial institutions – banks, pension funds and insurance companies – by squeezing interest income. and this comes at a time when profitability is already weak, when the sector has to adjust to post - crisis deleveraging in the economy, and when rapid changes are taking place in regulation. low real returns also affect the income of pensioners, who are a growing constituency in most advanced economies. their consumption in retirement depends precisely on the return they get on their savings. likewise low rates slow the rate of accumulation of pension assets of those not yet retired, which is again relevant as a larger cohort moves towards retirement. there is a temptation to conclude that since very low rates generate these challenges, they are the problem. but they are not the problem. they are the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy. it is this phenomenon – the global excess of savings over profitable investments – that is driving interest rates down to very low levels. and so the right way to address the challenges raised by low rates is not to try and suppress the symptoms, but to address the underlying cause. this requires that we tackle both the long - and short - term drivers of lack of demand, and that we draw for that purpose on both monetary policy and other types of policy. the long - term perspective from a long - term perspective, nominal bond yields have been on a declining trend in all major economies since the 1980s. this is in part a welcome development, as it reflects the success