so we have to be mindful not to exert an undue influence on price formation. another potential complication relates to our public sector purchases. a key safeguard that we have set up for these purchases is to operate so - called “ blackout periods ”, where we do not buy around the date of a new issuance. this facilitates price formation and ensures that article 123 of the treaty – the monetary financing prohibition – is fully respected. conclusion the economic recovery in the euro area has been better than expected and employment has risen strongly. both wages and underlying inflation appear to have turned the corner. all the conditions are in place for a sustained adjustment in inflation towards our aim. so it ’ s just a question of time now. more haste, less speed, however. the improving inflation trajectory means that we can gradually scale back our net purchases and keep monetary policy sufficiently accommodative to continue to support the convergence of inflation towards our aim. we will continue to monitor developments in the economy and set policy in a way that remains consistent with our price stability objective. in doing so, we must also take into account the balance of risks. if we withdraw our monetary policy stimulus too early and too fast, asset prices could collapse and yields rise sharply, with negative spillover effects to the economy. if our asset purchase programme continues for too long, the side effects will increase. and if we nourish a market belief that the exit might be permanently postponed, potential cliff - edge effects could be exacerbated. we are pursuing a credible prospect for the exit to keep these risks contained. see mersch y., “ economic policy and the need for humility ”, speech at the conference “ banking and financial regulation ”, bocconi university, 9 october 2017. 2 bartelsman e., lopez - garcia p. and presidente g., “ cyclical and structural variation in resource reallocation in europe ”, mimeo. 3 see e. g. gopinath g. et al, “ capital allocation and productivity in south europe ”, nber working paper no 21453, 2015 ; borio c. et al, “ labour reallocation and productivity dynamics : financial causes, real consequences ”, bis working paper no 534, 2016 ; andrews d. and petroulakis f., “ breaking the shackles : zombie firms, weak banks and depressed restructuring in europe ”, oecd economics department working paper no 1433, 2017

the financial sector. banks could be hit hard as funding costs rise faster than interest income on outstanding loans. but it may also be the case that the impact of these factors has already been felt, and inflation could turn out higher than we expect over the course of the year. we would find ourselves behind the curve – and realise it – and we would have to adjust our forward guidance. this forward guidance was put in place to stabilise market expectations and to enhance the effectiveness of our asset purchases. we do so by indicating that interest rates will rise only when we are well past the horizon for asset purchases. prolonging asset purchases pushes out market expectations of a rate rise and pushes down interest rate expectations across the entire curve. of course, the effectiveness of our forward guidance also relies on our credibility. 3 / 5 bis central bankers'speeches in effect, forward guidance is a promise not to react to short - term data outturns in the future so as to persuade markets to expect interest rates to remain low. but if we offer guidance that extends too far into the future, it risks unduly tying our hands. this is a particular risk at present since, as i mentioned earlier, future increases in interest rates need to be gradual. moving late could result in policy remaining too loose for too long. the time will come this year to make further gradual adjustments to our monetary policy stance in line with our confidence in achieving our objective ; market expectations are appropriate in this regard. we should then certainly reflect at length on the degree to which we wish to pre - commit ourselves. the second risk for monetary policy relates to the side effects of low interest rates. our measures have considerably improved financing conditions for households and firms, and have unblocked the flow of credit. yet easier financing conditions may encourage investment in projects that are only profitable at low interest rates, and such loans risk turning sour as interest rates rise. indeed, banks and investors may be tempted to “ search for yield ”, without being adequately recompensed for the risk they are taking on. our mandate is to deliver price stability. ensuring financial stability risks are adequately contained is the role of banking supervision and macroprudential policy. while there is no evidence at present of asset price bubbles in the euro area, there are some notable localised pockets, such as in commercial real estate, and signs of “ search for yield ” behaviour. the financial crisis showed how such risks can interfere with the smooth operation of monetary policy through