covered bonds. how asset purchases contribute to the ecb ’ s objective with our monetary policy decisions in june and in particular in september, we have transitioned from a monetary policy framework based predominantly on passive provision of liquidity to a more active and controlled management of our balance sheet. bis central bankers ’ speeches this means that it is now changes in the size and composition of our balance sheet that determine our monetary policy stance – or to be more specific, the markets in which we intervene, and the magnitude and pace of our purchases. we expect such interventions to affect output and inflation through two main channels. direct pass - through effects the first is by addressing impairments in financial markets that have a direct pass - through effect to the real economy. and this effect will naturally be stronger in those markets that are more important for the transmission of monetary policy. with this in mind, we began our shift to actively deploying our balance sheet by focusing on the abs market, as this was a market that was both impaired and that had a tight link with bank lending, which is the main transmission mechanism of monetary policy in the euro area. this reinforced our overall aim to ensure there are no barriers to credit supply as credit demand progressively picks up. purchases of abs will push down market spreads on senior tranches, reduce volumes available for investors in those markets and thereby encourage banks to relieve this scarcity by originating more abs. as they can only do this by creating more loans in the first place, this ought to increase the supply of credit and reduce the price at which it is granted. the impact of these purchases will be bolstered by the scaling - up in parallel of the tltros. as banks receive cheap long - term funding on the condition that they expand loans to households and firms, the tltro will increase credit supply, which in turn should lead the price of credit to fall in a competitive environment. and both these measures will arrive in the context of the successful completion of the comprehensive assessment, which puts banks in a much stronger position to transmit our new monetary policy impulse. indeed, there is already evidence that in expectation of the roll - out of these measures, banks are lowering lending rates and increasing loan volumes. our latest bank lending survey reported a net easing of credit standards on loans to non - financial corporations and, more generally, suggests we have passed a turning point in credit growth. portfolio balance effects the second channel through which we expect asset purchases to work in the euro area is the broad portfolio

##b have taken several steps to address fragmentation, and the financial situation in the euro area has improved dramatically. spreads on government bonds have fallen on average by 3 percentage points. interest rates on corporate and bank bonds have also converged substantially. and the fragmentation of financial flows across borders has receded, although it is still higher in some markets than it was before the crisis. bis central bankers ’ speeches the process of cleaning up the banking sector has also advanced considerably. in particular, our comprehensive assessment has encouraged banks to frontload their balance sheet repair and recapitalisation efforts, as well as identifying €25bn in capital shortfalls and imposing important prudential requirements. all this increases confidence in the sector and puts euro area banks in a better position to restart lending to the real economy. nevertheless, these positive developments in the financial sphere have not transferred fully into the economic sphere. the economic situation in the euro area remains difficult. the euro area exited recession in the second quarter of 2013, but underlying growth momentum remains weak. unemployment is only falling very slowly. and confidence in our overall economic prospects is fragile and easily disrupted, feeding into low investment. indeed, the latest flash euro area purchasing managers index released yesterday suggests a stronger recovery is unlikely in the coming months, with new orders falling for the first time since july 2013. in this context, the inflation situation in the euro area has also become increasingly challenging. headline inflation has fallen significantly over the last year. last november, it still stood at 0. 9 %. this was low, but it was generally expected to rise safely above 1 % by now. instead, the latest reading for headline inflation is 0. 4 %. this downward movement of inflation was primarily driven by declines in energy and food price inflation, which are two components that tend to be volatile and whose effects are typically temporary. so to some extent the ecb could “ look through ” them. indeed, in our current environment low energy and food prices give valuable support to economic activity by raising real disposable incomes. but we also see that core inflation is low – the inflation rate that strips out these volatile and temporary components. the annual rate of change in core inflation has been consistently below 1 % over the past year, with the latest reading for october at 0. 7 %. a low reading for core inflation for such a period of time indicates that it is not only temporary factors that are operative : underlying demand weakness is also playing a role. indeed, we have clear