To exert vigilance effectively and efficiently the anchoring and monitoring of inflation expectations, particularly on the long end of the time horizon, are both very important. Let me elaborate a little bit on that. We know that excess volatility of expectations can be signalled by abnormal developments in monetary and credit conditions.
This is likely to be the case when unsustainable surges in asset prices – propelled by flights of optimism, and sustained by unanchored expectations – are built on conditions of excess liquidity. The drifting of expectations away from the central bank objective toward chronic inflation or debilitating deflation has historically very often been associated with monetary imbalances foreshadowing and facilitating the process.