Second, I would like to discuss the economic challenges we face and what it takes to address them. I am acutely aware that the focus of policymakers lies elsewhere for the moment. But let me be quite clear: economic success is also part of the solution in other fields. Therefore, mitigating economic risks deserves to be high on the political agenda. The ECB’s monetary policy: working and still flexible It was about three years ago that inflation started moving away from the ECB’s medium-term inflation aim of below, but close to, 2%. Since October 2013, inflation has been below 1%. Throughout 2015 headline HICP inflation in the euro area was very low or even negative, remaining under the influence of low commodity prices, and euro area annual HICP inflation was estimated at 0.4% in January this year. In parallel to this trend, we had to continually revise our outlook for inflation: while at the start of 2015, our staff was forecasting inflation to reach 1.5% in 2016 and 1.8% in 2017, in December they projected a rate of only 1% for this year and 1.6% for 2017. Against this backdrop, the ECB decided in December to act again. Our assessment of the monetary policy stance had two parts. First, we noted that the measures put in place since the summer of 2014 had been very effective. The monetary stimulus that they introduced led to a broad-based easing of financing conditions, stimulated credit provision, and has since provided substantial support to the euro area recovery.
The Central Bank’s short-term foreign liabilities were close to zero at year-end, where they in fact remain. The Bond Market Bond market reforms were continued in 1997. In 1996, the Central Bank decided to withdraw from the long-term market and reached custodian agreements with three securities firms following a bidding process. The Bank handed over to the firms a part of its securities portfolio and at the same time ceased to be a market maker in government bonds, government notes and housing bonds. The experience from these agreements is positive and they were BIS Review 42/1998  -4-  renewed in March 1997. The new agreements were more extensive than the earlier ones, and in their wake two banks announced that they would engage in market making for certain classes of government securities in the same manner as the custodial firms. It is not unlikely that such custodial agreements will become unnecessary and that the Central Bank will no longer need to be involved in ensuring adequate market making in the long-term market. Both the Treasury and the State Housing Authority began to reorganize the classes of bonds they issue, with the effect of improving the price determination of government guaranteed bonds and raising turnover in the secondary market. The Central Bank’s Monetary Policy Instruments In 1997, the Central Bank began preparing changes to its monetary policy instruments.