Finally, special attention will have to be paid to the incoming data from the financial sector in order to closely monitor the impact of recent events and tensions. The implications of recent financial sector tensions have been contained so far. But, if these tensions persist or intensify, a scenario could materialise of significantly tighter credit and financial conditions and worsening confidence, with downward effects on economic activity and prices. In this respect, special attention will have to be paid to data on the supply of bank credit, as measured for instance by the BLS. Conclusions Let me conclude by highlighting two main takeaways from my words today. First, at the ECB Governing Council we stand ready and have the instruments available to respond as and when necessary to maintain price and financial stability in the euro area. Second, in March we took a further step in the process of adjusting the monetary policy stance to the euro area inflation outlook, but uncertainty is high and future decisions will continue to be data-dependent. Inflation in the euro area is slowing and will continue to do so markedly in the coming months. But there are factors affecting underlying inflation that may delay its return to the 2% target in the medium run and that we will therefore monitor closely going forward.
Moving up the risk spectrum, the price of both investment and sub-investment grade corporate bonds has risen since March last year, by 20% and 60% respectively. Global equity prices have risen by over 70% over the same period. The rise in UK equity prices is one of the largest in the 316-year history of the Bank of England (Chart 4). Residential and commercial property prices in the UK have turned. And global wealth losses on private sector securities, at around $ trillion, have fallen by a factor of four over the past year alone. What explains this remarkable recovery in risky asset prices? Three factors seem to have been important, all of which can be traced to policy actions by the authorities:   First, the rate at which the future cashflows on risky assets are discounted has fallen due to lower short and long-term global real interest rates. Using a standard asset pricing model, this discount rate effect accounts for perhaps around one fifth of the rise in UK and euro-area equity prices and one third of the rise in US equity prices since March last year (Chart 5).   Second, as fears of a repeat of the Great Depression have abated, the premium that investors require to compensate for this risk – the risk premium – has fallen, boosting expected future cashflows on risky assets. This more than accounts for the rise in UK and US equity prices over the past year (Chart 5).