In particular, the employment growth rate has reached levels unknown since the start of the decade, and this has been duly reflected in the indicators of consumer confidence. Overall, the information available suggests the expansionary phase of euro area output will continue over the coming quarters, though possibly at a somewhat lower rate than in the first half of 2006. In any event, around the turn of the year the economic situation will foreseeably be perturbed by the temporary impact of the rise in the main VAT rate in Germany in early 2007. Against this background, medium-term risks of a growth downswing cannot be ruled out if the slowdown in the US economy becomes more intense. Adding to this uncertainty is the possibility that oil prices will resume the upward course interrupted in August and, over a longer horizon, that there will be a disorderly correction of the macro-financial imbalances between the main world areas. The most recent changes in the growth rate of the harmonised index of consumer prices have been much assisted by the marked decline in oil prices since mid-August and by the stripping out of the base effects from the previous year. These factors have meant that, for the first time since early 2005, inflation has stood below 2%, the ECB target (it stood in fact at 1.6% in October). Beyond the temporary variations in this variable, the index that excludes energy goods prices has also performed  BIS Review 117/2006  1  more favourably throughout the year.
2  BIS central bankers’ speeches    Second, monetary policy is about setting interest rates, but also involves observing and analyzing leverage and liquidity. Monetary aggregates as well as the volume and modalities of maturity transformation reveal very useful information on the transmission mechanism. This is actually the conventional wisdom within the Eurosystem, through the use of the second pillar. Although less acceptable outside the euro area, I conjecture that the lessons of the crisis will trigger some rethinking here and there.   Finally, the debate on whether monetary policy should also aim at financial stability must give more consideration to the awkward interaction between instruments and the diversity of accountability regimes. Both create the potential for additional confusion about the ultimate objectives of each policy. It seems to me that most of the discussions are conducted under the implicit assumption that price stability will be as easy to maintain in the next decade as it was in the past. So, there would not be much to lose in “diverting” some of the power and credibility of monetary policy to seeking financial stability. It is very clear that this assumption is severely tested, perhaps sooner than we thought. It will be important, in this environment, to maintain clarity of purpose and robustness in institutional arrangements in order to limit the risk of weakening the benefits of Central Bank independence, which were so hardly won over the last decades. BIS central bankers’ speeches  3