The main risks currently being considered by the Central Bank are: (1) an eventual propagation of food and energy price shocks to inflation dynamics, in the context of a closing output gap and transitory high inflation rates. This propagation could be materialized via rising wages, due to wage CPI indexation and a reduced unemployment rate; or via rising medium and long-run inflation expectations that significantly could diverge from the inflation target; (2) larger adjustments in global financial markets, with more severe consequences for world growth and commodity prices; (3) signs of more rapid moderation of internal GDP growth dynamism, beyond expected. In particular taking into account these risks, the Central Bank continues conducting the course of monetary policy according to its constitutional mandate to safeguard price stability. Yves Mersch: Recent financial market developments Speech by Mr Yves Mersch, Governor of the Central Bank of Luxembourg, at the 50th anniversary of ACI Luxembourg, Luxembourg, 12 October 2007. 4  BIS Review 120/2007  *  *  *  Since my first invitation to an ACI event as a speaker a few months after assuming my first mandate 9 years ago, the markets have undergone many turbulent sequences, although I could not detect a correlation between market upheavals and my regular appearance at ACI events. Let me therefore thank the Luxembourg chapter for inviting me again today. I feel honoured.
Broadly speaking, we believe that this goal was attained. The current circumstances are different. Once again, we are facing a crisis which could adversely affect economic activity and agents' income. However, this time, some loss of income is inevitable, insofar as it is caused by the rise in the prices of goods that we do not produce. Attempting to avoid the adjustment that is needed will only trigger a more persistent and protracted inflationary process, with very negative consequences for competitiveness and economic stability. A different monetary policy response is therefore needed. I will now address the role of each area of economic policy in the current setting, beginning with monetary policy. ECB monetary policy The ECB is responsible for maintaining price stability in the euro area. That is how it can best help ensure sustainable economic growth over the medium term. To explain the ECB's response to this inflationary episode, it is useful to remember that it defines price stability as a symmetric inflation target of 2% over the medium term. The aim is therefore not to stabilise current, observed inflation, but to stabilise inflation over a two to three-year horizon. This is justified because our actions affect inflation in a very gradual way, achieving their maximum impact after about two years, and is particularly appropriate in the face of certain kinds of shocks – such as adverse supplyside shocks, which push inflation and activity in opposite directions in the short term.