This scenario is based on the expectation that the global economy will remain resilient, with the slowdown of economic growth in the United States partly offset by the continued strength of emerging market economies. However, in view of the potential impact of ongoing financial market volatility and re-pricing of risk on the real economy, this assessment remains surrounded by a high level of uncertainty. And in the Governing Council’s view, the risks surrounding this outlook for economic growth lie on the downside. The monetary analysis had confirmed the prevailing upside risks to price stability at medium to longer-term horizons. On the basis of latest available data, covering the period to the end of November 2007, the underlying money and credit expansion remains vigourous, even taking temporary factors into account, such as the flattening of the yield curve, the financial market turmoil and specific transactions associated with the restructuring of certain banking groups. Therefore, monetary and credit developments continue to require very careful monitoring, not least with a view to better understand the response of the private sector to increased financial market volatility. Thus far, there has been little evidence that the financial market turbulence since early August 2007 had strongly influenced the dynamics of broad money and credit aggregates. Indeed, the expansion of loans to households and non-financial corporations has remained robust, which may suggest that the supply of credit has not been impaired.
Second, I would welcome the efforts of the supervisory community, namely through the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors, in keeping each other abreast of developments and in considering jointly possible measures to contain the potential effects of the turmoil. Third, I would underline the importance in stress situations, like the current one, of effective and smooth cooperation and exchange of information between the supervisory authorities and central banks. As to the policy lessons to be learned in order to avoid the recurrence of similar disruptions in the future, I would say that, while it is still too early to draw definitive conclusions, there is a common understanding on the key issues requiring further analysis. In this respect, let me recall a few topics. First, the need for the financial industry to provide significantly more public information about securitisation, credit risk transfer and complex structured products. Transparency appears to be of the essence in order to restore trust and confidence. Second, the need for rating agencies to review their methodologies for complex structured products and to address very seriously potential conflicts of interest. Third, the need for investors to review their investment behaviour excessively reliant on ratings. Fourth, the need for supervisors to implement the new capital framework under Basel II as rapidly and effectively as possible and to reflect on possible improvements of the framework, including the enhancements of the supervisory regime for liquidity risk.