Overall, in recent weeks, market expectations have raised the projections of short-term inflation. In addition, in the short term, inflation is affected by supply shocks that can have significant effects. Developments in the international oil market do not help the outlook for domestic inflation. Recent geopolitical tensions in the Middle East, which, among other consequences, led to an embargo on Iranian exports, and a harsh winter in the Northern Hemisphere have made the actual and expected oil price to escalate. The Brent price has risen more than 15% during the current year, while projections taken from futures contracts have also risen and point to an average price for oil of near $ per barrel during 2012. The persistence of a high price always raises worldwide concern because of its implications on inflation and growth. Concerns regarding inflation deal with the direct impact of fuel and energy inflation, and also with the secondary effects that they cause, which could be accentuated in an environment with a narrow output gap. Final thoughts Before I end my presentation, I would like to share some thoughts on monetary policy. As mentioned at the beginning of this presentation, our task as economic policymakers is made more difficult in a more uncertain environment. We make our best decisions based on whatever information is available at the moment. Currently, decision making relies on certain elements that point to opposite directions. On one hand, the international scenario is very complex, even though when compared to a few months back, the tensions seem somewhat smaller.
Monetary stimulus is more effective if, in a deflationary environment, other policies can also give households and firms the confidence that global reflation is in prospect. And structural reforms can boost long-run wealth allowing monetary policy to bring forward spending from future incomes that are real and not ephemeral. All must recognise the imperative of avoiding the global liquidity trap. Not to beggar-thyself via beggar-thy-neighbour. Not to obsess over process at the expense of productivity. But by building resilient domestic demand and sustainable cross border capital flows, we in the G20 can redeem an unforgiving world. BIS central bankers’ speeches  15  Annex  Chart A1 Secular drivers of lower real rates – quantification  Source: Taken from Rachel and Smith (ibid.). 16  BIS central bankers’ speeches