The achievement of the overriding policy objective: price stability Confronted with a series of adverse exogenous supply shocks (affecting in particular oil prices, food products and services prices) leading to a rise in the HICP of above 2% in year-on-year terms from 2000 to 2002, the level around which the HICP has hovered since, the Eurosystem has been able to achieve its main objective: since the Eurosystem became responsible for monetary policy in the euro area, HICP inflation has averaged 2%, which is near to the “close to but below 2%” at which we aim over the medium term. Let me remind you that HICP inflation was around 4% in the 1980’s and about 9% in the 1970s [see Figure 1]. Until recently, the single monetary policy also succeeded in stabilising and anchoring medium to longterm inflation expectations at around 1.8% to 1.9%, despite all the above mentioned shocks. That is to say, once again, at a level close to, but below, 2% in accordance with our definition of price stability – whether one takes the inflation expectations derived from surveys (for example, Consensus Forecast, or the ECB survey of professional forecasters – [see Figure 2] ) or those drawn from market data, notably index-linked government bonds. Recently, the awareness of a durable higher cost of oil has pushed expectations slightly above 2%. The last December key ECB interest rate’s hike has however brought these market expectations back to 2% that is to say in line with our definition of price stability over the medium term.
In response to the unfolding crisis, Governments and central banks adopted aggressive measures, including fiscal stimulus packages, bank recapitalisations and the provision of government guarantees, and injections of huge amounts of liquidity. It was also important to critically review the legislative and regulatory framework in order to pre-empt the recurrence of, or at least better manage, similar situations. The de Larosière Report, mandated by the European Commission (EC) and published in February 2009, set the scenario for reforms at a European level. Similar work was undertaken at the global level by the Financial Stability Board (FSB) and by the Basel Committee on Banking Supervision (BCBS). This work has clearly showed that the Basel II capital requirements did not ensure an adequate buffer to sustain an institution on a going concern basis. Confidence in regulatory capital waned and the market started to assess bank robustness using other tools. Liquidity measurement, for example, had been largely excluded from Basel II. Some internal risk models were based on short-term statistical horizons that failed to capture periods of stress. The potential of the regime to exert a strong pro-cyclical bias also became manifest. In its efforts to address identified weaknesses, the BCBS issued two consultation documents in December 2009, one on “Strengthening the resilience of the banking sector” and another on an “International framework for liquidity risk measurement, standards and monitoring”. Concurrently, the EC is proposing amendments to the Capital Requirements Directive (CRD) in order to align it with the recommendations of the BCBS.