In this respect, should the recovery in domestic economic activity turn out to be faster than expected, the limited monetary policy tightening implied in the baseline scenario could be implemented earlier than envisaged. The fact that inflation will rise in the forthcoming period due to base effects and public price adjustments, poses an important risk factor through its potential impact on inflation expectations. Several adverse factors such as food and oil price increases, base effects and administered price hikes have brought about upward movements in inflation since the last quarter of 2009. Although these factors are temporary, they are likely to cause headline  16  BIS Review 31/2010  inflation to stay at elevated levels for some time. It is crucial that economic agents fully understand the temporary nature of these developments while forming their medium- and longer-term expectations. Under the assumption that resource utilization would remain low, labor market conditions would have an adverse impact on consumption expenditure, and fiscal policy would generate a gradual depressing effect on the economy, these temporary factors as well as other one-time cost push pressures would not lead to a significant deterioration in general pricing behavior. Currently, the annual rate of increase of services prices and core inflation are consistent with medium-term inflation targets, and no serious risk of pass-through is observed. Therefore, it is foreseen that policy rates would be maintained at low levels for a long period.
The second condition may be even more stringent. Ultimately, what makes a reserve currency is the ability to serve unconditionally as a store of value. The country must therefore develop deep, liquid and unfettered financial markets. It also entails an ability to offer “benchmark” safe assets that keep their value in all circumstances, and may serve as vehicles for reserve accumulation. Typically, only government debt will be used as a reserve asset. So, being a reserve currency also means that “foreigners” will permanently hold a large part of Government debt and their judgment will ultimately prevail as to the true solvency of the Government. Being a reserve currency therefore implies constraints as much as it brings benefits. That may be the reason why countries, including China, would proceed cautiously on the road towards full reserve currency status. There is a distinction between being a reserve currency, on the one hand, and a global currency, on the other. The first concept refers to the currency as a store of value; the second may concern only its role as a medium of exchange. These are two different attributes. A currency may be widely used in transactions without being considered for reserve accumulation. This distinction maybe relevant when looking at the composition of the special drawing rights (SDR). As you know, this is the “basket currency” that serves as a unit of account for the IMF and, to a limited extent, as medium of exchange between its member countries.