Since our forecast of June 2001, the world economy has moved towards recession. Short-term inflationary pressures have subsided considerably. On the assumption that the three-month Libor rate will remain stable at 1.75% during the next three years, inflation should amount to 0.9% in 2002, move up to 1.3% in 2003 and reach 1.5% in 2004. The fluctuations in the anticipated 2002 inflation rate are due to basis effects that do not reflect the inflationary trend. Inflation is expected to remain within the range of price stability throughout the forecasting period. From mid-2002 on, however, it will follow a slight upward trend through the rest of the forecasting horizon. This slight rise in anticipated inflation is attributable to two factors. First, the world economy will recover in due course. Second, Swiss monetary policy at a constantly low interest rate - which is currently 1.5 percentage points lower than in the June 2001 forecast - will tend to have an increasingly expansive effect as time passes. These two factors combined will cause inflation to rise somewhat over time. Our forecast is based on the assumption that the US economy will remain in recession until mid-2002 and will subsequently gradually return to its potential growth path. In Europe, the economy will presumably stagnate until mid-2002 and pick up momentum afterwards. We expect the US dollar to remain roughly at its current level vis-à-vis the euro. The forecast assumes that today's relatively low oil prices will eventually climb back slightly.
Even if the ability to provide liquidity assistance is limited, like in case of currency board, central banks take – or are even supposed to take – a leading role in crisis resolution. Thirdly, central banks are often responsible for regulating the banking system. That is also the case in Estonia, even after the reorganisation of the supervisory function has been completed. Bank of Estonia is responsible for banking regulations while the Ministry of Finance will regulate insurance and securities market. From the central bank's point of view, the banking regulatory policy goes somewhat beyond the traditional micro-prudential approach that is basis for Basle capital accords. The equally important question for central banks is to what extent the banking policy depends on the general macroeconomic conditions or to put it simply, should regulatory changes take into account business cycles or should they be guided solely by concerns on micro level. III. Early warning systems and macroprudential analysis  Let me now touch upon these three broad categories in more detail. Estonian experiences and the regulatory questions lead me directly back to the first main task – efficient monitoring and analysis. For us, the harsh lessons from late nineties have underlined the need to better understand the key vulnerabilities in financial system. This task has become even more pressing now when Estonian banks have become an integral part of major Scandinavian financial groups.