1/6  BIS - Central bankers' speeches  What I have just described relates to the use of our central bank assets to deliver monetary policy goals. The liability side of our balance sheet is key to monetary policy setting too, through the setting of interest rates. But our liabilities also play a key Financial Stability role, since the level of reserve account balances held by banks at the central bank is a crucial part of their holdings of liquidity. Before the financial crisis, the level of liquid assets, including reserves, was much too low, and this contributed to the scale of the financial crisis. Let me now draw the next set of conclusions and propositions. Both sides of the central bank balance sheet matter for our dual objectives of monetary and financial stability. What is less often said is that post financial crisis, irrespective of QE, a larger central bank balance sheet would have been needed to restore the safe stock of reserves and liquidity buffers. It follows, therefore, that we will not shrink central bank balance sheets to what they were pre-crisis. But at the moment we don't know with any precision where that level of reserves will be, or what the composition of the assets backing those reserves will be. One factor bearing on the equilibrium reserve level question depends on the future mix of banks' liquidity protections, as measured by the Liquidity Coverage Ratio. Take the major UK banks as an example.
Looking ahead, inflation rates are likely to stay clearly above 2% over the coming months. Thereafter, on the basis of the path implied by futures markets for oil prices, inflation rates should fall below 2% in 2012. This pattern reflects the expectation of relatively stable wage growth developments in the context of moderate economic growth. The September 2011 ECB staff macroeconomic projections for the euro area embody these considerations and foresee annual HICP inflation in a range between 2.5% and 2.7% for 2011 and between 1.2% and 2.2% for 2012. In comparison with the June 2011 Eurosystem staff macroeconomic projections, the range for HICP inflation in 2011 remains unchanged, while the range for 2012 is slightly narrower. It is necessary to recall that the staff projections are conditional on a number of purely technical assumptions. The Governing Council views the risks to the medium-term outlook for price developments as being broadly balanced. On the upside, the main risks relate to the possibility of higher than assumed increases in oil and non-oil commodity prices as well as increases in indirect taxes and administered prices, owing to the need for fiscal consolidation in the coming years. The main downside risks relate to the impact of weaker than expected growth in the euro area and globally. Turning to the monetary analysis, the annual growth rate of M3 was 2.0% in July 2011, after 1.9% in June. The annual growth rate of loans to the private sector was 2.4% in July, after 2.5% in June.