Risks  In the last part of my presentation, I would like to talk about the risks with respect to the inflation outlook in the upcoming period and provide some information pertaining to the probable monetary policy strategy should these risks materialize. The fact that inflation will remain elevated for some time warrants the close monitoring of price setting behavior. The combination of several unfavorable developments, such as  unprocessed food and oil price increases, administered price hikes and base effects has led to a significant increase in inflation since the last quarter of 2009. Although these factors are temporary, they cause headline inflation to significantly exceed the inflation target, leading to an adverse impact on inflation expectations. Apart from items that are directly affected by cost push effects, current pricing behavior does not reveal any deterioration to the extent that might endanger the achievement of medium-term targets. However, I would like to remind you that monetary tightening may be implemented sooner than envisaged in the baseline scenario, should inflation expectations continue to rise and lead to a deterioration in general price setting behavior. Although downside risks regarding global economic activity have been decreasing, they remain a concern. Rising budget deficits and ongoing problems in credit, real estate and labor markets across developed economies continue to pose downside risks for the recovery in global activity. Should the global conditions deteriorate again, and consequently delay domestic recovery, the policy rate may remain constant for a longer period than envisaged under the baseline scenario.

Although the specifics vary across central banks, the approaches outlined have several important common elements. We each have taken actions to provide more financing at terms longer than overnight. We each have chosen to auction funding against a broader range of collateral, collateral other than government securities, and in our case with a broader set of counterparties. And we have activated swap lines to help the relevant central banks provide liquidity in dollars in their markets. The initial spark to the pressures we observe in markets today was the sharp deterioration in the value of nonprime mortgage securities and the resulting increase in uncertainty about the value of a much larger amount of financial assets exposed to that risk. This was magnified by a substantial increase in uncertainty about the economic outlook and the consequences of that uncertainty for asset values and credit losses. Financial institutions faced a sharp drop in demand for a range of assets, impairing the securitization market as a source of funding. And a substantial amount of these illiquid assets were held in vehicles with implicit or explicit liquidity guarantees provided by banks. This produced a large unexpected increase in demand for funding from banks at the same time banks confronted a reduced capacity to raise financing. As market participants have adjusted to what has been a very acute change in expectations about economic and credit risk, they have become more cautious in how they use their liquidity and capital.