Inflation dynamics are also tangibly weaker than we expected in December. While the most recent wave of disinflation is mainly due to the renewed sharp fall in oil prices, weaker than anticipated growth in wages together with declining inflation expectations call for careful analysis of the channels by which surprises to realised inflation may influence future price and wage-setting in our economy. Therefore, at our last meeting in January we judged that it will be necessary to review and possibly reconsider our monetary policy stance at our next monetary policy meeting in early March, when the new staff macroeconomic projections become available. Strengthening the euro area recovery Our monetary policy is working; and the ECB is willing to contribute its share to ensuring that the recovery remains firmly on track. But there are risks that – if they were to materialise – could undermine its course. The policy challenges we face are fourfold. They relate to: the global environment; the situation of the financial system; the economic and fiscal policies of Member States; and the political uncertainty surrounding the European project. First, as regards the global environment: growth prospects are slowly improving in advanced economies, but the outlook in emerging markets is more subdued. Overall, growth is low by historical standards. Moreover, emerging markets are facing economic and financial risks: some are suffering from structural impediments and macroeconomic imbalances; others have to adjust to lower commodity prices. They remain vulnerable to an abrupt shift in risk sentiment that could tighten financing conditions.

But with hindsight, seen across the world as a whole, there was a case for somewhat tighter monetary policy to prevent the demand for resources outstripping supply (although I would note that our interest rates have been consistently higher in recent years than those elsewhere in the advanced economies). The rise in oil and food prices has appeared as an external pressure on each country on its own but it is not external to us all collectively. A particular problem here – that has yet to be resolved – is the expansion of the dollar bloc. The emerging economies were importing loose monetary policy, which scarcely seemed appropriate to their domestic conditions. However it is hard to believe that a somewhat tighter monetary policy would have been guaranteed to head off the credit boom and subsequent crunch altogether. Put another way, monetary policy is a blunt instrument. To prevent excesses in financial markets, we might have had to generate an unnecessary slowdown in the real economy. I share the view therefore that we have to look for new regulatory measures to complement interest rates. There are a number of specific lessons on regulation which have already been identified. The FSA, for example, is already strengthening its prudential supervision. And internationally, we need to fill gaps in the current framework – for example on mortgage origination in the US, increasing the capital requirements for some credit products and loan commitments, and ensuring that investors and rating agencies assess new products more diligently.