a more stable and less crisis - prone global economy. improving the international financial system requires better management of national financial sectors and also enhanced international cooperation and coordination, because in a globalized economy with strong, complex, cross - border linkages, even domestic financial stresses can have serious international repercussions. countries need to work together to ensure that weaknesses in the global financial system are recognized and addressed. i am encouraged by the progress we have made in strengthening the banking sector through the capital and liquidity requirements of basel iii. we have also made important strides in improving international cooperation and coordination in the supervision of systemically important financial institutions, whose operations and exposures span numerous jurisdictions. that said, we need to continue working toward viable resolution mechanisms for these institutions. further work is also needed to improve our macroprudential approach to managing vulnerabilities. and we must collaborate to ensure that risky activities do not migrate to the shadows of the financial system in an attempt to circumvent regulatory authorities. we must also strengthen the international monetary system. we need a system characterized by more open capital accounts, flexible exchange rates, and independent monetary policies. open capital accounts, supported by appropriate financial supervision and regulation, channel savings to their most productive uses, thereby enhancing welfare. exchange rate flexibility improves domestic macroeconomic management, allowing countries to pursue independent monetary policies tailored to their individual needs, and limits unwelcome spillovers to other economies. such a system can also flexibly adapt to changing economic and financial realities as countries develop, technology progresses, and shocks buffet the global economy. our current international monetary system does not yet fulfill these objectives. we now have a hybrid arrangement in which some economies have flexible exchange rates, maintain open capital accounts, and pursue independent monetary policy – a sensible reconciliation of the so - called impossible trinity. but other countries heavily manage their exchange rates, with varying mixes of capital mobility and monetary policy independence. inflexible exchange rates in these countries have tended to inhibit adjustment of unsustainable global imbalances in trade and capital flows. indeed, as i noted, such imbalances appear to have fostered the buildup of vulnerabilities in the run - up to the recent financial crisis. countries with current account surpluses and restricted capital flows have bis central bankers ’ speeches been able to resist currency appreciation for prolonged periods, even when justified by underlying fundamentals. in principle, adjustment of imbalances could occur if countries permitting relatively limited movements in

##fiable objective – namely, to keep average inflation in the euro area below but close to 2 % over the medium term. the rationale behind this objective was explained at the time we clarified our strategy in 2003, notably in remarks by our then chief economist otmar issing. it ensures that inflation remains low enough to avoid distorting the decisions of firms and households in the economy – while preserving a sufficient buffer away from zero. we need this buffer away from zero to provide a safety margin against deflationary risks at the euro area level. it also prevents countries experiencing inflation rates well below the euro bis central bankers ’ speeches area average as part of their adjustment processes from being forced to operate in deflationary territory for protracted period. these considerations are the backdrop against which we decided to cut our main policy rates two weeks ago. the rationale for action the context of this decision was a gradual but sustained downward drift in inflation that we had observed over several months. inflation projections by ecb staff, as well as by other major forecasting institutions, had been revised down repeatedly over the last year – from already low levels. and the process of gradual disinflation did not just affect individual, volatile components of inflation such as energy. instead, it reflected a broad - based reduction in all major inflation components since last summer. the disinflationary trend was further confirmed by the latest yearly inflation figures published by eurostat. these were revised down by almost half a percentage point to 0. 7 % in october. overall, we have been witnessing a disinflation “ in slow motion ” for several months now. and combined with still weak economic and monetary dynamics, the latest data suggest that we may experience a prolonged period of low inflation going forward. so why did we act? it was not because we see deflation risks materialising in the euro area. with the recovery taking hold, we still expect inflation to return very gradually to levels below but close to 2 %. this view is also supported by inflation expectations, which over a longer - term horizon remain firmly anchored at levels close to 2 %. rather, we acted to restore an appropriate safety margin from zero as prescribed by our price stability objective. by rebuilding the safety margin, our accommodative stance also has an important side effect : it facilitates the continuing process of internal rebalancing in the euro area. countries with past competitiveness deficits should accept low inflation rates relative to the euro area average