, as a result of a partial spillover of the sharp rise in long - term bond yields in the united states and the release of slightly higher - than - expected real gdp data for the euro area for the first quarter of 1999. however, long - term nominal bond yields in the euro area remain low by historical standards. annual consumer price increases in the euro area rose slightly from 0. 8 % in january 1999 to 1. 0 % in may. this small increase is mainly due to the impact of higher oil prices. excluding seasonal food and energy, which are two of the more volatile components of the harmonised index of consumer prices ( hicp ), the rate of increase in consumer prices has continued to fall slightly in recent months, to stand at 0. 9 % in may. recent forecasts of international organisations for inflation in the euro area over the next one to two years generally point to a range of around 1. 0 - 1. 2 % this year and 1. 4 % in 2000. hence, all available evidence points to the conclusion that both in the short and medium term, price developments should be compatible with the eurosystem ’ s definition of price stability, i. e. with increases in the area - wide hicp remaining below 2 %. against this background, the governing council has decided during its recent meetings to keep interest rates on the monetary policy instruments unchanged. foreign exchange rate developments let me refer briefly to recent exchange rate developments. since its launch in january 1999 the euro has fluctuated significantly against the currencies of our major trading partners but currently stands at a level that is broadly corresponding to the level of its constituent currencies that was observed in summer 1997. this fluctuation has reflected a cyclical divergence between the euro area and the united states that is expected to diminish over the course of this year and thereafter. given that the euro is a currency firmly based on internal price stability, it therefore has a clear potential for a stronger external value. since the start of stage three of economic and monetary union ( emu ) the euro has become the second most important international currency in the world, and the policy of the eurosystem will safeguard its internal purchasing power, which is a basis for a solid and stable currency over the medium term. 2. the eurosystem ’ s monetary policy and fiscal policies of member states i should like to emphasise that the eurosystem ’ s monetary policy strategy is geared towards the maintenance of price

to achieve them is by establishing a stable financial system. of course, there are judgements to be made on what constitutes financial stability, but those are not judgements that should be a product of murky compromises with other objectives. the assessment of the failures of monetary policy in the 1970s should stand as a clear guide as to why we must establish a strong understanding of financial stability as the driving public policy objective for the financial system. the absence of a consensus for low inflation in the 1970s as an objective of public policy led to – and i will tell you the source of this assessment at the end – policy making which lacked the courage and conviction to do what was needed to achieve an objective which in itself was not always accepted as necessary. policymakers did not persist with actions when criticised ( criticism will of course happen ), they tended to give too much weight to perceived political constraints and too little weight to the cost of failure to achieve the objective of policy. they talked tough, but didn ’ t match their words with bis central bankers ’ speeches actions, and their actions in response to criticism tended to be of the “ do something ” variety. and the result was? a policymaking process and institutions with low credibility in the eyes of the public, a very dangerous place to be. now, i haven ’ t made this up, you can read it in one of the best accounts of the failings of monetary policy in the 1970s, the history of the federal reserve by allan meltzer. the reason for drawing this point out is that if the reforms are to work, we must have a clear consensus that financial stability is a goal which will enable other things that improve the welfare of the public to be achieved more easily. so, what does this mean for important aspects of the regulation of the financial system? for microprudential supervision, the proposal is based on the so - called twin peaks model which separates prudential supervision ( one peak, to be in the pra ) from conduct of business and consumer and investor protection ( the other peak, to be in the consumer and markets authority ). one of the very important features of this approach is that it doesn ’ t mean one peak is less important than the other, that is not a consequence of financial stability being a necessary condition for good conduct of business. rather, it should enable each regulatory body to be focussed on its own objective, because it requires different skills and experience to undertake the two peaks. of course, great attention