a high level of uncertainty. at the same time, there are still risks relating to a disorderly adjustment of the past accumulation of macroeconomic imbalances, especially outside the euro area. in addition, geopolitical tensions continue to weigh adversely on confidence. indeed, the increase in oil prices over the past few weeks – besides being influenced by temporary supply constraints – reflects the risk of more acute tensions in oil markets in the future, which, in turn, would have a negative impact on the prospects for economic activity worldwide. there are still, therefore, downside risks to the outlook for economic activity in the euro area, although the current low level of interest rates should help to counterbalance these. turning to price developments, according to eurostat's flash estimate, annual hicp inflation was 2. 2 % in december 2002, unchanged from november 2002. due to the increase in oil prices, some renewed upward pressure on consumer prices is likely to have emerged around the turn of the year, and this pressure may have been reinforced by effects stemming from various increases in indirect taxes and administered prices which became effective at the beginning of 2003. at the same time, base effects – relating mainly to unprocessed food prices but, in part, also originating from past increases in services prices – will help to reduce annual hicp inflation figures in early 2003. furthermore, the direct effects of the recent appreciation of the exchange rate of the euro on import prices and their gradual passthrough to the euro area economy should contribute to dampening consumer price inflation. the current subdued pace of economic growth should also contain inflationary pressures. while the significant risks surrounding oil price developments make any short - term prediction difficult at this stage, the most likely outcome remains that inflation will stabilise in the course of 2003 at a level below 2 %. a major condition for this outlook for inflation to materialise will be moderate wage developments. reflecting the rigidities prevailing in euro area labour markets, wage growth remained on an upward trend until early 2002, despite the weakening of economic activity. it is not yet clear whether this trend has come to a halt. wage moderation is crucial for maintaining price stability. furthermore, it would help to improve the prospects for economic and employment growth. an important contribution to strengthening growth prospects in the euro area should also come from fiscal and structural policies. determined reform efforts are needed in these policy areas to increase incentives for investment and employment creation in the euro area. regarding fiscal policy, countries

i will argue that in the vicinity of the effective lower bound for policy interest rates, communication becomes even more important, and while there are similarities to communication further away from the lower bound, there are also peculiar challenges. i said before that monetary policy is transmitted mainly through asset prices. since financial markets exist to price future cash flows, they are inherently forward - looking. this means monetary policy works largely by affecting expectations of future policy interest rates – this is true 1 / 10 bis central bankers'speeches both at, and away from, the effective lower bound. away from the lower bound, monetary policy steers such expectations mainly by sending signals through the current level of central bank interest rates and by communicating on the central bank ’ s assessment of the macroeconomic outlook. 4 at the lower bound, the ability of central banks to ease the stance of monetary policy in this way is constrained. instead, central banks must increasingly rely on influencing expectations directly. this they can do by communicating about the likely path of future policy rates – by providing forward guidance. in other words, the lower bound puts a premium on clear communication not only because it represents unusual circumstances that require the central bank to explain itself carefully, but also because it elevates the importance of communication in the monetary policy toolbox. indeed, with frictionless capital markets, at the effective lower bound forward guidance would be the only way to ease the monetary policy stance. 5 in this setup, central bank asset purchases would be ineffective : whether assets are held on the balance sheet of the public or private sector would not affect term premia and, hence, long - term interest rates. of course we know that capital markets are not frictionless. this opens up an important role for central banks to intervene in asset markets via outright purchases and to act on the term premium. so, forward guidance is one tool, but not the only one, central banks can resort to in conditions where the space for changes in policy - makers ’ traditional instrument – the short - term policy rate – is constrained. the ecb ’ s forward guidance but let me focus on the workings of forward guidance by looking at the case of the ecb. i will start with some general remarks before explaining our current forward guidance framework. 6 for forward guidance to be credible, it ultimately has to be anchored in the central bank ’ s mandate. any pronouncement we make about the likely path of our policy instruments is inevitably based on current information and conveys our assessment of where the