kemal kozaric : launch of the eurosystem needs assessment program speech by mr kemal kozaric, governor of the central bank of bosnia and herzegovina, at the signing of a protocol between the european central bank, the delegation of the european commission in bosnia and herzegovina and the central bank of bosnia and herzegovina, sarajevo, 16 february 2007. * * * mrs. tumpel - gugerell, mr. lys ladies and gentlemen, i have a great pleasure to welcome you today in the central bank of bosnia and herzegovina and to announce the signing of protocol among the european central bank, on behalf of the eurosystem, the delegation of the european commission in bh and the central bank of bosnia and herzegovina. first of all, i would like to welcome all the representatives of the european central bank and the partner central banks included in the program – deutsche bundesbank, eesti pank, bank of greece, banco de espana, banque de france, banca d ’ italia, oesterreichische nationalbank and banka slovenije, then, the representatives of the delegation of european commission in bh and the resident program coordinator, mr. santiago fernandez de lis. i also wish to welcome the resident representative of the world bank office to bh, mr. dirk reinermann and the state minister of finance and treasury, mr. dragan vrankic. with today's signing of the protocol among the european central bank, the delegation of the european commission in bh and the central bank of bosnia and herzegovina, we are officially marking the start of eurosystem needs assessment program to the benefit of the central bank of bosnia and herzegovina. this program, which will be funded with euro 300. 000 by the european union, identifies the areas in which the central bank of bosnia and herzegovina should achieve progress, in order to have its own standards adjusted with those adopted in the european system of central banks. on this occasion i would like to thank to the delegation of the european commission to bh for its contribution in the realization of this program. i also thank to the european central bank, which has recognized the central bank of bosnia and herzegovina as the institution ready to accept the european standards and to adjust its rules, policies and practice to the european ones. we are very happy that the central bank of bosnia and herzegovina, by joining this program, will receive such kind of assistance from the european central bank and other partner central banks.

ecb ’ s institutional structure also facilitates transparent policy - making and the communication of policy decisions to the general public and financial markets. that this communication has been successful is supported by some evidence suggesting that the ecb ’ s focus on a quantitative definition of price stability has influenced price and wage setters in the euro area. although prices tend to move very sluggishly in the euro area compared to, say, the us, inflationary shocks dissipate at a similar rate to the us – the extra rigidity in the euro area is offset by the benefits of the effectiveness of monetary policy in anchoring euro area inflationary expectations16. so what does the foregoing analysis imply for policy prescriptions now? as inflation expectations appear to be appropriately anchored, it may be tempting for policy - makers to follow an accommodative monetary policy, riding the back of increased credibility. however, an accommodative monetary policy would not be a prudent prescription since the inflation expectations of economic agents may rise, ending the period of low inflation expectations. indeed, if inflation expectations depend not only on current inflation, but also on average inflation in an earlier, higher inflation, regime, a large and persistent shock, such as a negative energy supply shock may well lead economic agents to raise their expectations that the monetary authority will shift to a higher inflation regime17. the credibility that monetary authorities have gained so far must not be jeopardized by loosening the tolerable inflation range. a credible central bank can help stabilize the economy during this oil shock without moving to a higher inflation target. indeed, the credible central bank can take advantage of its credibility during an oil price shock because it faces less of a trade off between inflation and output than a less credible central bank. this situation enables the credible central bank to counter the shock through a smaller tightening of monetary policy than would otherwise be the case because the dynamics of inflation due to expectations are self - contained18. in the specific case of the ecb, credibility and well - anchored inflationary expectations have allowed monetary policy to be quite accommodating despite actual inflation at or above 2 % for more than two years. more recently, however, there have been potential upside risks to inflation stemming from both real economic and monetary developments. as a consequence, the ecb has acted to preempt any unfolding of these upside risks by withdrawing monetary accommodation. this circumstance underlies the rising rates in the euro area during the past year.