assuming that the three - month libor remains constant at 0. 25 % over the next twelve quarters, and it covers the period from the first quarter of 2011 to the first quarter of 2014. for purposes of comparison, the ( dash - dotted ) green curve shows the conditional inflation forecast published in march, which was also based on the assumption of a three - month libor of 0. 25 %. until the beginning of 2012, the path of the snb ’ s new conditional inflation forecast lies above that of the previous quarter ’ s forecast. this is attributable to the assumption of higher oil prices compared to the previous quarter and somewhat higher import prices. the significant increase in the third quarter of 2011 is due to a base effect, because inflation in the corresponding quarter of 2010 was comparatively low. in addition, a one - off statistical effect can be expected in the third quarter of 2011. this is attributable to more frequent data collection in the case of prices for clothing and shoes ; it also accounted for an increase in inflation in the first quarter. during the course of 2012, the path of the new forecast falls below that of march, due to the slowdown in inflation attributable to the latest appreciation in the swiss franc. towards the end of the forecast period, inflation rises briskly and exceeds the upper bound of 2 %. this shows that the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising price stability in the long term. due to the risks mentioned previously, the conditional inflation forecast is, however, associated with a high level of uncertainty. bis central bankers ’ speeches conditional inflation forecast of march 2011 and of june 2011 percentage change in national consumer price index from previous year inflation forecast march 2011 ( with libor at 0. 25 % ) forecast june 2011 ( with libor at 0. 25 % ) % 2. 5 1. 5 0. 5 – 0. 5 observed inflation june 2011 i nf l at i on q2 q3 q4 q1 q2 q3 q4 q1 q1 q2 q3 q4 q1 2. 5 2. 7 3. 0 1. 6 0. 0 - 0. 7 - 1. 0 - 0. 2 1. 1 1. 0 0. 3 0. 3 0. 6 q2 q3 2. 4 - 0. 5 0. 7 q4 conditional inflation forecast of march 2011 with libor at 0. 25 %

given the lack of harmonisation of national systems, which strongly complicates the resolution of cross - border banks. significant steps are being taken to overcome these shortcomings. i will return to this topic after discussing the implications of deleveraging for monetary policy. monetary policy and the deleveraging process whereas the deleveraging of the banking sector is a necessary process to correct the imbalances built up prior to the crisis and to bring the economy back to strong and sustainable growth path, “ disorderly ” deleveraging can represent a serious threat to price stability. i have already described some of the mechanisms through which deleveraging can spiral off. i would like to now focus on the implications of deleveraging for the transmission mechanism of monetary policy. the financial sector represents a powerful conduit of the monetary policy impulses decided by the central bank – the so - called credit channel of monetary policy. 2 it works mainly through changes in the balance sheet position of banks and ( non - financial ) borrowers, influencing credit demand and supply. when there are significant adverse shocks to the balance sheets of financial institutions, for example because of sharp decreases in the values of assets or because of impairment in funding markets, banks can respond by tightening credit standards applied to households and firms. the transmission of shocks hitting financial institutions ’ balance sheets to the real economy – or originating within the financial system itself – is exceptionally strong if banks are not able to shield credit supply and if borrowers are highly dependent on bank credit to finance investment and consumption. many euro area banks, for instance, have been highly dependent on market funding and have therefore been vulnerable to sudden stops in this source of funding. we also know that in the euro area banks are the main providers of funds no. 1 ; and m. brunnermeier and l. h. pedersen, ( 2009 ) “ market liquidity and funding liquidity ”, review of financial studies, vol. 22, no 6. see bernanke, b. s., and gertler, m., 1995, “ inside the black box : the credit channel of monetary policy transmission. ” journal of economic perspectives 9 ( 4 ) : 27 – 48 and a vast following literature. bis central bankers ’ speeches to the non - financial sector. 3 therefore, the potential for a very large amplification of shocks to the real economy is particularly strong in the euro area. in such situations, the transmission mechanism of standard monetary policy