25 basis points in the last monetary policy review on 29th january 2013. currently the crr stands at a historically low level of 4 per cent of ndtl of banks and policy repo rate is at 7. 75 per cent. bis central bankers ’ speeches conclusion while i have tried to unravel the inflation puzzle and provide some explanation why inflation remained entrenched despite output gap being negative, we know that sustained level of high inflation is bad for the economy as it imposes real costs which are borne disproportionately by the different segments of the economy. in order to bring inflation down on an enduring basis and anchor inflation expectations there is a need for policy action on several fronts. bis central bankers ’ speeches first, it is important to aim for nutritional security not only to harness the demographic dividend stemming from our sizeable young population but also to contain food prices. this will require addressing the supply - demand imbalance in the agricultural sector and modernising the supply chain. second, concerted efforts are required to secure energy security for the country. the bulk of our fossil fuel requirement is met by imports. a necessary step in this direction is market related pricing of petroleum products to economise consumption and reduce the subsidy burden. this should be supplemented by step up in electricity generation so as to minimise fall back option of diesel generation of power. third, in a supply constrained economy, potential output is not a reliable gauge for inflation threshold as firms operate below capacity and yet retain the pricing power. hence, reliability of power supply and availability of necessary industrial raw materials are important for industrial capacity utilisation and improvement in productivity. besides moderating inflation, this will also reduce reliance on imports of products for which domestic capacity exists. fourth, it is imperative to maintain exchange rate stability to cushion transmission of international price pressures in commodities, particularly crude oil. this will require management of the current account in our balance of payments with the rest of the world at sustainable levels. fifth, fiscal consolidation is important for maintaining both domestic and external balance so that we avoid the risks of twin deficits. as our own high growth experience of 2003 – 08 suggests, lower fiscal deficit not only encourages private investment but also helps in maintaining price stability. finally, while persevering with the steps to increase the depth of the financial market and addressing credit constraints, monetary policy needs to be calibrated to the evolving growthinflation dynamics so that we move towards our potential growth in a non -

of an unduly rigid interpretation of the provisions of the treaty. the application of the maastricht criteria in making this point i am clearly not suggesting, as some academics have done, that the maastricht criteria are “ neither necessary, nor sufficient ”. on the other hand, there are some aspects of the criteria that could legitimately be the subject of reflection. the calculation of the reference value of the inflation criterion is a case in point. over the past few years there has been a debate about how one should define “ best performance ” in relation to inflation and also about the term “ outlier ”. and even about why countries outside the euro area should be included among the best performing countries. this debate appears to have resurfaced again during the preparatory phase of the current ecb convergence report. another, and currently very topical aspect that also has ‘ level playing field ’ connotations is the impact of the ongoing spike in the international oil price. the current reference value for the hicp inflation criterion is influenced by countries whose energy needs are satisfied in varying degrees by non - oil fuels. at the same time, of the nms that would not have satisfied the inflation criterion on the basis of the march 2006 data, some are more heavily dependent on oil imports, so that price levels generally in these countries have been reflecting the higher cost of oil and energy to a much greater degree than is the case in the reference countries. this argument could also apply to malta in the future since not only is oil the sole source of electricity generation, but a high proportion of drinking water needs are also met by the transformation of sea water, a process that involves a high consumption of electricity. the difficulty of controlling inflation in current circumstances is indeed also reflected in the fact that three of the present euro area members exceed the inflation reference value by an average of 1 percentage point, and there is evidence pointing towards a divergence in inflation rates between these countries over the past five years. 9 moreover, the nms have registered rates of inflation between 2002 and 2005 that were around one half those recorded during the preceding four - year period. this is indicative of the significant degree of macroeconomic stabilisation taking place, at the same time that progress continued to be registered in terms of real convergence. in fact, since 2000 real gdp growth in nms was on average more than double that registered in the euro area member countries. these considerations acquire greater significance when viewed in the context of fiscal developments