the bursting of the dotcom bubble, terrorist attacks, geopolitical tensions and a continuous increase in the prices of commodities, notably oil. however, since the introduction of the euro, inflation expectations – notably average long term expectations as measured for example by consensus economic forecast or the survey of professional forecasters - are firmly anchored at a level consistent with the eurosystem ’ s quantified inflation objective of below but close to 2 %. break - even inflation rates, defined as the yield differential between conventional nominal bonds and inflation - linked bonds, are slightly above 2 % but this may reflect risk premia for the latter type of bonds due to liquidity constraints or technical factors. this anchoring of expectations at these levels is of vital importance, as it confirms the credibility of the eurosystem and its forward - looking, medium term orientation and as expectations play an important role in shaping economic dynamics. taking decisions based under conditions of uncertainty is an unavoidable element, and perhaps even a characteristic ingredient, of central banking. this uncertainty stems from two elements. - first, economic knowledge is imperfect. there is no model, however sophisticated, which can faithfully replicate the exact functioning of the economy. more particularly, uncertainty clouds our knowledge of the transmission mechanism from interest rates to prices. this transmission is characterised by long, variable and uncertain lags. our imperfect knowledge of the economy and the monetary transmission mechanism is further compounded by the delays with which economic and financial data become available, and sometimes also by the quality of these data, and this despite all efforts and progress made in the area of statistics. - second, the future is uncertain. economic developments are continuously influenced by a large variety of demand and supply shocks. fiscal policies may turn out different than expected. exchange rates may move by more than warranted by underlying fundamentals. commodity prices not only depend on supply and demand but also on geopolitical tensions. it is therefore a permanent challenge for the central bank to extract relevant information from diffuse data and events and to determine the appropriate path of monetary policy. since the introduction of the euro, the eurosystem systematically analysed and cross - checked economic and monetary information under its two - pillar strategy, in the context of its forward - looking, medium - term framework. • in 2001 the economic outlook deteriorated rapidly and medium - term inflation expectations were in line with the eurosystem ’ s objective. the rapid expansion of m3 during the 2001 - 03 period was not considered a threat

priority and expectations. at the initial stage of development, as is the case now for the asian bond market, government policies and efforts will be important to spearhead the process of growth and development. but once the momentum takes off, market mechanism should take over to ensure that the pace and focus of development are consistent with market expectations. and, at this level, the role of policy should be to support and facilitate market development by streamlining rules and regulations, by facilitating cross - border trade and investment flows, and by providing the necessary financial infrastructure. this approach will help ensure that the region ’ s financial environment remains conducive to private sector activities and participation. let me take the opportunity here to stress that, at this juncture of financial markets development in asia, i think that support from the authorities is still important and remains a crucial factor. but in order to leverage the impact of government ’ s support and involvement to the fullest, it is important for the authorities to be clear and firm on their commitments to develop the markets. government involvement should also be focused and concentrate on issues that cannot be tackled by private market participants. importantly, the authorities should engage the private sector early into the process of market development so that the direction of policy and development is aligned with needs of the private sector. most of the issues that i have raised today are not new, but they are the important ones. again, i will not be surprised if many of you are also having the same thoughts. such convergence of ideas will be good in helping to advance our interest and work on regional financial cooperation. i am confident that we can move forward more rapidly in the direction that will be most beneficial to our economies, while sharing a common vision of greater prosperity and economic well - being for our region. thank you for your attention. 3 / 3