institution, the ecb, with a clear mandate of maintaining price stability. moreover, the treaty defines a clear and efficient allocation of responsibilities, where the single monetary policy is primarily responsible for price stability, while structural and fiscal policies at the national level are responsible for providing the necessary framework for enhancing potential growth and employment in a lasting manner, objectives for which governments, not central banks, have the appropriate instruments. this clear allocation of responsibilities ensures transparency and accountability, further fostering good policies. i do not think that a fully - fledged political union would necessarily guarantee better economic prospects. in this respect, it is interesting to note that national governments will increasingly be scrutinised, both by the electorate and the capital markets, with comparisons being drawn between the economic performance of the various countries within the euro area. also here, it is the single currency which enhances transparency and thus leads to improved competition with positive effects for all citizens. with a single monetary policy, striking cross - country deviations in real growth and unemployment can no longer be blamed on differences in monetary or exchange rate policies. over time it will become increasingly clear that cross - country differences in economic performance are, to a considerable extent, related to national fiscal and structural policies. this will increase the incentives for carrying out structural reforms. the general comparison between the euro area and the us presented above, obviously, does not do justice to the diversity that exists within the euro area. as the responsibility for structural reforms in the eu and in the euro area rests with the individual member states, a wide variety of institutional solutions and regulatory arrangements across countries and sectors exist. in many areas i consider this decentralised approach to be an opportunity, not a disadvantage. it makes possible healthy competition between differing policy designs of national authorities and enables solutions that are tailored to the particular needs of a country or region. this fact, which is a clear advantage of the euro area economy compared with other more centralised economies, is often not recognised enough. decentralised policies offer a unique opportunity to explore different solutions in a competitive manner, allowing the testing of various approaches and, if thought useful, selection of best practices with a high degree of confidence. fiscal policy is a good example of a field where europe found an efficient solution in the form of common rules which keep the advantages of decentralisation and subsidiarity. as is well - known, budgetary policies remain under national responsibility, but effective common rules have been developed in the form of the excessive deficit

inflation effects. if inflation is higher due to these shocks, but inflation expectations don ’ t move and broader prices and wages don ’ t accelerate, then shocks will have only temporary consequences and we can afford to look through them. if the consequences are that inflation will deviate from the target in a more permanent way, however, then policy should respond. of course, it is difficult to determine if shocks will be permanent. we have forecasts and surveys to help guide our judgement, but these are imperfect tools. furthermore, by the time you have firm proof of second round effects, the policy response is sure to catch out economic agents that have already increased prices, causing economic dislocation. this implies that we need to take into consideration the expected second round price effects of shocks. in late 2015 and early 2016, policy was tightened. we were experiencing large and simultaneous price shocks – a major drought and sustained depreciation. inflation expectations were already close to or above 6 %, and core inflation was over 5 % and climbing. so there was minimal room for error. the inflation forecast showed a protracted breach of the target range. it was therefore likely that without a policy response, inflation would have shifted outside the target range in a more sustained way. the gradual policy adjustments helped prevent this outcome, while recognizing the relatively weak economic environment. we have not had to tighten policy sharply to achieve high real interest rates, as has been necessary in countries such as brazil, russia, ghana and zambia. all this is in the past. the rate hikes from late 2015 and early 2016 are only beginning to affect the economy now. those hikes help explain why inflation is returning to target. any new decisions will shape economic outcomes in about one to two years ’ time. we are therefore focussed on the outlook for late 2017 and 2018. we see the shocks of 2016 dissipating. food price inflation is expected to slow from the first quarter of next year as weather conditions normalise. the exchange rate has recovered some ground, and although its volatility reminds us how rapidly these gains could unwind, the rand has appreciated roughly 15 % against the us dollar from january ’ s lows. accordingly, our forecasts show inflation reaching 5. 5 % by the end of 2018. the mpc noted in the last two policy statements that if these forecasts prove durable, the end of the hiking cycle may be close. one of the biggest questions is over inflation expectations, which remain clustered around