speak too soon for the wheel ’ s still in spin … … … … … … … …. the loser now will be later to win for the times they are a - changin ’. it is only some months ago that a lot of writers and critics “ prophesized ” that, in an era of globalisation, inflation is, and should not be, a cause for concern among monetary policymakers. with the benefit of hindsight, though, they should have followed bob dylan ’ s advice : “ but don ’ t speak too soon, for the wheel is still in spin ”, as inflation has reappeared on a global scale. moreover, in the face of the global financial turbulence of the past months, the debate in the media has switched from being about a “ goldilocks environment ” to the inherent risks of entering a period of perceived stagflation. considering that “ the times they are a - changin ’ ”, as bob dylan put it, a medium - to longerterm perspective is of the essence. taking such a medium - term view, i have always been one of the sceptics with regard to the “ globalisation = low inflation ” - paradigm, notwithstanding the fact that the notion of “ more globalisation equals lower inflation ” is shared by many observers – or was, at least, shared by them until a few months ago. what is the underlying reason for this widespread assumption? evidently, since the beginning of the 1990s, the ongoing advance of globalisation has coincided with a marked decline in inflation rates and inflation volatility worldwide. it is not surprising that a causal interpretation has been given to these parallel developments with increased globalisation being seen as the agent that has driven down inflation rates. and, indeed, over the past ten years, price rises in manufacturing imports in the euro area have been rather subdued, thus dampening – other things being equal – the increase in the overall consumer price index. at first sight, this seems to support the view of “ opportunistic disinflation ” according to which globalisation has been a key factor in lowering inflation rates. however, the past few months, in particular, have shown that there are obvious reasons why many observers should have been more cautious before drawing such conclusions. in fact, globalisation does not necessarily only have a dampening effect on inflation. to the contrary, the opposite might be the case as well ; globalisation might be a major driver of inflationary pressures. the

credit has slowed down, public - sector demand has accelerated. the european commission projects that the euro area government deficit will increase from 2. 0 % of gdp in 2008 to 6. 4 % in 2009 and 6. 9 % in 2010. the increasing deficit has been met by a strong supply of credit from the banking system. euro area banks have been buying considerable amounts of government bonds over the past few quarters. this has taken place against a steepening of the yield curve. in the third quarter of 2009 the difference between the yield on longer - term euro area government bonds and the threemonth inter - bank interest rate was on average 308 basis points. this is the largest gap since 1980. it suggests that the funding costs for banks have become favourable relative to the yield on longer - term investment such as government bonds. overall, the recent purchases of government bonds by euro area banks have not been out of line with what we would expect, given the current circumstances. historically, bank purchases of government debt securities have shown a strong correlation with the steepness of the yield curve. banks regard the purchase of government bonds as an attractive strategy, for when making such purchases they park liquidity while demand for loans remains subdued and at the same time they make their portfolios less risky. beyond the influence our policy has had on the yield curve, the available evidence does not indicate that our liquidity support has led to excessive purchases of government bonds by banks. to sum up, the divergence between slow credit flow and buoyant trading by the banking system seems to be in line with historical experience under comparable conditions. the current low level of interest rates is consistent with the analyses conducted under the economic and monetary pillars of the ecb ’ s strategy, which point to the absence of inflationary pressures. the question is : how long can low levels of interest rates be maintained without creating distortions in the efficient allocation of funds by the financial sector, and possibly endangering price stability? this is at the heart of the exit strategy. before turning to it, let me make a few remarks about the divergent behaviour within the financial sector, especially in banks. the challenge for other policies as i just mentioned, it is no surprise to see a slowdown in credit flows at the same time as a pick - up in trading. to some extent this divergence is desirable because a sound financial system is the key to a sustainable recovery. still, it might create undesirable volatility in financial markets