core inflation was concerned. the projection of the head line inflation, however, was systematically too low, because – among other reasons – the scale of the pass - through of past energy or commodity price shocks into output prices has been underestimated. secondly, upward risks to headline inflation stem from pronounced base effects. base effects occur when variations in the annual growth rate of the hicp are the result of an atypical movement in the index in the base period. they tend to be particularly influential during periods when inflation volatility 12 months earlier was high, for example as a result of sharp movements in commodity prices. it is expected that 2011 will benefit from negative cumulative base effects from energy and food in 2010 of up to 0. 7 percentage points. thirdly, the choice of leading sub - indicators is a tricky one. let me give an example. in recent years energy prices, namely for crude oil, contributed to an increasing extent to the volatility of headline inflation. there is, in fact, not just one price for “ oil ”. traditionally west texas intermediate ( wti ) commands a higher price than brent crude. most recently the price differences between the two benchmark sorts of crude oil showed anomalies : on 1 march, wti was trading around 100 us dollar per barrel, while brent was at 114 us dollar per barrel. while this huge difference could be partially explained by regional factors like the cold winter in europe and the large stock of wti oil in the us, the reliability of these prices to signal global scarcity can be questioned. fourthly, one major driver of inflation is the dynamics of the economy. to measure the slack in the economy, the deviation of aggregate demand from the economy ’ s potential supply – the so - called “ output gap ” – is often seen as a helpful guide for policymakers. on this logic, inflation rises, when aggregate demand exceeds potential output. however, the concept of a stable relationship between output gap and inflation is not only frequently challenged in theory but also hard to apply in practice. the operational appropriateness of the output gap as a guide to policy is limited by the availability of reliable real - time estimates. for example, estimates of the euro area output gap, as published by international organizations from 1999 to 2004, underwent significant revision. some revisions matched or even exceeded the original estimate of the gap itself. bis central bankers ’ speeches complexity has increased further because of the financial crisis : in this context, the crisis has had

mario draghi : hearing before the plenary of the european parliament on the occasion of the adoption of the resolution on the ecb annual report 2012 introductory statement by mr mario draghi, president of the european central bank, at a hearing before the plenary of the european parliament on the occasion of the adoption of the resolution on the ecb annual report 2012, strasbourg, 12 december 2013. * * * president, honourable members of the european parliament, i am very pleased to take part in this debate on the ecb annual report 2012. today is the last time in this legislature that i participate in the plenary. this represents a good opportunity to take stock of the progress made over the past few years in strengthening the resilience and stability of the euro area. to introduce the debate, i would first like to review the more recent ecb ’ s monetary policy decisions. i will then address institutional matters of particular interest to your house as well as the progress made so far in reinforcing emu governance. i will thereby address most of the issues which the econ committee highlighted in its draft resolution on the ecb annual report. ecb ’ s monetary policy let me begin by describing the economic environment of the past years. the economic recovery that followed the post - lehman global recession of 2008 – 09 was aborted in the euro area as the sovereign debt crisis took hold. financial stability was threatened ; the viability of banks that had survived the first phase of the crisis was called into question. credit was curtailed and the recession that ensued has lasted until the first quarter of this year. since then, we have been experiencing a weak recovery. weak economic activity and high unemployment have resulted in a subdued inflation. against this backdrop, and in respect of our price stability mandate that was assigned to us by the treaty, we have lowered our key interest rates to historically low levels. to clarify the orientation of our monetary policy going forward in an exceptionally uncertain environment, we introduced forward guidance in july 2013 : we stated that we expected key interest rates to remain at present or lower levels for an extended period of time. that statement was conditional and based on an overall subdued outlook for inflation extending into the medium term, given the broad - based weakness in the real economy and subdued monetary dynamics. in november we acted upon that conditional pledge by reducing two of our key interest rates, as price pressures have diminished further and we anticipate inflation weakness to be protracted. in keeping with these anticipations,