of the last hearing ) and inflation a little below 2 per cent ( enough to justify the may and july easings in monetary policy ). the picture was not all rosy - - the slower output growth of 1996 was still making its presence felt in the form of sluggish employment growth in the first half of 1997, there were some doubts about the strength of investment, and the effects of el nino were around the corner. but economies nearly always present a mixed picture, and this mixture was a lot better than most. in addition, financial conditions had become clearly easier than in may. the overnight cash rate had come down from 6 per cent to 5 per cent as a result of the two easings of monetary policy, and yields on 10 - year bonds were down from 7¾ per cent to 6 per cent. the exchange rate against the us dollar has come down from 77. 7 us cents to 70. 3 us cents ; against the trade - weighted index, it has come down from 60. 2 to 57. 0. i come now to the point where i should say a few things about what has been happening in asia and the rest of the world. i will do my best to be specific, but you should bear in mind that the ground is constantly changing. the first thing i would like to say is that in the long run i am still very optimistic about asian growth prospects. these countries still retain a set of characteristics that are conducive to long - run growth : • they can still achieve rapid productivity growth through technology transfer, i. e., they have started from a long way behind and have a fair way to go ; • they are oriented towards international trade ; • they have high savings rates and high investment and a relatively small government sector ; • they have generally sound fiscal and monetary policies - - although they have got some way to go in terms of the soundness of their banking and financial sectors ; and • they have great respect for, and devote considerable effort to, education. i do not see the end of the asian miracle, partly because i do not think it ever was a miracle ; it was just the application of some tried and tested rules of good economic policy. it is still fortunate for our long - run prosperity that we have strong links to asia. having declared my optimism about the long run, i should now turn to the short run. clearly, there are going to be difficulties here, in particular among four asean countries - - thailand, malaysia

monetary situation. i will then address the relationship between monetary policy and financial supervision. and i will close by outlining my views on the priorities for 2013 in implementing the shared longer - term vision for emu. 1. economic and monetary developments since our last meeting, the ecb has left its key interest rates unchanged : the main refinancing rate stands at 0. 75 % ; the rate on the deposit facility at 0 % ; and the rate on the marginal lending facility at 1. 50 %. bis central bankers ’ speeches on non - standard monetary policy measures, the governing council decided in december to continue conducting all refinancing operations as fixed rate tender procedures with full allotment, at least until july 2013. the medium - term outlook for economic activity remains challenging. economic activity contracted for a second consecutive quarter in the third quarter of 2012, and indicators for the fourth quarter signal further weakness, although some recent survey indicators have stabilised at low levels and financial market sentiment has improved further. domestic demand is dampened by still weak consumer and investor sentiment and the ongoing balance sheet adjustments in the banking and business sectors, which continue to weigh on investment decisions. we expect economic weakness to extend into next year with a very gradual recovery in the second half of the year. the recovery is expected to be supported by strengthening global demand, a highly accommodative monetary policy stance and significantly improved confidence in financial markets, all of which should work their way through to spending and investment decisions. annual inflation in the euro area has continued to moderate, falling from 2. 5 % in october to 2. 2 % in november. looking ahead, inflation is expected to decline further. this should support real disposable incomes. risks to the outlook for price developments are broadly balanced. inflation expectations for the euro area remain firmly in line with the governing council ’ s aim of maintaining annual inflation rates below, but close to, 2 %. our monetary analysis paints a picture consistent with price stability. looking at developments over several months, the underlying pace of monetary expansion, when accounting for special factors, remains subdued. loan dynamics are also subdued and in many parts of the euro area, credit has been contracting. this is the result of balance sheet adjustments by banks and businesses as well as the current economic weakness. 2. monetary policy and financial supervision let me now turn to the first topic chosen for our exchange of views, namely the relationship between monetary policy and financial supervision. the discussions leading to the