altered projections of policy revision by key central banks are associated with downgraded next year growth forecasts for major economies. also, the current standstill in trade disputes may merely prove a temporary truce. these risks are quite tangible for emerging market economies. second, we have here the oil glut risk in 2019. this is partially associated with a downward revision of the global demand outlook. however, the main reason is an aggressive expansion of oil production in the us. in early december, opec and other oil exporters agreed to cut production in 2019. however, the developments of this year demonstrate that producers can rapidly ramp up shale oil production when prices are high. another considerable external factor is geopolitical risks affecting both russia and other 1 / 3 bis central bankers'speeches countries and regions. as far as internal factors are concerned, here we have persistent uncertainty over the price response to the vat rate hike, the effect of this year ’ s weakening in the ruble on inflation, and its effect on inflation expectations. it means that the uncertainty over price movements is associated with both an estimated direct effect of proinflationary factors and the scale of secondary effects dependent on inflation expectations. thus, our baseline scenario assumes that the vat rise will contribute approx. 1 pp to inflation. however, the possible estimates of this contribution range between 0. 6 and 1. 5 pp. the scale of secondary effects is still harder to estimate. even a temporary acceleration of price growth raises inflation expectations of both households and businesses. we saw it from the surge in petrol prices registered in may - june this year. petrol prices have been stable in the second half of the year. however, surveys suggest that russians are highly concerned about the rise in petrol prices. inflation expectations remain unanchored. this means that they are highly likely to go up in response to price growth following the vat rate hike. therefore, we cannot consider the vat rate revision as a purely one - off factor. elevated inflation expectations may change consumer behaviour and reduce the propensity to save. in these circumstances, firms will have an opportunity to raise retail prices even when the effect of one - off factors is exhausted. if this spiral is set off, inflationary pressure will rise and inflation may hold above the 4 % target for a long period of time. this will require a considerable and enduring monetary policy tightening. the task is to reduce as much as possible the risks of this scenario materialising. in addition, full

significantly improved since the peak of the crisis. the recovery has strengthened and broadened across sectors and countries and the balance of risks is within a whisker of being called balanced. growth of gdp per capita was in fact higher in the euro area last year than in any other major advanced economies in the g7. and unemployment has declined to 9. 5 % in february 2017, the lowest level since may 2009. the output gap should be closing within the policy horizon ; nairu at the same time has been revised downwards – for those who love unobservables. but to reap the full benefits of our monetary policy, it needs to be complemented by sound economic and fiscal policies at national and european level. to the extent that fiscal 1 / 3 bis central bankers'speeches and economic policies did not provide the necessary cyclical support and tackle decisively enough structural drivers of the crisis, the monetary policy reaction is more extended and forceful with the negative consequences as would have been the case in a healthier environment. therefore, there is a need to improve economic and fiscal policies. this implies both more decisive action by national governments and full implementation of the strengthened institutional framework of economic and monetary union. the improved financial and economic architecture of emu since the onset of the crisis, many of the shortcomings in the financial and economic architecture of economic and monetary union have indeed been overcome. economic governance has been strengthened by enhancing the stability and growth pact whilst introducing a framework for macroeconomic surveillance to identify and address macroeconomic imbalances as well as declining competitiveness through the so - called six - pack and two - pack. further steps were also taken towards improving budgetary coordination among member states. however, the preventive arm of the stability and growth pact has proven to be dysfunctional. the creation of the european stability mechanism ( esm ) provided a tool for crisis resolution at european level. the establishment of banking union was a further essential step for safeguarding financial stability in europe. regarding the regulatory treatment of sovereign exposures, it was agreed to await the outcomes of the basel committee. following the work of the basel committee the council will consider possible next steps in the european context. in the long run we certainly need to realize that a zero - risk weight for sovereign cannot hold a reality check. moreover, the acknowledgement of sovereign debt restructuring as a real possibility requires deeper reflections on sovereign debt restructuring mechanism for the euro area and would underpin the credibility on of the no bailout clause