athanasios orphanides : the role of central banks – lessons from the crisis panel remarks by mr athanasios orphanides, governor of the central bank of cyprus, at the vith international symposium of the banque de france on “ which regulation for global imbalances? ”, paris, 4 march 2011. * * * the topic of this session is lessons from the crisis, specifically regarding the role of central banks. let me start with a question : how do we learn in our profession? the answer, i believe, is that our main guide is history. indeed, one of the many differences between central banking and the natural sciences is that in central banking, unlike the natural sciences, we cannot run controlled experiments to improve our knowledge. as a result of the crisis, we are experiencing a unique natural experiment to draw lessons from. i fully expect this episode, which unfortunately is still mutating and evolving in some areas, to provide material for myriads of phd theses and other studies for decades to come. what do we mean by “ lessons ” for the role of central banks? lessons in the sense of learning things we did not know? or in the sense of reaffirming things we knew? in my view, we have some of each but, in addition, we have seen an evolution in the consensus views on familiar questions. let me focus on just a few1. * * * the crisis has reaffirmed the benefits of an independent central bank focused on maintaining price stability and safeguarding well - anchored inflation expectations in line with price stability. the focus on price stability yields gains in credibility and allows central bank flexibility as well as the ability to act decisively when needed on other issues. as an example, let me remind you of the decisive provision of liquidity in august 2007 and later in september 2008. another example is the decisive policy easing in response to the crisis. the risks of deflation were greatly reduced because inflation expectations over the medium term remained wellanchored, in line with our definition of price stability2. the new spike in energy prices, that reminds us of the spectre of stagflation risks, once again reaffirms how important it is to act decisively to ensure that inflation expectations remain well - anchored to preserve stability. * * * another lesson reaffirmed is that monetary policy is not just about setting policy rates. even though the academic consensus was converging to this view before the crisis,

the existence of spare capacities in the economy even during 2011 suggests that the albanian economy will continue to operate below its potential, generating weak inflationary pressures by the internal demand. on the supply side, increasing productivity during 2010 q4 and a slower rise in unit labour cost, generate lower inflationary pressures from the labour factor. inflationary pressures over the level of domestic prices, which come as a result of fluctuations in the prices of oil and food items in international conjunctures, are estimated to be present during the current year, but with a continuous downward trend. due to the aggravated geo - political situation in the world, the uncertainty that surrounds these expectations remains high. the absorbing capacity of the domestic economy to these shocks and avoidance of steady pressures on inflation will be a function of the albanian economy performance and the control of agents ’ inflationary expectations. monetary indicators performance has reflected a slowdown of the money supply over the first two months of the current year, confirming contained monetary inflation pressures. the m3 aggregate marked an annual average increase by 11. 2 %. the currency component of the money supply provided a downward contribution to the broad money expansion ; however, the use of foreign currency at high levels in the banking system and the economy remains one of the weaknesses of the albanian economy. as an expression of its interest in addressing this issue, in today ’ s meeting, the supervisory council of the bank of albania decided to waive the remuneration of the mandatory foreign reserve. this measure will encourage commercial banks effectively to reduce their funds collection costs and will favour intermediation in the national currency. the level of the demand for money by private and bis central bankers ’ speeches public economic agents has increased. our assessments indicate that monetary expansion is in conformity with the private sector demand for real money. the performance of loans to the private sector has been in line with its seasonal behaviour at this period of the year, increasing on average by 10. 1 % in annual terms. although insofar credit developments have been slow, there are encouraging signs for a better performance of lending in the future. private sector ’ s demand for loans, whose low levels have been a primary obstacle for the revitalisation of lending, increased during the first quarter of the year and is expected to grow in the next quarter as well. the banking system enjoys good health and liquidity conditions for supporting a growing demand for loans, with even better lending conditions. the bank of albania supports the banks ’ initiative to clean up their balance