seen to be excessive and a sign of overshooting. however, the longer these weaker levels persist, the greater the risk that the relatively benign impact on inflation will end. some prices are also impacted far quicker than others : for example petrol prices where the pass - through is very quick. we have been fortunate that the impact on petrol prices has been moderated to some extent by the weaker international oil price. nevertheless, should current levels of both product prices and the exchange rate persist, we can expect a sizeable increase in the petrol price in july. in essence, while monetary policy remains tolerant of inflation at the upper end of the target range or of temporary breaches, the increasingly risky outlook for inflation, and its possible impact on inflation expectations, does constrain further accommodation. more importantly, monetary policy cannot deal with structural constraints. all too often it seems easier to place expectations on monetary policy to respond and thereby avoid the more difficult task of dealing with these constraints. while the trade - offs between output and growth are well - understood, the bigger challenge comes from the expanding financial stability mandates. prior to the crisis, in many countries financial stability was an implicit objective of central banks, and in many instances was conflated with the health of individual banks and the stability of the banking system. in retrospect this is quite surprising, given that monetary policy is intermediated through the financial system, and therefore a dysfunctional financial system would effectively block the transmission mechanism of monetary policy. bis central bankers ’ speeches in the early part of the 2000s there was disquiet about emerging asset price bubbles with some voices, most notably at the bank for international settlements ( bis ) arguing that central banks should lean against these developments. the standard central bank response at the time was that, with inflation generally under control, low interest rates were appropriate. furthermore, it was argued, central banks were not well placed to recognise bubbles, let alone prick them, but were best placed to clean up in the event of a bubble popping. unfortunately, central banks are still cleaning up from the on - going global crisis. having recognised that price stability is not sufficient for financial stability, the need to focus on financial stability is clear, given that the fall - out of the crisis has been so protracted and costly. cleaning up is no longer the only option. the focus is now on macroprudential oversight, which focuses on the financial sector as a whole, rather than on individual banking institutions, which is the

stefan gerlach : macroprudential policy in ireland address by mr stefan gerlach, deputy governor of the central bank of ireland, at the seminar on “ reform in the aftermath of the crisis ”, university of limerick, limerick, 19 september 2013. * * * i am grateful to mark joy for his help in preparing these remarks. thank you very much for the invitation to speak at this seminar on reform in the aftermath of the crisis here at the university of limerick. this is my first visit to limerick so i am particularly pleased to be here. as all of you know, the central bank of ireland regulates and supervises individual financial institutions, that is, we are the microprudential supervisor, here in ireland. this is an area that fiona muldoon, who will speak later this afternoon, and her colleagues on the bank ’ s regulatory side have done much to strengthen in recent years. the motivation for microprudential policy is that by seeking to reduce the risk of failure of individual financial institutions, the health and stability of the overall financial system can be promoted. but we know from the financial crisis that the financial system is more than the sum of its parts. unfortunately, it is easy to imagine a situation in which individual market participants appear safe and sound, but the system overall is not. for instance, consider a situation in which financial institutions ’ individual balance sheets look healthy but they hold similar market positions. if for some reason these institutions decide to limit their exposures by reducing their positions, by selling collectively they might cause the market to become one sided and prices to fall rapidly. as that happens, they may redouble their efforts to get out of the market, leading to fire sales, massive valuation losses and to contagion to other investors. the risk that markets may herd, and for financial institutions to have similar positions, may thus cause problems that microprudential supervisors may not spot. what is less well known is that the central bank is also the macroprudential policy maker in ireland. 1 as such we monitor developments in the financial system to limit the likelihood of another financial crisis. macroprudential policies are very much a response to the financial crisis and an example of how central banks and financial regulators are drawing the lessons from the crisis and reforming the way they go about ensuring financial stability. since the notion of macroprudential policy is much less well known among the public, today i will take the opportunity to talk about it