mugur isarescu : integrated supervision opening speech by mr mugur isarescu, governor of the national bank of romania, at the seminar “ integrated supervision ”, jointly organised by the romanian financial supervisory authority and the national bank of romania, sinaia, 22 january 2014. * * * distinguished guests, ladies and gentlemen, it is a pleasure for me to warmly welcome you to this seminar on integrated supervision. the newly established romanian financial supervisory authority and the national bank of romania decided to jointly organize the conference on this challenging topic that has recently come into the spotlight. i particularly want to thank our guests from the national supervisory authorities of austria, the czech republic, germany, poland, united kingdom and ireland. i also welcome the experts from the world bank, the international monetary fund and the european commission who will generously impart their knowledge to all of us. i do wish all of you a pleasant stay here in sinaia. this three days long seminar is an excellent occasion to learn, to exchange views and to generate professional ties. allow me to say a few words about where you are. this is a premise of the national bank of romania ’ s training center, situated in cumpatu district, in this lovely resort, sinaia. the name sinaia is an eponym of mount sinai. by the end of the 17th century, a group of wallachian monks, led by mihail cantacuzino, a landlord of those times, went on a pilgrimage to palestine and the sinai peninsula. they were hosted at saint catherine monastery. once returned, they established a convent quite here, in the heavily forested area, at the bottom of the carpathians. the new monastery was called sinaia, in the memory of their journey to the sinai peninsula. a century later, the first king of romania, carol i fell in love with the place and built peles castle, his summer residence. following the establishment of the peles castle a railroad connecting the capital to the king ’ s new summer residence was built. little by little, sinaia became popular among the members of the high society : they started building summer residences as well as hotels, villas. you can visit the peles castle and the sinaia monastery on friday. and now about this seminar. the topic of this seminar is integrated supervision to ensure financial stability. it relies on several conceptual layers. first of all, to understand that the frontiers among financial activities have been blurred by financial innovation and the formation

clarity on our monetary policy reaction function and then being guided by that reaction function in our decisions. we should respond to incoming information on the medium - term inflation outlook and the balance of risks surrounding it. and we should keep our policy tight until we see inflation firmly converging back to 2 % over our policy horizon, taking into account the lags with which our monetary policy operates. when we were normalising rates the pace of adjustment was key. but with rates now moving into restrictive territory, it is the extent and duration of monetary policy restriction that matters. by smoothing our policy rate hikes – that is, moving in small steps – we can ensure that we calibrate both elements more precisely in the light of the incoming information and our reaction function. this framework will allow us to return to our target without undue delay. and it will allow us to do so at minimal cost to the economy and employment, reducing the risk that we tighten too much. the uncertain economic environment the current uncertain economic environment makes forecasting inflation particularly challenging. the medium - term inflation outlook was revised substantially upwards in our staff projections last december. headline inflation was projected to stand at 3. 4 % in 2024, before falling to 2 % in the third quarter of 2025 ( chart 1 ). and core inflation was expected to remain above target throughout our horizon, declining to 2. 4 % on average by 2025. the risks to this outlook were primarily on the upside. chart 1 euro area hicp headline inflation and inflation projections ( annual percentage changes and percentage point contributions ) source : eurosystem staff macroeconomic projections for the euro area, december 2022. notes : the dashed yellow line denotes projections. the latest observations are for the fourth quarter of 2022. but key assumptions underpinning economic projections can change quickly. in fact, recent surveys and the latest european commission forecast see headline inflation significantly below our december projections for 2024. [ 5 ] and risks have become more balanced. let me now review the key factors making projections difficult in the current environment. energy prices energy inflation has slowed more than projected in december. as a result, headline inflation is also falling : in january it was well below what we expected in december, driven by the energy component ( chart 2 ). if the drop in energy prices is sustained, headline inflation may fall below 3 % towards the end of the year. chart 2 inflation in the euro area ( annual percentage changes and percentage point contributions ) sources : eurostat