define precisely the coordinated effort needed to contain inflation in pursuit of the broader economic objectives of sustainable high economic growth and employment creation. while this agreement should define the practical implication of the reserve bank ’ s goal of price stability, it should also guarantee the instrumental independence of the reserve bank. secondly, the announcement of inflation targets clarifies the central bank ’ s intentions and reduces uncertainty about the future course of monetary policy. inflation targets make policy transparent. they make the central bank ’ s intentions explicit in a way that should improve the planning of the private sector. thirdly, inflation targeting helps to discipline monetary policy and strengthens the central bank ’ s accountability. if targets are not met, the central bank has to explain what went wrong. this leads to a better understanding on the part of the public on what basis monetary policy decisions were made. disadvantages of inflation targeting although inflation targeting has certain definite advantages when compared with other monetary policy frameworks, it could also have certain disadvantages. one of the limitations of inflation targeting is that it is a complicated approach to implement. although all monetary policy frameworks should be forward looking, inflation targeting relies heavily on forecasts. where inaccurate forecasts are made public it can obscure the central bank ’ s objectives and reduce its credibility. compared with other monetary policy frameworks there is also the risk that inflation targeting could lead to inefficient output stabilisation. this can occur particularly in the event of significant supply shocks, such as sharp changes in the price of oil. preconditions for inflation targeting in view of these potential disadvantages of inflation targeting, it is important that certain preconditions are met before a decision is taken to implement this framework. in this regard it is important that a central bank is free to pursue financial stability. the inflation target may be jointly set by the government and the central bank. however, once the target has been determined the central bank should be free to use any instrument to achieve the ultimate objective. in the application of inflation targeting it is further important that there is a commitment by all authorities to the objective of price stability. preferably there should be close cooperation between monetary policy and other policies, and in this coordinated effort the inflation objective should be an inherent part of overall policy. to implement inflation targeting it is important that well - developed financial markets exist in a country. the policy instruments generally used by monetary authorities require effective money, capital and foreign exchange markets. if financial markets do not react quickly to the

which had also been stable for some time, rose rapidly, reaching 6. 7 % in november – a level not seen since 1994. the sudden worsening of the situation is above all due to the fall in household spending. households saw their financial situation deteriorate sharply due to the loss in value of their real estate and financial assets, while also suffering – until recently – a progressive erosion of their purchasing power through the continuous rise in fuel prices. although fuel prices have since receded, the effects of the price correction in the real estate sector – the root cause of the financial crisis – as well as the fall in stock market prices continue to be felt. in europe in the third quarter, gdp recorded a second successive fall. despite the recent depreciation of the euro, exports have been hit by the slowdown in global demand. this is especially true of germany, which is highly export - dependent. by prompting a revision of plans to expand production capacity, first in the export industry and then in the upstream production chain, the fall in exports has led to a downturn in demand for equipment investment. moreover, in some countries, for instance spain and ireland, construction activity has been affected by a significant correction in property prices. the picture is more mixed in asia. japan and some emerging economies in the region will probably not be able to escape a brief recession, but on the whole economic activity should continue to advance, albeit less strongly than previously expected. in addition, the emerging economies in latin america and eastern europe, which until now have been heavily dependent on capital inflows, could experience a marked slowdown in growth. thus, what was merely a risk scenario at our september assessment is now becoming reality. the advanced economies have more or less moved into recession simultaneously. the crisis in the financial sector has finally spread to the rest of the economy. with the decline in global demand, prices for food, raw materials and oil have fallen sharply. this is the positive flipside of the coin, since this development will boost real incomes and consumption in most countries. swiss economic outlook the swiss economy is of course affected by this worsening of the international environment. at our september assessment, we were still projecting a marked slowdown in activity, but with growth remaining positive in 2009. we are now forecasting that gdp growth will be negative, not only during the first two quarters of next year, but also on average for 2009 as a whole. with the probable exception of consumption, all demand components