2 per cent over the medium term. the interventions prevent the imbalances from worsening ; on their own they cannot overcome the underlying causes. at european level there is an urgent need for a governance in which budgetary discipline and solidarity are mutually supportive ; there is also an immediate need to implement the instruments of financial support for managing the crisis. but without a decisive and lasting response from appropriate domestic policies that, by promoting growth, remove the imbalances in the public finances, the first objective is unattainable, the second a palliative. the work begun with the first report of the financial stability board in april 2008 has proceeded to good effect. much has been done, both in implementing it and in drawing up new regulations. it is now necessary to continue with the transposition of the new rules into national legal systems. international coordination has been a key factor in imparting impetus to the reform of international finance ; it remains crucial to its implementation. the contribution of the g20 leaders has been fundamental. to crown the process, the financial stability board will submit a report to the next g20 summit in cannes in november with specific recommendations regarding systemically bis central bankers ’ speeches important financial institutions, the limits to be imposed on the shadow banking system, and the reduction of the systemic risk associated with otc derivatives business. the italian banks italy ’ s banks have to face the impact of sovereign risk on their funding, on the value of the collateral they provide for refinancing, and on their capital market. but our banks ’ exposure to greece, ireland, portugal and spain is modest, amounting to about 1 per cent of total system assets. their investment in italian government securities is substantial. although the banks ’ short - term liquidity position continues to be in balance as a whole, it is affected by the persistence of strains, particularly on the wholesale markets, where fundraising has slowed markedly since the summer. the bank of italy continues to ask banks to maintain balanced liquidity positions ; these positions undergo careful monitoring at weekly intervals by the bank ’ s supervisory area. though diminishing, the rate of growth in lending to both households and firms remained higher in august than the rates for the euro area. in september the three - month growth came to 3. 9 per cent on an annualized basis. however, surveys of firms find a tightening of lending standards and growing difficulty in obtaining credit. the bank lending survey conducted by the eurosystem also finds signs of a tightening

9 per cent in the third quarter, reflecting large year - on - year drops in energy prices. total cpi inflation should rise to 1. 0 per cent this quarter, while the core rate of inflation is projected to reach its trough of 1. 4 per cent during the same period. owing to the substantial excess supply that has emerged in the economy, the bank expects both core and total inflation to return to the 2 per cent target in the third quarter of 2011, one quarter later than we projected in july. the main upside risks to inflation relate to the possibility of a stronger - than - anticipated recovery in the global economy and more robust canadian domestic demand. on the downside, the global recovery could be even more protracted than projected. in addition, a stronger - than - assumed canadian dollar, driven by global portfolio movements out of u. s. - dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation. on tuesday, the bank reaffirmed its conditional commitment to maintain its target for the overnight rate at the effective lower bound of 1 / 4 per cent until the end of june 2010 in order to achieve the inflation target. the bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework that we outlined in the april mpr. as i said last week, our focus in the conduct of monetary policy is on achieving the 2 percent inflation target. the exchange rate should be seen in this context. it is an important relative price, which the bank monitors closely. what ultimately matters is the exchange rate ’ s impact in conjunction with all other domestic and foreign factors on aggregate demand and inflation in canada. to put it simply, the bank looks at everything through the prism of achieving our inflation target. current macrofinancial environment as many of you have no doubt noticed, it is currently a very constructive environment for financial institutions. flow trading and market making have become more attractive and intermediation spreads have increased. underwriting fees have recovered along with the capital markets ; and there are very early signs that an appetite for mergers and acquisitions has returned. banks are once again being compensated for their basic businesses of providing liquidity and credit. interestingly, despite the fall in measured volatility, industry var, while down from the peak earlier this year, is still above pre - lehman levels. what is perhaps less evident is that these returns are largely the product of public policy. while medium - term challenges clearly remain