deposits. this is the essence of the prudential regulation of banks ; the objectives of which are the avoidance of banking crises and the protection of depositors. these objectives are both clear and, other than in the most exceptional of circumstances, achievable. what is problematic is to expect central banks to use their regulatory tools to achieve other objectives besides those of prudential regulation ; for example attempting to direct the credit allocations of banks. as with monetary policy, this will create conflicts of interest which are likely to bis central bankers ’ speeches undermine prudential regulation and make it harder to evaluate the performance of the central bank and hold it to account. 3. the operational independence of the central bank in common with many other central banks around the world, the bou has operational independence. in uganda this independence is guaranteed by the constitution which explicitly states that : “ in performing its functions the bank of uganda shall conform to this constitution but shall not be subject to the direction or control of any person or authority ”. what does operational independence actually mean in the context of the central bank and why is it important? in essence operational independence pertains to the independence of the central bank to set its monetary policy instruments, such as the policy interest rate, free of any interference from other persons or authorities, such as ministries of finance. it does not mean that the central bank is free to set its own policy priorities or objectives. whether or not the central bank should prioritise the control of inflation or some other objective is an inherently political question which must be determined by a political organ. often this will be determined by the legislature, with the policy objectives set out in legislation, as is the case in uganda where the bank of uganda act specifies the functions of the bou and places emphasis on “ achieving and maintaining economic stability ”. within the specific framework of politically determined policy objectives, a central bank with operational independence is free to set its policy instruments to best achieve those objectives. operational independence is regarded as being of fundamental importance in the institutional governance of central banks because of the notion of the “ time inconsistency ” of economic policy making. this refers to the incentives that policymakers with short time horizons have to take decisions which may generate short term gains but at the expense of long term costs, and the recognition that rational private sector agents will understand the incentives facing these policymakers and take actions which will circumscribe any short term gains without necessarily mitigating the long term

monetary policy plays a very important role in guiding expectations about the economy and the actions of the central bank. that is why we announce the cbr publicly at the start of every month and explain the thinking behind our interest rate decision. since the itl framework was introduced, we have been able, using our regular interventions in the money market, gradually to bring short term interbank interest rates quite closely into line with the cbr. the average 7 day interbank rate for november was 12. 6 percent, which is very close to this month ’ s cbr of 12. 5 percent. in turn other interest rates such as those paid on wholesale deposits are now also moving roughly in line with the cbr. as such the bis central bankers ’ speeches cbr is now proving quite effective in influencing the marginal cost of funds for commercial banks. we have been less successful in influencing the path of bank lending rates ; they followed the cbr up in the second half of 2011 but have been much slower in coming down this year, with the result that interest rate spreads have widened. i hope that, as our financial sector becomes more competitive and sophisticated, we will see bank lending rates become more responsive to changes in the marginal cost of funds for banks and interest rate spreads being reduced. finally i will briefly touch on the instruments of monetary policy. in the past, the main instrument of monetary policy was the regular primary auction of government securities, which we used as a tool to control the monetary base. under the itl monetary policy framework, our operating target is the interbank interest rate, not the monetary base, and the tool we use to influence the interest rate is secondary market operations in the money market, mainly repos and reverse repos. the primary auctions of government securities are now used to fund the government ’ s domestic borrowing requirement and to refinance the existing stock of securities as they mature, rather than as an instrument of monetary policy. furthermore, the government will fund fully its domestic borrowing requirement from the market, by issuing securities, without recourse to any funding from the central bank. it is possible that we might occasionally use a primary auction of securities for monetary policy purposes in the future, but this will be the exception rather than the rule and if we do so we will announce this explicitly, to avoid any confusion. i hope that you have found these remarks useful. as i noted earlier, transparency and communication play a vital role in modern monetary policy frameworks, so it is