policy will normally be tightened to ensure that demand is compatible with long - term sustainable growth. and as long as demand in the economy increases at a rate compatible with long - term growth, there is less risk of exaggerated indebtedness. inflation targeting should thus, at least in theory, reduce the risk of extensive financial imbalances accumulating. however, even with an otherwise successful inflation target policy, real and financial imbalances created by exaggerated asset prices can build up. if there are exaggerated expectations regarding growth in productivity and profits in a particular country, this can lead to a strong inflow of capital and strengthening of the currency. the increase in real demand, which is caused by exaggerated increases in asset prices, can thus be partly met by increased imports, while the currency strengthens and domestic inflationary pressure is reduced. there are also other factors not connected with the expectations that push up asset prices and can temporarily lead to the increase in demand that is created by exaggerated asset prices not being expressed as inflation and thus not being counteracted by tighter monetary policy. a high level of credibility for the central bank can also create low and stable inflation expectations, which can mean that inflation will not rise for a period of time, despite strained resource utilisation. deregulation on globalised markets can also temporarily subdue inflationary pressure. is there reason to change strategy? the question is whether it is possible to raise ambitions for monetary policy to prevent financial bubbles arising? most people advocate a strategy where asset prices are merely taken into account to the extent that they affect inflation forecasts during the normal forecast horizon. however, there are also advocates of a strategy where monetary policy also prevents the occurrence and effects of financial bubbles. those who maintain that monetary policy cannot counteract the occurrence of financial bubbles point out that the central bank has no possibility of determining whether or not asset prices are fundamentally motivated. they also point out that it is difficult to motivate an interest rate hike that is essentially aimed at counteracting an excessively large expansion in credit and an overly high real demand if the assessments of inflation do not at the same time show that the target level will be exceeded. interest rates must be raised before overly large imbalances accumulate. the motive would be to reduce the risk of a recession and low inflation during the period following a fall in asset prices. if the central bank is successful, it is not possible to demonstrate afterwards that one has been right. a further argument is that it

emmanuel tumusiime - mutebile : banking issues in uganda speech by prof. emmanuel tumusiime - mutebile, governor, bank of uganda, on the occasion of eid - el - fitri celebrations at bou western gardens, kampala, 25 september 2009. * * * your eminence the mufti of uganda distinguished guests ladies and gentlemen asalaam aleikum, eid el - fitr, al - mubarak. it gives me great pleasure to welcome you to this annual auspicious occasion when we at the bank mark the end of the holy month of ramadthan and the celebration of eid el fitr. let me take this opportunity to congratulate your eminence and all muslims in uganda for having been steadfast in observing the fast throughout the holy month of ramadthan. to the bank muslim staff who observed the fast, i highly commend you and urge you to maintain this noble act of worship. the virtues of fasting should be upheld throughout your daily life both at work and elsewhere. the bank of uganda as a public institution upholds the freedom of worship for every member of staff. it is our conviction that religion plays a great role in enhancing morality in the society leading to ethical conduct, discipline in the work place and invaluably contribute to better outcomes. our commitment is demonstrated by the bank values which each staff is required to uphold. this blends very well with the requirements of fasting in the holy month of ramadthan. fasting brings a reminder to all of us to go back to god, to do the right things and shun evil. let me take this opportunity to address you on the health of the uganda's financial sector. first of all there was a baseless rumour in the red pepper of september 14, 2009 that a “ top bank faces closure over gadaffi cash ” that the workers of " an islamic founded bank " were about to become jobless and that the top management faced arrest because the bank was being used as a conduit for money " to some officials at mengo " from foreign sources. let me reiterate the statement in the press release i issued on september 15, 2009 – “ i assure everyone that no bank in uganda is under any threat of closure whatsoever ”. the general public should continue to ignore these completely baseless allegations. all banks and other supervised financial institutions are well managed, well capitalized