s responsibility for banking supervision would pass to a new institution - the financial services authority, or fsa - which would assume responsibility for the regulation and supervision of all financial institutions in the uk. this was widely seen as the price we had to pay for our enhanced monetary policy role. but at the same time the chancellor confirmed the bank ’ s continuing responsibility for the stability of the financial system as a whole, so that in fact what this has done - as in relation to monetary policy - is to distinguish and clarify the respective roles : of the bank, which now focuses upon systemic risk - and retains its lender of last resort role within parameters that are broadly defined by the legislation ; of the fsa which oversees both the prudential and business conduct of all individual financial institutions, including the banks, with the emphasis on consumer protection ; and the treasury, which has ultimate responsibility for both these dimensions. the new arrangements make a good deal of sense in the uk context where traditional distinctions between banks and other types of financial institution have progressively eroded and where there has been a general movement towards greater consumer protection across a much broader front. but at the same time as clarifying our respective responsibilities, and providing in each case for transparency and separate accountability for the way in which they are carried out, the new legislation recognises the vital importance of close coordination between them and establishes a framework for that. it is early days to assess the effectiveness of these arrangements, but my impression is that so far they are working well. governor jayawardena, there are many aspects of our new regime that i have not touched upon - including questions relating to our capital, our revenues, expenditure and allocation of profits and how they are reported and accounted for - which can also affect the degree of independence we enjoy. perhaps we might explore these together with the other issues in our discussion. but i hope i have said enough to draw a few conclusions. my starting point had been that central bank independence in the extreme sense of exemption from democratic control is unrealistic and inappropriate. yet wise governments in many countries around the world have recognised that they can gain advantage - in terms of public and market credibility from detached and unbiased advice in its field of competence from the central bank. the value that they put on the central bank ’ s role depends very much on the quality of that advice - the central bank ’ s objectivity and its technical expertise and professional competence. that is largely down to us. but the benefit a government derives from

##en economic activity, thereby adding to the forces which had already depressed the outlook for the euro area before the escalation of tensions in the middle east. as a result, we should only expect a modest rate of economic growth for 2003. however, the evolution of economic growth for the rest of this year is particularly difficult to foresee at the moment, given the exceptional degree of uncertainty arising from the military conflict. our baseline scenario continues to be one of a moderate recovery associated with diminishing uncertainty, starting in the second half of 2003. however, we will need to review the economic implications of the war as soon as a clearer picture emerges. a number of scenarios, implying widely different outcomes for economic activity, are conceivable at present. yet it would be premature to assign specific probabilities to any such exercises, which are mainly of an illustrative nature. looking at price developments, annual hicp inflation is estimated by eurostat to have been 2. 4 % in march 2003, unchanged from february. the recent drop in oil prices is not likely to be reflected in the price statistics until april. as for the outlook for price stability over the medium term, it is particularly important to clearly distinguish between short - term volatility and more fundamental factors. while oil price developments may very much influence the pattern of inflation rates over the coming months, other factors should dominate beyond the short term. the lagged effects of the appreciation of the euro exchange rate since mid - 2002 will continue to dampen upward pressure on prices, as will the modest economic growth. if the recent significant reduction in oil prices is sustained, inflation rates will in all likelihood fall below 2 % in the course of 2003 and remain in line with price stability thereafter ; evidently, this presupposes that wage moderation prevails. overall, the present policy stance is consistent with the preservation of price stability over the medium term. it maintains a monetary environment that is in itself favourable to economic growth in a situation in which other factors are having an adverse effect on economic activity. exceptional circumstances are complicating the assessment of economic trends. we will therefore continue to monitor events carefully and evaluate them in the light of our mandate. regarding fiscal policies, the stability and growth pact provides a robust and flexible framework for addressing any strains on public finances without undermining the principle of budgetary discipline. while letting, where possible, automatic stabilisers operate in reaction to changing economic circumstances, there is no reason