stability of the financial system, of which the banks are a central component. it is natural that in a time of crisis and uncertainty, such as the present, the banks should exercise special caution in their credit policy. moreover, the supervisor of banks and i encourage the banks to be more careful and not to take unnecessary risks – – but this too must be to the right degree. hence it is essential that the banks, which are one of the most crucial elements in the economy's ability to continue to grow, strike the correct balance between their credit policies, which at this time must be cautious, and the needs of the economy, particularly the business sector, for finance. i am not speaking only about the supply of bank credit, but also about its cost. recently the bank of israel reduced the interest rate sharply, with the purpose of helping to lower the cost of credit to the business sector and households. in practice the banks hardly reflected these cuts in the cost of credit they offered. and here again, although in this special period spreads are expected to increase, it is important to maintain a sense of proportion and not act excessively. to put it another way, i repeat what i said to you in previous years, " good bankers can make good loans in bad times, " and i have every confidence that in this hall we have good bankers. as an economist, i would like to explain this issue by noting that this relates to externalities. thus, if all banks significantly tighten their credit policy the economy will grow more slowly, thereby retrospectively justifying the step they took. on the other hand, if every bank takes into account that even slight easing of its credit policy in its marginal decisions will make the economy grow faster, this will retrospectively justify their decision. one of the bank of israel's roles is to help to achieve the right balance. to do this we will, monitor the amount of credit each bank gives, among other things. we see no conflict between our responsibility to support the return of the economy to rapid, sustainable growth, and our responsibility to support the stability and strength of the whole financial system, and specifically of the banking system. the financial crisis is still with us, and is too soon to predict when it will end. we do know, however, that it will end, and the economy will return to growth rates similar to those of the last few years. hence the importance of not wasting valuable time. and i am saying this when the steps formulated

case in 2009 following the collapse of lehman brothers. first, the persistence of low inflation across a range of statistical metrics was higher than in 2009. this reflects the fact that, at that time, disinflation was very abrupt with inflation rates expected to quickly revert back into positive territory. the current episode is characterised by a prolonged downward inflation trend, and we expect inflation to remain in negative territory until latter stages of this year. second, since last summer market measures of inflation expectations have become more sensitive to realised inflation, even at maturities and at horizons that we would normally expect to be more resilient. this is in stark contrast with 2009, where inflation expectations hardly moved, even over the shorter end of the inflation forward curve. finally, measures of core inflation are less sticky today compared to 2009, which implies a higher risk of second round effects materialising from low realised inflation and falling inflation expectations. this in turn creates a higher likelihood that, absent policy action, low inflation will become entrenched and will not bounce back when oil prices normalise. the importance of fulfilling the mandate in sum, what we saw was a real risk of not achieving our aim of an inflation rate of below but close to 2 % over the medium - term. and let me stress that there is no room for complacency when inflation stays too low for too long. there are real costs to falling short of our objective. those costs are both institutional and economic. first, in institutional terms, it is important to remember the very unique environment in which we operate in the euro area. it involves multiple actors in multiple countries, and optimal economic outcomes can only be achieved if each of those actors follows the rules in its domain, thereby ensuring a consistent set of policies at the aggregate level. this is why, for example, we constantly stress the importance of countries respecting the stability and growth pact rules. however, if we were to miss our mandate as soon as it became difficult to achieve, how would it affect the incentives of others in the euro area to fulfil their own mandates? could we still expect others to stick to their commitments – such as implementing structural reforms and fiscal consolidation – in difficult times? and perhaps even more importantly, would our credibility be preserved if we are given a narrow mandate but cannot deliver it? second, in economic terms, a too prolonged period of low inflation can negatively affect both consumption and investment. certainly, an oil price shock improves the terms of trade, increases