The Governor reviews the state of the economy and the challenges facing economic policy-makers following sterling's suspension from the ERM. The major challenge, he argues, is to pursue a more balanced domestic policy (now no longer dictated by the consequences of German unification) without undermining the medium-term commitment to stable prices. Uncertainties about the current conjuncture and, in particular, about the strength of debt deflationary pressures require the authorities to be alert to changes in the economic situation. But the Governor warns against a short-run stimulus to activity; this would be costly later as there is no long-run trade-off between inflation and output. He also stresses the importance of greater openness in explaining the basis of monetary policy and welcomes the Chancellor 's recent initiative, including his invitation to the Bank to publish a quarterly report on inflation. Turning to banking supervision, the Governor describes the changes the Bank has introduced in response to the lessons of the BCC1 affair and the conclusions of the Bingham report. These changes, which do not represent a shift in the Bank's overall approach to supervision (which Bingham recognises has served the community well), involve a major strengthening of the Banks supervisory capacity with a particular focus on ensuring that supervision is more alert to signs of possible criminality.