On the other, in a climate of buoyant sales, the widening of business margins continued, albeit at a lesser rate than in previous years. All these factors, combined with the rise in oil prices in the first half of the year, meant that inflation rose in 2006 and that the inflation differential with the euro area stood at 1.4 pp. Inflation began to perform more favourably in the closing months of 2006, a trend that has run into 2007, with the related differential being cut to 0.5 pp. Foreseeably, these inflation dynamics will remain in place for several months. But it should not be forgotten that the improvement has a temporary component, linked to the path of oil prices, and that core inflation remains at 2.5%, despite the continuing restraint of import prices. Price and cost increases in 2006 once again outpaced those of our competitors, prolonging the deteriorating trend of the indices that measure relative prices and costs. Insofar as this difference is not warranted by quality improvements, the trend of these indices reflects a loss in competitiveness, whose adverse consequences for growth will become patent once domestic demand moves back onto a normal footing. The outlook for the Spanish economy points to the continuation of the main features recently observed, namely: the restructuring of spending, thanks to a gradual easing in domestic demand, particularly in consumption and residential investment, and an improvement in the contribution of net external demand.

Lowering the barriers to entering the financial sector, the free circulation of information and fiercer competition have also brought financial markets closer to a situation of pure and perfect competition, which is beneficial to all consumers. Last but not least, the growth of market financing has allowed savings to be channelled directly into investment. Reducing the share of bank financing, and consequently that of money creation, has enabled a less inflationary financing of the economy. Thus increased, monetary stability has produced tangible and positive effects and contributed decisively to a strong and sustainable growth of the world economy. Thus, these developments have resulted in increased monetary stability and a more efficient allocation of resources. However, while globalisation and financial integration have decisively contributed to improving overall economic efficiency, experience also suggests that financial cycles may have tended to amplify relative to business cycles over recent years. In particular, financial markets have experienced in some circumstances somewhat erratic developments. The rapid emergence of the "new economy" bubble in 1999 and early 2000 – followed by a series of sharp corrections – illustrated the potential of markets for providing funding to the real economy (particularly to the most innovative sectors); but it also demonstrated the tendency of markets to over-react, moving from excessive optimism to disproportionate pessimism, with the ensuing negative consequences for the behaviour of firms and households. As a result, financial authorities have been confronted with boom-bust episodes which must be carefully monitored, since they could affect global monetary and financial stability.