When the hinterland is in difficulty, the financial centre will be adversely affected, but it still plays an important role in facilitating the process of recovery. As confidence recovers and investor interest returns, the financial centre will be an important conduit for the funds required for rehabilitation and growth. Thus as Asian economies make progress in putting themselves in order, they will need access to global capital for corporate restructuring and new investments. Singapore's financial centre will be ready to play that role, whether the capital is to be raised through loan syndication, debt securitisation, private equity, or bond issuance. Financial centres in Asia Looking ahead, the trend towards concentration of financial institutions and activities in fewer major centres is likely to persist. However, it is not easy to predict which specific cities will emerge as leading centres. This will depend not only on the static comparative advantage of the different cities, but also on the dynamic competitive advantages created by their policies and strategies. Incumbents will always have an advantage, but no lead is totally unassailable, as London found to its dismay in 1998 when within a few months Frankfurt snatched away the trading of German bund futures. London and New York will continue to be key global players. In Asia, while Tokyo will always be big and significant, the role of the other centres is still unclear. Hong Kong, Singapore, Sydney, and in the longer term Shanghai are in play.

It is the Governing Council’s view that, at the policy-relevant medium-term horizon, there are upside risks to the outlook for price developments. These risks include the possibility of renewed increases in commodity prices and of previous rises having further and stronger indirect effects on consumer prices. There is particularly a very strong concern that the emergence of broad-based second-round effects in price and wage-setting behaviour could add significantly to inflationary pressures. Moreover, the upside risks to price stability could be aggravated by unexpected rises in indirect taxes and administered prices. Against this background, it is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability. Broad-based secondround effects stemming from the impact of higher energy and food prices on price and wagesetting behaviour must be avoided. The Governing Council is monitoring price-setting behaviour and wage negotiations in the euro area with particular attention. All parties concerned – in both the private and the public sectors – must meet their responsibilities in this regard. The Governing Council has repeatedly expressed its concern about the existence of schemes in which nominal wages are indexed to consumer prices. Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which would be detrimental to employment and competitiveness in the countries concerned. The Governing Council calls for these schemes to be abolished. The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons.