Almost all components of demand continue to grow, albeit at a more moderate pace. Private consumption will benefit from the healthy improvement in disposable income. Equipment investment is being stimulated by the high rate of utilisation of production capacity and the favourable business outlook in many industries. Residential construction is likely to see a measure of calm. Yet increased investment in commercial and industrial building may offset this development to some extent. The somewhat weaker global economic development – though still favourable overall - will probably continue to have a positive impact on exports. For 2007, we expect overall GDP growth of about 2%. Monetary developments Allow me to explain developments in the financial markets and the monetary aggregates. Two topics merit particular attention: the development of credit and money supply and the exchange rate. In addition to long-term interest rates and exchange rates, loans – among other things – play an important role when changes in key interest rates are transmitted to the economy. What information can we derive from the development of lending activity? Loans are registering constant growth. Mortgage loans, which account for the great majority of all bank loans, have grown at a rate of more than 5% since 2003. This is a reflection of the clearly expansionary monetary policy at that time. The growth rate of mortgage loans has gradually slowed, however, and is now slightly below 5%. This is nevertheless still a high growth rate. Other loans, however, are witnessing stronger growth and are currently expanding by 6%.

One of the things that I strongly encourage for all countries is a review of implementation of the Basel Committee’s Core Principles for Effective Banking Supervision. These principles are key to laying a successful supervisory foundation. Likewise, sound accounting and provisioning standards are critical to ensuring that the capital ratios, however calculated, meaningfully reflect the bank’s ability to absorb losses. This brings me to the second stage. Supervisors do not need to wait for the formal adoption of Basel II to start introducing or using the principles of the three pillars. On the contrary, incorporating these principles is excellent preparation for adopting Basel II in the future. For example, supervisors might choose to move towards a more risk-based approach to supervision, developing skills in assessing the quality of a bank’s risk management and its ability to assess risk exposures. At the same time, banks could be reminded of their responsibility to develop their own processes for evaluating their capital needs and a strategy for maintaining their capital levels, consistent with the principles of Pillar 2. With regard to the principles of market discipline in Pillar 3, supervisors may wish to focus initially on ensuring a baseline level of disclosures across all banks. This might include discussing with banks, investors, and other users of financial information their information needs and the tools available so that supervisors can tailor requirements accordingly. In my view, these two preliminary stages provide an excellent preparation for the “final” stage of moving to Basel II.