redress as soon as possible. all told, as important as the solvency assessment the exercise provides is the detailed information furnished on each bank. in particular, the asset quality review offers significant data on the potential shortcomings of the way in which the financial information disclosed by banks reflects the risk they assume. here it can be seen, once again, that there is no widespread material understatement of risk, in the form of valuation failings or provisioning shortfalls. but there are european banks where the asset review has evidenced shortcomings of some significance. in the case of spanish banks, the analysis has offered fairly satisfactory results. in particular, the asset quality review situates spain as the country where fewest failings have been detected in proportion to the sector ’ s aggregate assets. in other words, according to the exercise, the balance sheets published by spanish banks reflect, on average, the risks arising from their investment with greater rigour than that seen in the other jurisdictions, with fewer valuation flaws or provisioning shortfalls being detected as a result. this is a particularly positive outcome as it arises from the application of a methodology – common to all the banks analysed – based on objective observations and which, unlike the stress test, does not depend on the design of debatable macroeconomic scenarios or working hypotheses. in any event, the stress test also provides positive results for the spanish banking sector which, in virtually all cases, exceeds fairly comfortably the minimum capital thresholds set. only one bank evidenced a very small capital shortfall as at 31 december 2013, and this has now been more than covered following the capital increase made by the bank in the first half of 2014, which gives it a solvency level in line with the sector average. accordingly, spanish banks may be said to have comfortably passed the test, evidencing both high quality of disclosed financial information and considerable resilience to adverse macroeconomic developments. naturally, there is no room for complacency, and the results should not be taken as conclusive proof of the unquestionable and generalised health of our banks. the challenges are manifold, and i shall refer to some of them later. however, it would seem fair to say that the exercise has validated the collective efforts made to overcome the huge impact that the international and european financial crisis and the harsh macroeconomic bis central bankers ’ speeches conditions – linked in part to the collapse of the real estate sector –

well as to the demand side. observers conventionally assess the outlook for growth by looking at the prospects for demand components, adding them up, and then assuming that supply will respond. anything that stimulates demand is thought to be “ good for the economy ”. but over recent years, we have increasingly been reminded that it is the economy ’ s supply side performance – the quantity and quality of the capital stock, the availability of labour and the productivity with which both those factors are used – that ultimately determines its rate of growth over the long term. demand management policies – monetary policy and government spending and taxation measures designed to have a broad economic impact – can usually ensure that there is adequate expenditure to use the economy ’ s productive resources. but while we can, in most circumstances, create additional demand, it is much harder to create additional supply. unless additional supply is somehow forthcoming, however, expanding demand just produces overheating and inflation. inflation did pick up in australia during the middle years of the current decade, from 2. 4 per cent in 2003, to 2. 6 per cent in 2004, 2. 8 per cent in 2005, and 4 per cent by mid 2006. that peak in the cpi inflation rate was affected by some temporary factors, which have now reversed. but measures of inflation designed to extract the underlying trend showed a pick - up too, from about 2½ per cent to 3 per cent during the first half of last year. the most recent data for inflation, however, showed a more welcome trend, with underlying measures of inflation running at a reduced pace and the cpi rate on its way down as well. in our statement on monetary policy released about six weeks ago, our judgement was that underlying inflation would probably run at about 2½ per cent for the year 2007, which was a slight downward revision to earlier expectations. data on labour costs received since then add credence to that forecast. compared with what we expected a year ago, then, growth has turned out to be stronger, employment higher, but underlying inflation a little lower, and wages growth has been steady in the face of unanticipated labour market strength. this is quite a favourable set of outcomes, and should prompt us to ask how it all fits together. one possibility is that all we are observing is lags at work. earlier national accounts showed a weakening in growth from mid 2005 through to mid 2006. perhaps this led, with a lag, to the slowing in prices recorded in recent quarters