house and universal broker industries. this integration is expected to promote a more competitive and dynamic financial system, enhance efficiency and strengthen the potential to capitalise on expanded business opportunities, both locally and abroad, thereby strengthening the competitive position of the new entity. foreign equity participation in investment banks has also been liberalised, from 30 % to 49 %, as part of the overall efforts to strengthen their linkages globally and to enhance the transfer of specialised skills and expertise in the investment banking industry. moving forward, the competitive pressures are expected to intensify in the investment banking industry. with the extension of the investment bank framework to universal brokers, 17 investment banks may emerge from the rationalisation exercise. amid this more competitive and challenging environment, the ability of the investment banks to thrive will no longer depend on factors such as asset and capitalization levels, but on their capacity and capability to manage and utilise their resources in the most efficient and effective manner. of importance is the need for merchant banks to continuously review their comparative advantage, business focus and organisational structure to strengthen their strategic and operational agility to respond proactively to the competition and maintain their market niche. in this regard, investment in human capital and expertise is essential to deliver customised and unique value propositions. with the entry of new players into the industry, it is expected that staff mobility within the industry could increase. the challenge for merchant banks will be to continuously train and retain their pool of expertise. the transformation of merchant banks into investment banks will also bring about new risks as well as a multitude of new opportunities. the placement of banking and capital market activities under one roof entails wider risks which need to be addressed to ensure that they do not pose undue risks to safety and soundness. safeguards and chinese walls are essential to manage conflict of interest situations within the investment banks. as capital market intermediaries, investment banks would also need to carefully manage issues on investor protection and the need to promote fair, efficient and transparent markets. the principles of fair market practice to promote investor confidence and ensure the protection of their interests need to be embodied in investment banking operations. reputation and trust are indeed valued assets and the cornerstone of banking business. as investment banks originate more complex financial solutions to meet the needs of the more discerning and sophisticated wholesale customers, they also need to be mindful of the importance of preserving trust and personal reputation in business practices. in this regard, focus will be accorded to strengthen the overall market conduct

07 jun - 07 mar - 07 dec - 06 jun - 06 sep - 06 mar - 06 dec - 05 - 4 source : national statistics office, bank of png staff calculations, world bank. other factors affecting inflation in png while food prices contributed to 60 percent of png ’ s inflation between march 2008 and june 2009, over the last year, they have only contributed about 35 percent. therefore, increasingly, additional pressures are contributing to inflation. after years of strong revenues, government spending has increased dramatically, contributing to strong domestic demand. additionally, png ’ s macroeconomic stability of recent years has led to increased business activity and foreign investment, most notably the png liquefied natural gas project which is currently under construction. moreover, due to the length of this boom in business activity, domestic demand pressures have consistently exceeded the ability of domestic supply to increase, and inflation expectations have increasingly become a factor in price setting and wage negotiations. with data collected from our business liaison surveys, we can see that wage expectations increased with the food and fuel price surge in 2008. but starting at the end of 2009 – even before the current food price surge began – we have seen wage expectations increase to their highest sustained levels since our survey began. when expectations of higher inflation are built into business costs, higher inflation can become entrenched, and monetary policy must then also decrease these expectations to reduce inflation. expected average employee wage change over the next year ( percent ) trimmed mean ( 50 % ) survey response q4 2010 q2 2010 q4 2009 q2 2009 q4 2008 q2 2008 q4 2007 q2 2007 q4 2006 q2 2006 q4 2005 q2 2005 q4 2004 q2 2004 q4 2003 source : bank of png staff calculations. bis central bankers ’ speeches thus, since 2007, inflation in png has been affected mainly by these factors : 1 ) external food and fuel prices ; 2 ) increased domestic demand due to high government spending, business activity, and lng project construction ; and, increasingly, 3 ) inflation expectations. role of monetary policy the bank of png has some tools to affect these inflation developments, but when it comes to externally driven factors such as food prices, png is a price taker, and the main challenge is for the bank to limit these prices passing on to other prices. moreover, with much of the current business boom driven by the lng project, the bank of png can only have a limited effect on demand