jean - pierre roth : inflation and economic activity – are we at a crossroads? summary of a lunchtime discussion by mr jean - pierre roth, chairman of the governing board of the swiss national bank and chairman of the board of directors of the bank for international settlements, at the “ geneva financial center ” organisation, geneva, 28 august 2006. the complete speech can be found in french on the swiss national bank ’ s website ( www. snb. ch ). * * * while the world economy is experiencing exceptionally vigorous expansion and inflationary pressure is contained, there is still a certain amount of uncertainty. will the economy turn down again and inflation accelerate? the swiss national bank is not working with a scenario of imminent weakness in the global economy, even if the rate of growth slows somewhat. certainly, the us economy appears to be heading for a soft landing, and economic activity in europe is also likely to increase less rapidly in the second half of the year. on the price front, the recent surge in inflation in the consumer price index was largely attributable to the cost of goods and services directly linked to energy prices, while core inflation remained at a relatively low level. given the slowdown in global spending and the normalisation of monetary conditions, inflationary pressures are likely to remain restrained. this assessment also applies to switzerland. the vitality of the manufacturing, financial and construction sectors, which have fuelled economic growth in our country over the past few quarters, is likely to diminish, particularly in view of the expected slowdown in global demand. growth in swiss gdp will probably amount to a little over 2. 5 % in 2006 ( this is a cautious forecast ), falling back slightly in 2007 yet remaining in the vicinity of 2 %. consumer prices rose 1. 4 % in july, marginally above our figure for core inflation, which at 1. 2 % is the highest since april 2002. however, these rates are well below the level of 2 % that we consider the upper limit for price stability. for 2006 as a whole, we expect the average rate of inflation to remain below 1. 5 %, and this is unlikely to change much in 2007. with respect to monetary policy, the healthy economic outlook in both the world and domestic economies, together with the high level of capacity utilisation in manufacturing, require us to further pursue normalisation of the target range for the three - month libor. this is particularly necessary in view of the significant relaxation in global

institutions located in different jurisdictions. the whole infrastructure underlying these transactions has reached a global dimension. over the past decades cross - border infrastructures have deployed their activities essentially as a complement to domestic systems, but i expect them start playing a more powerful role at a domestic level as well. the common approach to regulate and oversee cross - border securities clearing and settlement systems, which i have referred to previously, is being worked on. the various standards and recommendations that have been issued recently is proof this. some may set the accent on the divergences, misinterpretations or on the incompleteness of these standards and recommendations. i do not refute them but i also see the value added of sharing the same language to tackle complex issues. regulatory and overseers tend to adopt a pragmatic approach where one authority takes on a leadership role and consults with other relevant authorities. such a model based on the lamfalussy standards ( 1990 ) has already been put in place among central bankers and has proven to be effective in the context of the continuous linked settlement system ( cls ). a second challenge that the authorities face lies in the risk of cross - border financial transactions. indeed, whereas the nature of the risks remains basically the same, both the probability of occurrence of an adverse event and the risk exposures themselves have clearly increased. the added dimension of cross - border activities lies in potential spillover effects due to the interlinking of systems. credit, liquidity and operational risk events occurring in one jurisdiction may indeed trigger a systemic crisis by spilling over to foreign financial markets. not only systems of the same nature, i. e. payment systems, but also different systems such as payment, clearing and settlement systems have been linked at an international level. a promising outcome would be a cross - border delivery - versus - payment mechanism that relies on central bank money. all in all, the current and, if feasible, future linkages explain why regulatory and oversight authorities have to widen the focus of their responsibilities further. a third challenge relates to in - house clearing, payment and settlement mechanisms at large custodians. this commercial function has undergone a remarkable process of concentration in the last few years. some of these service providers have become very significant for the stability of the financial system as witnessed by the events of september 11, 2001. however, independent of specific events, the question arises whether regulatory and oversight control has kept up with this development everywhere. it is indeed rather problematic that custody