the first quarter, gross domestic product ( gdp ) was up by 3. 2 % saar, exceeding the long - term average growth rate by a significant amount. the strong economic performance assisted the recovery of the labour market. employment was up in industry as well as in the construction and service areas. as a result, unemployment figures dropped further and the unemployment rate fell below the level of 3 %. demand indicators were still trending upwards, which should result in a renewed drop in unemployment in the months ahead. moreover, labour demand continued to be met by a significant influx of labour from abroad. the opening of the labour market within the context of the bilateral agreements with the eu creates additional growth potential. the competitive position of our economy is high, and the recent depreciation of the swiss franc on the foreign exchange market gave it an additional boost. while exports continued to increase at a rapid pace, their growth rate may slow down somewhat compared with 2006. the healthy state of the economy and the improvement in the labour market have a favourable impact on consumer sentiment. since the beginning of the year, household spending has been increasing at very steady pace. a continuance of this trend is possible, since the current near full employment is likely to lead to an increase in real wages. during the next quarters, companies will continue to step up equipment investment since the rate of technical capacity utilisation – in particular in the manufacturing sector – is high. construction investment should stabilise at a high level. these developments in demand components led us to revise our gdp growth forecast upwards for 2007. for the current year, we now expect growth close to 2. 5 %. development in monetary and financial conditions in the swiss capital market, we have been observing a steady increase in long - term interest rates over the past three months. the yield on 10 - year swiss confederation bonds reached 3 % in may. real interest rates for long maturities have therefore registered an increase. this is a new development because up until now, long - term interest rates had not clearly reacted to the progressive increase in the libor. this will reinforce our efforts to tighten monetary conditions, since economic activity reacts more noticeably to long - term interest rates than to short - term ones. by contrast, in foreign exchange markets, movements in the swiss franc have resulted in a relaxation of monetary conditions. as of the beginning of 2006, the swiss franc started losing ground steadily visa - vis the euro. however, it firmed

slightly against the dollar during the same period. since our march assessment, the actual depreciation of the swiss franc, i. e. weighted in terms of exports, amounts to 1. 7 %. the corresponding relaxation in monetary conditions is weakening the effects of our policy of lifting interest rates and is increasing inflationary pressure through two channels. one the one hand, it is bringing about an increase in import prices, which could have an effect on consumer prices. even though the impact of this channel may have diminished during the past few years due to increased competition, there is no guarantee that – against the current backdrop of near full employment – it will not again be reactivated. on the other hand, it is strengthening the competitive position of our economy, thereby giving exports and economic activity a boost. as a consequence, the weak franc could heighten inflationary pressure in an economy already running at full steam. on the credit market, growth in mortgage lending is slowly receding, with the current rate of increase below 5 %. the “ other loans ” category continues to expand rapidly, while matching observations of the past in comparable phases of the economic cycle. this category is now growing at a rate of about 8 – 10 %, as at the beginning of the 2000s, when their level in fact considerably exceeded the levels we are currently experiencing. m1 and m2 shrank, which is nothing out of the ordinary during a phase of rising interest rates. when this happens, savings and sight deposits are shifted into time deposits. m1 and m2 are affected by this substitution. m3, which is not affected, is growing at a rate of 2 % to 3 %, which is appropriate for an expanding economy. inflationary risks in the current environment, price stability is subject to three types of risk : the first risk is connected with the development in the price of oil. the barrel price for brent crude rose by 40 %, from usd 51. 0 in january to usd 71. 7 in may. this will lead to higher inflation during the course of the year. unlike oil price hikes between 2004 and 2006, the most recent rally took place when capacity utilisation was higher. if the current surge in oil prices were to continue, it could affect prices more easily than previously. the second risk is due to the fact that demand is growing at too rapid a pace in relation to the development in production capacity. we estimate the gdp growth rate that can be sustained without pushing up inflation – potential gdp growth – at