global inflation expectations appear to be well anchored. the growth outlook for switzerland remains constructive, supported by an expansionary monetary policy stance. the rise in oil prices has, however, dampened domestic demand. weakness in germany and, more recently, in france are exacerbating the situation. economic growth is unlikely to accelerate into 2005. upward pressure on the exchange rate may exert additional unwelcome downward pressure on aggregate demand. some slack in swiss labor and product markets is likely to prevail. the output gap will close in 2006 at the earliest. in such an environment, it will take time for the unemployment rate to decline from the current 3. 7 %. real wage growth is well contained with growth rates fluctuating around 1 % per year since 2001. core inflation rates remain moderate at around 1 %. despite substantially higher oil price related cpi and ppi inflation since august of this year, longer - term inflation expectations remain firmly anchored as swap spreads and consensus forecasts confirm. the growth rates of swiss monetary aggregates and the development of credit confirm the overall picture of a moderate inflation outlook. the key challenge for monetary policy authorities - in switzerland and elsewhere - will be to continue to firmly anchor these longer - term inflation expectations. as i mentioned earlier, notwithstanding high oil prices, circumstances are favorable. price stability has been all but achieved in much of the developed world. even developing countries are enjoying relatively low and stable inflation rates. various forms of credible monetary policy frameworks are anchoring future inflation expectations. higher oil prices appear to feed through to higher headline inflation more rapidly than in the past but the magnitude of the effect appears to have declined. finally, the world economy is hardly overheating. indeed, judging by the oecd ’ s global leading indicator, the recent growth momentum is abating. moreover, to the extent that the recent oil price shock is to a significant extent demand driven, dampening global growth will at least to some extent be self - stabilizing with regard to underlying inflation pressure. compared to the time of the last great oil shock in the late 1970s, monetary authorities operate under a different paradigm to the extent that they can afford to “ look through ” what are likely to be temporary spikes in headline inflation associated with what is likely to be a demand driven level shift in the equilibrium price range of oil. indeed, in some cases, monetary policy may find itself in a position to be able to respond to the output loss associated with higher oil prices

this process. this asset allocation shift is reflected in a marked increase in the liquidity of oil futures contracts together with upward trending prices ( see figure 6 ). there is some evidence that hedge funds have been particularly active in the oil futures market. in a recent study, the bis notes a high correlation ( 0. 8 ) between the weekly oil price changes and changes in long positions of non - commercial traders of oil futures. 1 market estimates suggest there could be a single digit dollar per barrel speculative premium on the oil price. 2 3. what does market tell us? oil price development in the past decade has been characterized by short - term spikes in the spot price ranging from 11 to 40 usd per barrel for wti crude. meanwhile, futures prices remained well anchored around 20 usd per barrel. the recent run - up in oil spot prices however was part of a shift of the entire curve. market estimates of the long - run marginal cost of oil nearly doubled and now stands bis quarterly review, september 2004, p 6. for a survey on the literature on speculators and their impact on price developments in the oil market, see weiner, r, ( 2002 ) : “ sheep in wolves ’ clothing? speculators and price volatility in petroleum futures ”, quarterly review of economics and finance, 42 ( 2 ), 391 - 400. at 35 usd per barrel for wti delivery in 5 years ( see figure 7 ). moreover, despite the most recent sharp correction in spot prices from 55 to 46 usd per barrel wti, long - dated futures prices have receded only marginally. since 2002, prices of oil futures are generally quoted below expected spot prices - a state labeled backwardation. backwardation implies uncertainty about production and supplies and effectively favors further inventory draw downs ( see figure 8 ). price information extracted from the market appears to confirm that at least for the time being, average oil prices are likely to remain elevated compared to historical price ranges. forecasting market prices is an inherently difficult endeavor. immense uncertainties on the supply side make oil price forecasts particularly challenging. reserve figures can be increased rapidly by the discovery of new oil fields or by exploitation at greater margins due to new technologies. proven oil reserves in the middle east, for example, increased from 16 billion barrels in 1944 to 116 billion barrels of meanwhile extracted or still available reserves in 1975. in 1984, 200 additional barrels were added to the proven reserves in the middle east, which now stand at