not decoupled from interest rate developments in other countries. a rise in foreign interest rates normally pulls in the direction of a weaker krone. a weaker krone pushes up prices for imported goods. when inflation is already high, as now, this increases the risk of inflation becoming entrenched, which we must take into consideration when setting the policy rate. if the fx market loses confidence in our commitment to tighten monetary policy when inflation rises, the krone may depreciate further. confidence in the inflation target is a precondition for monetary policy's ability to dampen fluctuations in the economy and to support high employment. 3 / 5 bis - central bankers'speeches in the long term, there is no conflict between the objective of price stability and high and stable employment. ensuring that inflation remains low and stable is the most important contribution monetary policy can make to promoting high employment over time. we cannot keep employment permanently above potential by keeping the policy rate low. the level of employment over time is determined by structural conditions such as labour force composition, the tax and social welfare system and wage formation. in the short term, however, there may be a conflict between how quickly we should aim to bring inflation back to target and the aim of high and stable employment. when we set the policy rate, we weigh these considerations against each other. inflation is now markedly above the target. we could have raised the policy rate higher and faster than we have so far. inflation might then have come down faster. the reason we are taking a while to bring down inflation is that our job is also to contribute to high and stable employment. we do not want to restrain the economy more than that required to tame inflation. chart 8 : prospects for lower price inflation and somewhat higher unemployment the bank's forecasts in march indicate that inflation will move down towards 2 percent over the coming years. if developments turn out as projected, inflation will return to target with little rise in unemployment. there is substantial uncertainty about the outlook. the future policy rate path will depend on economic developments. problems in some us and swiss banks have led to large movements in global financial markets over the spring. the authorities in these two countries have intervened to reduce the risk of contagion to other institutions and markets. the turmoil has had only a limited impact on funding costs for norwegian banks and mortgage finance companies. norwegian banks are profitable, solid, and have ample liquidity. they are well positioned to cope with higher losses and market stress

above 10 %, tier 1 to capital to rwa ratio and capital to total assets ratios should be above 5 %. banks has been scaled down to around 20 percent, from 50 percent in cy00. the net effect of the liberal licensing policy and consolidation is that today pakistan has 39 banks ( down from 46 in 1997 ). excluding the five large banks, of which the largest bank is government owned, there are around 20 banks among the remaining 35 banks, which together hold a mere 9 percent share in the banking system. while large banks are improving their performance and converging on bottom - line performance indicators under increased competition, small banks are gradually losing ground because of the lack of scale and operational efficiency. enhanced competition and the need to substantially grow the lending portfolio to remain commercially viable would eventually pose problems of existence for small banks. recognizing the system risk, sbp has stiffened its licensing policy and regulatory capital requirements and has increased the paid up capital requirements for banks to $ 100 million. 4 positioning themselves accordingly, a few banks have injected fresh capital or amalgamated with other financial institutions to meet these requirements. a wave of mergers and amalgamation has become a business reality in pakistan and over the last five years, 21 financial institutions have been merged / acquired. this has involved a buy - in of foreign banks by the local banks, merger of smaller banks and dfis, merger of investment banks with commercial banks and so on and so forth. in order to eventually have a stronger banking system, pakistan is striving for further consolidation of the banking sector and it is with this in mind that the sbp has approved in principle additional five strategic mergers : 1. standard chartered bank ( scb ) is acquiring union bank which had sometime back acquired bank of america and emirates international bank. following this scb will emerge as a local subsidiary 2. merger of rupali bank pakistan operations with and into arif habib rupali bank 3. merger of atlas investment bank with and into atlas bank limited after its acquisition of dawood bank ltd. 4. merger of habib bank ag zurich pakistan operations with and into metropolitan bank 5. merger of picic and picic commercial bank going forward, sbp ’ s strategy is to allow new entrants by way of strategic partnerships with licensed banks and to encourage additional mergers and acquisitions. this will help evolve a stronger and robust banking system to meet the challenges of the increasingly complicated financial environment. the competitive environment might also force financial institutions to specialize in