7 % planned for this year. this will help to limit domestic inflationary pressures. it would also limit the damage to our competitiveness in the event of a sharp appreciation of the euro. as our spring bulletin points out tomorrow, we still have an inflation problem. the excess inflation over that of our euro area partners is largely a services sector phenomenon. nominal pay increases in recent years have been much higher than the euro area. while higher productivity increases here have partly offset these differences, these have been confined to a relatively small number of industrial sectors. the strengthening of the euro since the middle of last year has exacerbated the effect of these unfavourable trends on competitiveness. it behoves us, therefore, to focus on all policy areas in order to quickly reduce our inflation rate to that of the average of our euro area partners. in this regard, i am happy to see, as part of the anti - inflation initiative in the proposed national partnership agreement, that representatives of employer and union organisations will work with the government in an effort to target domestic sources of inflation. the financial sector i would now like to make a few comments on the financial sector. as a major player in the economy, the broad financial sector benefited from the strong economic performance before the recent slowdown. this was reflected in strong growth in balance sheet sizes and in employment. the ifsc continues to be a success story. the main area of growth in the ifsc has been in the funds sector ; these now account for about half of total employment of about 11, 000 with aggregate authorised funds amounting to over euro 300 billion. irish banks have faced a marked deterioration in their business environment in the past year or so. in response to this, they have become more conscious of managing both their primary and secondary exposures to particular industries and sectors. in terms of performance, it is too early to make an assessment of the overall profitability of the banking sector in 2002. however, some key results published to date, suggest that irish credit institutions continue to increase profits, but at a slower rate than in previous years. irish banks remain well capitalised with strong solvency ratios and, to date, there has been only a marginal increase in impaired loans. provisioning levels have also been maintained suggesting that the banking system is well covered against loan losses. notwithstanding the currently stable picture, it is important to bear in mind that bad debts lag the economic cycle. therefore, loan quality will be a topical issue for

some time. regarding the broad property sector, the weaker state of the economy, together with a continuous expansion of housing output, would seem to point to more subdued prices ahead. in the commercial property sector, prices have ceased rising. the growth in residential mortgage and commercial property lending, nevertheless, remains strong despite the underlying weakness in the economy and the uncertain outlook. our continuing concerns in this area will be dealt with in our bulletin tomorrow. the new regulatory authority before concluding, may i refer briefly to the establishment of the new regulatory authority. as you know, the interim board of the irish financial services regulatory authority has been in place since last april. i have been working very closely with brian patterson to ensure a smooth transition to the new structures. we are very confident that we will be ready for the implementation date, expected to be in early may. as provided for in the draft legislation the financial services regulator will be a new authority with its own independent responsibilities for prudential supervision and consumer protection across the full spectrum of the financial services industry. in his address this morning, liam o ’ reilly described how the authority will discharge its functions. liam and his staff have made excellent progress over the past several months in mapping out the way forward for supervision. i wish him every success in the important work ahead. conclusion in summary, the world economy is currently labouring in the aftermath of past excesses, particularly in regard to asset markets, as well as present geopolitical uncertainties. these have seriously affected consumer and business confidence resulting in weak demand across the world economy. the international climate is evidently an important determinant of our economic performance, and there remain significant doubts over how and when the world economy will emerge from its current subdued state. our own policies should be directed to limiting domestic inflationary pressures and protecting competitiveness. while, our inflation looks set to moderate somewhat, as the year progresses, it will require a concerted effort to narrow the inflation differential against the average for the euro area.