low global interest rates have kept longer - term rates in new zealand lower than usual and necessitated more tightening in the ocr. mortgage rates on upward trend in addition, late last year the banks in new zealand started cutting margins as part of a mortgage war. the australian - owned banks have enjoyed strong profits in new zealand for some years. they are now seeking to keep up the returns by capturing more business through active marketing of fixed rate loans. this has kept the housing market much more buoyant, unlike in their home country australia where floating rates predominate and the housing boom is over. so far our focus has been on the overall effects on the new zealand economy. but we also need to emphasise the position of certain households that are potentially at risk. about a third of households have mortgages, and one tenth of those are quite deeply in debt, already spending over half their disposable income on servicing their mortgage. these people are vulnerable to interest rates rising, property prices falling, or their employment positions becoming more fragile. later in november we will be releasing our financial stability report, which will comment on the housing sector in more detail. this presents us all with a challenge. strong housing activity and other consumption in this tight economy is starting to drive inflation higher. in addition, pre - election fiscal promises and coalition undertakings could fuel the strong domestic economy further if they happen in the near future. and, the big oil price rise is already increasing headline cpi, while second - round effects could drive inflation further. oil price shocks we are addressing these inflation pressures through higher interest rates. but at the same time this strong domestic demand is driving the current account deficit, which itself is partly exacerbated by the opportunities the relatively higher new zealand interest rates offer overseas investors in the new zealand dollar. how do we intend to manage these issues? our primary concern is inflation. we are already seeing signs of domestic spending slowing. last week we increased the ocr again and stated that we need to see more housing and consumer 2 / 3 spending moderation before we will be comfortable that inflation pressures are contained. we will be helped in this by the pressures to increase mortgage rates already in the pipeline, by the tightening international bond rates, and by the increasing sensitivity of indebted households to monetary policy. we will be watching closely for signs of further slowing over coming months. but we cannot reduce inflation and reduce external imbalances alone. there are other key players in this process,

a sizeable capital exporter ( a surplus would also be expected because of its weak cyclical phase ), the current account surplus of the euroarea has averaged only $ 17 billion annually since 2000, compared to $ 26 billion for china and $ 80 billion for the dragons, whose per capita income is still relatively low. of course, if euroarea growth was faster, this aspect would not be so important since more market determined exchange rates in these countries would probably only add not more than one quarter of a percentage point to euroarea growth. however, with average growth in the euroarea of less than 0. 7 % in 2002 / 2003, even a small stimulus matters. in this context i would like to say something about the greek economy itself. unlike our partners in the eu, we are now enjoying strong growth that will stay close to 4 percent this year as in the last five years. admittedly, the stimulus from the forthcoming olympic games and the inflow of eu structural funds has contributed to the good economic performance ; but i think it is true to say that endogenous factors have been significantly more important. public expenditure on the olympic games, amounting to just over 1 % of gdp in the last few years, has also had the negative effect of raising the fiscal deficit to about its upper limit of 3 %, set by the european treaty, and has also intensified inflationary expectations. as a result external competitiveness will again probably be eroded somewhat in 2004, in turn restraining gdp growth. as for financial support from the e. u., it is worth mentioning that net inflows from the e. u. have fallen from over 5 % of gdp at the end of 1990s to 2. 8 % in 2003. the greek economy has succeeded in absorbing this negative shock without strains and the probable further decline in net e. u. funds, after 2007, which is related to e. u. enlargement, does not pose a serious threat to growth. against these negative influences there is an array of positive factors, starting from the fundamental changes in the economy that have occurred in the last fifteen years and are easily visible to the naked eye. not only is the economy functioning more efficiently, and reflecting a high investment - to - gdp ratio of 26 %, the capital base both in the private and public sector has broadened and deepened, but also business initiative is on the rise, and the factors in combination with the removal of exchange rate risk and low