sharp rise in house prices since the mid - 1990s. according to tns gallup ’ s consumer confidence indicator for the first quarter of 2005, households are still highly optimistic with regard to their personal finances and the domestic economy. our regional network confirms this impression, with reports of strong growth in companies that provide goods and services to households. on the whole, household consumption and housing investment are projected to show fairly strong growth over the next few quarters. even with a strong upturn in the mainland economy, the increase in the number employed has been relatively modest. productivity rose fairly sharply in the first few quarters after economic growth picked up. normally, when productivity growth is strong, enterprises again begin to hire new staff. the current upturn has lasted about two years. the fairly low level of growth in employment, as measured by the number of employed, must be seen in the light of the sharp decline in sickness absence through 2004 after rising for several years. the decrease in sickness absence has increased companies ’ supply of labour and reduced the need for new employees. measured in person - hours worked, employment growth was solid last year. the number of person - hours worked rose by 2. 2 per cent from 2003 to 2004. a corollary to the increase in the number of person - hours worked is partly reduced sickness absence and partly three more working days in 2004 compared with 2003. an increase in available person - hours and increased competition and rationalisation in many sectors led to higher - than - normal growth in potential output last year. the economy has therefore been able to grow fairly rapidly for a period without the emergence of bottlenecks in the labour market. in the business tendency survey, manufacturing industry reported rising output volumes and capacity utilisation. average capacity utilisation in the manufacturing sector is now close to its historical average. information from norges bank ’ s regional network also indicates an approximate balance between supply and demand in the economy, and that capacity utilisation is close to normal. a normal level of capacity utilisation is consistent with an output gap – the percentage difference between actual output and potential output – that is close to zero. growth in demand and output is expected to remain high in the near term. unemployment may fall somewhat more quickly than has been the case over the past year. the output gap is expected to be positive in 2005. higher demand for companies ’ goods provides scope for increasing prices. experience shows that inflation is directly influenced by the level of capacity utilisation in the

the central bank. the statutory responsibility for ensuring bank soundness has moved to these agencies, but the central bank has kept its traditional concern for the overall soundness of the financial system. this has led to a clearer distinction between the micro - and macroperspectives that had become blurred in the second half of the last century. in britain the creation of the financial services authority led the bank of england to build up its resources in financial stability analysis. this was a result of the bank ’ s efforts to ensure that oversight of the financial system did not fall between the gaps in the new institutional structure of supervision. since then other central banks have followed the bank of england ’ s lead. financial stability units – small teams with backgrounds in economics and banking supervision whose job it is to monitor wider trends in the financial system – are now increasingly a feature of the organisational charts of many central banks. these factors have led to a redefinition in the way in which central banks have begun to approach their traditional macro prudential remit. i would like to mention four of these in particular : • the formalisation of payments and settlement system oversight ; • the publication of financial stability reports ; • stress testing and scenario analysis ; and • concern with financial condition of non - bank financial intermediaries and health of corporate and household balance sheets. let me now briefly talk about each of these in turn. payment system oversight has been part of the core functions of central banks almost from the very beginning. however, once the formal responsibility for banking supervision was split away from central banks like the bank of england and the reserve bank of australia, these central banks began to formalise their role in payment system oversight. in australia, for example, the 1998 payment systems ( regulation ) act gives the rba powers to regulate the payments system and purchased payment facilities ( such as travellers ’ cheques and stored value cards ). it also allows the rba to obtain information from payment system participants and to set access regimes and determine risk control and efficiency standards for designated payment systems. the rba ’ s responsibilities in this regard are discharged by a payments system board. the adoption of real time gross settlement ( rtgs ) has been another key risk reduction initiative on the part of many central banks in the past decade and a half. these systems eliminate the build up of settlement exposure and herstatt risk between financial institutions as a result of the exchange of high - value payments and debt securities settlements. instead, individual transactions are