partner no sign of banks taking greater risks since the end of 2002, mortgage claims have recorded annual growth rates of up to 6 %. this is quite substantial compared with the rather moderate trend in real estate prices. it appears that the expansion of mortgage claims has not been driven so much by real estate prices, but by the number of loan requests. consequently, the growing demand for loans is more likely attributable to factors other than the expectation of a speculative boom in real estate prices. the crucial question is the following : is the higher demand for loans due to excessively harsh competition among banks that has led to cheaper credit not reflecting the actual risks incurred? how has the relatively strong growth in mortgage loans impacted on bank risks? to answer this question, we took a closer look at the banks ’ risk behaviour. several indicators led us to believe that banks have hardly engaged in excessive risk taking. while it is true that interest rate margins, i. e. the spreads between mortgage rates and the banks ’ financing costs, had fallen slightly by mid - 2005, other bank expenses declined at the same time. in the final analysis, therefore, the profit margin was virtually constant or even slightly higher. the profit margin corresponds to the difference between the interest rate margin and the total operating expenses expressed in percent of the loan volume and – to reflect expected risks – of total value adjustments and provisions. the banks ’ profit margin thus also serves to cover unexpected risks. given that the profit margin has remained constant or moved slightly higher, the banks ’ risk - taking capacity has not diminished in spite of pressure on interest rate margins. this presupposes, however, that the banks have made realistic value adjustments and provisions. we currently assume that this is the case. moreover, average lending limits for mortgage loans have changed only insignificantly and may be regarded as cautious. for instance, the proportion of low - risk first mortgages – i. e. those mortgages with the lowest lending limit – is over 90 %. the criteria used in extending loans can also be rated as conservative. as a rule, assessments of a debtor ’ s future solvency are based on considerably higher interest rates than the current ones. mortgage debtors should therefore be able to meet their liabilities even if there is a marked increase in the interest rate level. our analysis focuses on system - relevant banks and on different groups of banks. we rely on aggregated data and on a random sampling of banks or groups of banks. problems with

slightly weaker rate of 1. 6 %. due to improved economic activity abroad and the favourable exchange rate, exports exceeded their year - earlier level by 7. 4 %. equipment investment, which had expanded by as much as 7. 5 % in the final quarter of 2003, declined slightly due to special effects. the upswing has also made itself felt in certain domestic sectors. this is evident in private consumption, which increased by 2. 3 %. the uptrend, which had begun towards the end of last year, thus continued. surveys confirm that consumer sentiment has improved. construction investment also topped the year - earlier level by a hefty 2. 8 %. the expansion in mortgage loans by 5. 5 % confirms the revival in the construction and real estate sectors. the upswing is also evident from a stabilisation on the labour market. for the first time in five quarters employment slightly exceeded the corresponding year - back level. the job vacancies indices reveal that demand for labour is gradually rising again. the favourable overall picture is confirmed by the economic barometer of the institute for business cycle research at the swiss federal institute of technology. how do we assess economic development in the near future? for this year, we are forecasting economic growth of close to 2. 0 %. growth is therefore likely to be underpinned by both higher exports and stronger domestic demand and to lead to a gradual decline in unemployment as from the second half of 2004. towards the end of 2005, the economy should again be working close to capacity, and this will influence price formation. our inflation forecast of march already showed that, given an unchanged interest rate of 0. 25 %, inflation would exhibit a rising trend as from the second half of 2005. the reason was to be found in improved capacity utilisation and unemployment declining in step with the more favourable economic conditions. this assessment has not changed in any way. the new forecast, adjusted for the 25 basis points rise in the three - month libor, now suggests that, as from the second quarter of 2005, inflation will fall short of the figure predicted by the last forecast. it makes it clear that the normalisation of the monetary policy course now initiated improves inflation prospects. the monetary development our inflation forecast is much less certain over a longer horizon. for this period of time, it is particularly helpful to consider monetary factors. for the monetary analysis, i shall deal with the development of the money stock m3. when interest rates were last cut