##ties about the sustainability of the recovery have arisen. if this continues, it will help to reverse the trend in this component of the index. but, the most significant cause of reversal is likely to be a moderation in food prices over the next few months in response to a reasonably good monsoon. the other supply - side driver of inflation in recent months has been energy. the inflation rate for the fuel component of the wpi began rising in june 2009. though it remained in negative territory until october 2009, the rise itself contributed to a rise in the overall inflation rate. from october 2009 onwards, fuel inflation has been positive and rising quite rapidly. in short, the indian economy has clearly seen a spurt of inflation, significantly driven by supply - side factors in a period during which growth was relatively slow. prevailing wisdom on monetary policy suggests that supply - side pressures, particularly if they are temporary in nature, are not effectively tackled by conventional monetary measures, which are more directly aimed at reining in demand. apart from the temporariness of these supply - side factors, the overall state of the economy should also be considered. the same wisdom argues that, if the economy is at or close to full capacity utilization, monetary actions in response to supply - driven inflationary pressures may be appropriate. while they will not directly address the cause of the inflation, by signaling a willingness to compress demand, they will rein in expectations of inflation spiraling out of control. the fact that the economy was still growing at a relatively slow pace in the second half of 2009 – 10 implied that there was some slack still available in capacities across sectors and that the threshold for strong monetary actions had not yet been reached. however, monetary assessments at that time could not be made independently of the very drastic measures that had been taken when the global crisis precipitated in september 2008. those actions took the monetary position, as reflected in the repo and reverse repo rates and the cash reserve ratio ( crr ) quite some distance from what would be considered normal levels. even in the early stages of recovery, therefore, every opportunity to revert these instruments to normal needed to be exploited. i shall return to this point a little later in the article. the rising significance of demand coming back to the inflationary situation, while a significant proportion of the rise in the inflation rate over the past year can be attributed to supply - side factors, demand pressures became visible in early 2010. while it is difficult to identify a

the utmost determination, in line with our mandate. today, however, i do not want to talk primarily about monetary policy, but about the swiss financial industry. allow me to start by explaining why the financial industry, in general, and a healthy and stable banking sector, in particular, are of vital interest to the snb. there are two main reasons. first, the banking system fulfils a key financial intermediary role in the economy. due to this pivotal function, the banking sector plays a crucial part in the transmission of monetary policy. on the other hand, however, it may also be the source of financial shocks that impact on the real economy. second, the industry is itself a large part of the swiss economy. the significance of the financial industry and our position as a global financial centre are important contributors to the wealth of our nation. this is especially apparent here in zurich, where the financial sector generates much employment, wealth and tax revenue. in my remarks, i will first discuss the macroeconomic challenges associated with the banking sector ’ s key role in the transmission of monetary policy, as well as the risk that it may bis central bankers ’ speeches propagate financial shocks to the economy. then, i will discuss the challenges for the industry itself. lastly, i will address the main implications from the snb ’ s point of view. macroeconomic challenges let me start by focusing on the macroeconomic challenges associated with the importance of the swiss financial industry, and, in particular, the banking sector, for the rest of the economy. the main reason why the banking sector is so important for the swiss economy and the snb lies in its traditional function as financial intermediary. as banks collect funds and provide financing to firms and households, they are the “ life blood ” of the economy. related to this traditional function, there are two distinct aspects i would like to point out. first, banks play a crucial part in the transmission of monetary policy. there are various channels through which monetary policy is transmitted to the economy, but the primary channel is via changes to the short - term nominal interest rate, in other words, via the cost of borrowing and the return on savings. monetary policy thereby affects investment and consumption decisions throughout the entire economy, thus influencing business level activity and price dynamics. in its implementation of monetary policy, the snb provides short - term liquidity to the banking system, and not directly to firms and households. banks, as financial intermediaries,