- financial corporates index ( series 10 ) at the beginning of the time series in this chart. but this is no time for complacency. uk bank funding costs, as proxied by their cds premia, remain elevated – both relative to their historical average, and relative to european non - financial corporations ’ cds premia ( chart 10 ). and there remain significant risks going forward. sovereign strains, and their potential impact on the european banking sector in particular, represent the most immediate and material threat to markets generally and to uk financial stability. as a result, the interim fpc have recommended that the major uk banks provide improved and more comprehensive disclosure of their sovereign and banking sector exposures. there is also event risk associated with the forthcoming publication of the eba stress test results, if the results are markedly different from market expectations. market intelligence suggests that the major uk banks have raised around £25bn in private markets in the year - to - date 2011. bis central bankers ’ speeches the search for yield / assets the significant recovery in many global financial markets reflects, in part, the actions of policymakers around the world. in the united kingdom, the bank of england responded to the collapse in economic activity and the risk of deflation by cutting official interest rates and embarking on a programme of asset purchases financed by the creation of central bank reserves ( known as quantitative easing ). it also separately sought to stimulate markets for corporate debt and commercial paper, and put in place a special liquidity scheme for banks to swap their illiquid collateral for highly liquid t - bills. other central banks took a variety of similar actions. for example, the federal reserve began purchasing a range of private and public sector securities in large scale. and in europe, the ecb responded by offering its counterparty banks unlimited refinancing operations at maturities of up to 12 months. despite these differences in policy, one end result was common – they led to a massive expansion of central bank balance sheets ( chart 11 ) and a significant injection of liquidity into the global financial system. that in turn pushed down yields on “ safe ” assets, encouraging portfolio rebalancing ( one of the key channels through which asset purchases work ) and a “ reach for yield ”. 7 more recently contacts, especially those in the united states, have reported that the reach for yield has been exacerbated by a perceived reduction in the universe of acceptable assets for real money investors. 8 for example major

provides an opportunity for the government to improve the public utilities and introduce microeconomic reforms to remove impediments to trade and investment and efficiency in the delivery of public services. these reforms are necessary to promote economic growth. the level of gross foreign exchange reserves as at 9 june 2006 was k2, 990 million ( us $ 989 million ), a record high in our history, sufficient for 7. 0 months of total and 11. 0 months of non - mineral import cover. the high level of reserves has further strengthened the central bank ’ s position to smooth any undesirable volatility in the foreign exchange market. under the floating exchange rate regime adopted in 1994, the kina exchange rate is determined by the supply and demand for foreign exchange. consistent with the objective of price stability, the bank enters the foreign exchange market from time to time to smooth the effects of short - term volatility. in 2006, the exchange rate is expected to remain stable given the favourable international prices for mineral and non - mineral export commodities. non - mineral exports are expected to increase in 2006, due to the supply response to higher prices. producers and exporters are continuously encouraged to increase production for export to take full advantage of the current high international prices. in addition, developments in the mineral sector, particularly the progress on the png gas project and the finalisation of the ramu nickel project should contribute positively to investor confidence. lending to the private sector continued to grow strongly. the growth in lending has been broad based covering the agriculture, forestry and fisheries, manufacturing, transport and communication, building and construction and other businesses including hotels and restaurants, personal loans and advances for housing sectors. firms have responded positively to the low interest rates and lending has reached unprecedented levels. we recently announced the withdrawal of the 1 and 2 toea coins from circulation. i urge the public to return the 1 and 2 toea coins as they will officially cease to be legal tender on the 19th april 2007. i also encourage the business houses to make changes necessary for a smooth transition. in this regard, i encourage firms to be fair and responsible in adjusting prices to the on - off policy change. the government ’ s budget deficit in the march quarter 2006 was 0. 3 percent of nominal gross domestic product. however, substantial mineral tax receipts, which were higher than expected at the end of april 2006, suggest that government revenue is likely to be significantly greater that budgeted in 2006. while acknowledging the positive outlook of