rights. he says explicitly : “ every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. ” the “ invisible hand ” therefore cannot function in the total absence of government. indeed, apart from assuring the rule of law, smith saw two other functions for government : “ the duty of protecting the society from the violence and invasion of other independent societies ” and the “ the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain ”. against the backdrop of these brief reflections on the great adam smith, let me turn back to the specific question put to us. i have no doubt that together with a functioning rule of law and limited government intervention, free markets in general and financial markets in particular are the optimal path to the promotion of wealth. i am equally convinced that responsible behaviour has the best chances of flourishing in an environment of economic opportunities and rising standards of living. trust clearly enhances the rule of law as there will never be enough courts to permanently monitor all market transactions. modern means of communication and transparency, in turn, are trust - enhancing. think of seller and purchaser ratings on many internet auction sites. now, let me conclude my remarks with a final and in my view crucial note of caution. as charles kindleberger demonstrated convincingly in his 1978 book manias, panics and crashes, financial markets are prone to phases of irrationality and exaggeration. such market disequilibria lend support to the need for the rule of law and the utility of limited government intervention in a number of areas. i want to emphasize the word limited. notwithstanding adam smith ’ s own reference to government intervention, the role of government must remain a limited one. if temporary market imperfections or difficult market adjustment periods give rise to the justification for relentlessly expanding the role of government, there will be a point when markets will no longer function effectively and when welfare creation will seize to advance. there is no better breeding ground for irresponsible behaviour than an environment of economic stagnation or worse, welfare decline. there are times in history when the world economy undergoes fundamental structural change. with the rapid integration into the global economy of china and india, we are experiencing

between 1. 5 % and 2 %. this is lower than the growth rate we have observed since 2006. measuring the output gap is tricky, however, because certain favourable factors, such as the influx of skilled labour, the deregulation of certain domestic markets and increased global competition might have pushed up potential gdp growth. having said this, however, we should not overlook those factors which have the opposite effect. for instance, equipment investment has receded, which has a dampening effect on potential growth. moreover, even if capacity utilisation as a whole is not excessive, bottlenecks might occur in certain sectors of the economy. and, above all, experience has shown that the output gap is often underestimated during phases of growth. consequently, the risk of underestimating the output gap may now be greater than that of overestimating it. the third risk is associated with the future development of the swiss franc. as its exchange rate is determined by the market, it is subject to fluctuations. movements in the export - weighted swiss franc index alter the degree of restrictiveness of our monetary policy. normally, during periods of rising interest rates, this index tends to increase, thereby amplifying the effects of monetary policy by mitigating price increases in imported products and slowing the expansion in economic activity. this reaction pattern was not observed during the past two years, which could put pressure on interest rates. monetary policy decision before commenting our decision today, i would like to point out the changes that are shaping our current environment. in december 2005, when the present cycle of interest rate hikes began, we were concerned with the normalisation of the interest rate level – at the time the libor was at 0. 75 % – while allowing the economy to reduce its level of unused resources. our concern now is to ensure that monetary conditions are such that the healthy state of the economy does not jeopardise price stability in the medium term. we are still observing that the competitive pressure in the market is high, the labour market very flexible and that movement in the monetary aggregates is moderate. however, my analysis of the current situation has demonstrated that the inflation outlook has deteriorated in different respects since our last assessment : higher oil prices will have an impact on the consumer price index ; economic performance, which is better than expected, will result in an improved utilisation rate and increase pressure on prices and, finally, a renewed weakening of the swiss franc has neutralised the