union, 2019 / c 366 / 02 and imf ( 2019 ) article iv consultation : denmark, imf country report, no. 19 / 178. page 15 of 23 the purpose of the ccyb is to prevent a negative impact on the real economy when the financial system is under stress. the buffer has to be built up when systemic risks increase and before financial imbalances grow too large, making the financial sector vulnerable to negative shocks. the buffer has to be released if stress occurs in the financial system and there is a risk of severe tightening of lending to households and firms. the council published its framework for assessing the ccyb in december 2014. 21 denmark was one of the first countries to develop and publish a method to assess the ccyb. in denmark, the ccyb could potentially have been set at a positive rate from 2015. this was one year earlier than in many other countries. the danish framework was gradually phased in from 2015 to 2019. the buffer rate could be set at up to 2. 5 per cent in 2019, and from 2020 it can be set at a higher value if justified by the assessment basis. the initial method for assessing the ccyb comprised three steps. for step 1, the council identified five key indicators for the build - up phase and two key indicators for the release phase. 22 in step 2, other quantitative and qualitative information was taken into account. based on an overall assessment, the level of the buffer rate was determined in step 3. it became clear, however, that the method entailed a risk that the buffer would be built up too late in the financial cycle to make a difference if there was a need to release it. one reason was that one of the few key indicators was the so - called credit - to - gdp gap recommended by the basel committee and the esrb. there are some challenges in using this indicator for the current credit development. one of the weaknesses of the indicator is that it relies on a statistically calculated trend that is boosted by the very high lending growth and high level of lending in the pre - crisis years. this results in a highly negative credit - to - gdp gap in denmark in subsequent years, indicating no need to activate the buffer. however, even moderate lending growth can mask the build - up of risk, e. g. if credit quality requirements are eased and new loans are granted to more risky firms. and risks can be amplified by the already high level of

1. 4 % to 7. 9 % in fy06, in line with the annual target of 8 %. like other developing countries where transmission mechanisms are not immediately obvious or efficient, it takes well over a year or more for high interest rates to curb the credit growth. thus far while credit growth has decelerated, it remains fairly robust as demand pressures from both public and private sector remained high during the course of the year. consequently, it is no surprise that while food cpi decelerated as the government eased constraints by allowing imports of essential products ( sugar, cement and selected pulses ) and enhanced its distribution mechanism, the core inflation ( excluding volatile components of cpi i. e. food and energy ) is 7. 1 % for fy06. although the rate of passthrough from the higher prices of energy and other commodities to core consumer price inflation appears to have remained relatively low, the cumulative increases in energy and commodity prices have been large enough to account for the recent inflationary pressures in core cpi. anecdotal reports suggest that the labor market in pakistan is tight. while labor productivity remains low, the wage increases will generate additional pressures. over the medium term, managing inflationary expectations and perceptions and designing an appropriate monetary stance, which aligns economic activity with the economy ’ s productive capacity, will remain a challenge. financial sector reforms : consistent with trends observed in growing asia, structural changes in financial markets have been remarkable and significant. first, a word on the financial sector ’ s scope and scale : - financial assets grew by 70 % over the past five years and in cy05 reached rs 5. 1 trillion ( $ 85 billion ), equivalent to 80 % of gdp ; - the banking sector grew at a faster pace relative to non - bank sectors and accounts for 71 % of the financial industry assets ; - market capitalization of the stock exchange grew steadily and recently peaked at 44 % of gdp relative to 10. 3 % in june fy00 latest financial sector assessment for pakistan and the banking sector review 2005 1, which will be released by july 2006, together lend comfort that : ( i ) banking sector profitability ( after tax ), at over $ 1 billion, is at an all time high and the return on assets ( after tax ) increased to 1. 9 % in cy05 2 from 1. 2 % in cy04 ; surpassing the relevant international benchmark. the rapid growth in profits also resulted in considerably higher return