low rate of unemployment. secondly, productivity increases over the past decade or so were boosted by structural changes in the economy which involved transferring labour from low to high productivity sectors, notably in the high - technology areas. the scale of this cannot be continued in the future. this would suggest that growth potential in the medium - term would be at the lower end of the 4 to 5 per cent range. it is important that expectations are adapted to this somewhat lower, but still very satisfactory, rate of potential growth over the medium - term. credit growth continues to be a worry. in may, ireland ’ s adjusted private sector credit growth rate of 23 per cent was four times the euro - area rate of 5. 8 per cent. if such divergent rates of increase were to persist, ireland would become one of the most indebted countries in the euro area within a few years. this increase in credit has mainly been accounted for by mortgage credit. the bank remains concerned at the continuing large increases in house prices - currently running at 12 to 13 per cent especially in the light of the substantial increase in housing supply. if the increase in prices were to continue, the risk of a significant correction would increase. monetary policy and the euro area economy current prospects for the euro area economy are reasonably positive. with external demand remaining strong, growth is expected to average 1. 7 per cent this year and 2. 1 per cent in 2005. largely due to higher oil prices, inflation will be above 2 per cent this year and into the early part of 2005. i feel however, that on balance, the current evidence points to inflation in the euro area being in line with price stability over the medium - term. supervision this annual report contains a review of financial supervision issues covering the period from the 1st of january to the 30th april 2003, with a short summary of activities from may to december 2003. in accordance with the new legislation, the financial services regulator will publish its own report covering the 20 - month period from the 1st of may 2003 to the 31st of december 2004 in mid - 2005. in the meantime, the financial services regulator published a progress report in june of this year outlining its first year of operation. in addition to supervising financial institutions from a safety and soundness viewpoint, a comprehensive regulatory structure for consumer issues was put in place during 2003 with the appointment of a consumer director as provided for in the legislation. financial results the surplus income paid by the bank to the exchequer in respect of 2003 is €32

point of the corridor system. second, the marginal lending rate is the interest charged on overnight lending from the eurosystem to banks. it constitutes the ceiling of the corridor system. third, the deposit facility rate governs the remuneration for excess reserves that our counterparties hold with the eurosystem as overnight deposits. it constitutes the floor to the corridor system. moreover, it also provides the floor on interbank market rates as banks have no incentive to lend funds below this rate in the market. setting the deposit rate to a value below zero would imply that the remuneration for excess reserves in the euro area is negative. in other words, banks are charged for making overnight deposits with the ecb. from a technical point of view, we are ready to implement a negative deposit facility rate. and, in general, there are constellations conceivable where the eurosystem could deploy such a negative rate, if it is deemed required by our mandate to safeguard price stability. so what are the pros and cons? theoretically, a negative deposit rate may provide additional accommodation. in the current environment of excess liquidity, the relevant overnight interest rates have shifted close to the deposit rate. in this situation, reductions in the deposit rate could push down overnight interest rates further. at the same time, possible caveats and unintended side effects of this move have to be kept in mind. in particular, crossing the zero line can set off actions in the market that may run counter to the central bank ’ s policy easing intentions. for example, there can be a substitution by private actors towards cash which becomes the highest yielding short - term asset. similarly, the money - holding sector may promote financial innovations that could emulate currency and allow tax avoidance. these actions may undermine the underlying purpose of the move towards negative deposit rates. overall, the consequences are subject to considerable margins of uncertainty as such a move has never been observed in the eurosystem or in any other major currency area in the world. how do these considerations differ from those underlying the move by denmark ’ s or the swiss central bank? both countries apply a fixed exchange rate policy vis - a - vis the euro area. in contrast, the ecb does not consider the euro exchange rate as a policy target. this adds an additional complexity to the monetary policy objective function. what could be the effects of introducing a negative deposit facility rate on the euro exchange rate? one can in principle single out three factors that would