and the service sector. imports are expanding at a brisk pace. there are prospects of continued strong growth in petroleum investment in 2005. employment is rising, albeit still at a moderate pace. monetary policy influences the economy with long and variable lags. there is always uncertainty surrounding inflation developments. a very high oil price may also have an impact on the krone exchange rate. historical deviations between projected and actual developments in the cpi - ate provide an illustration of the uncertainty surrounding the inflation projections. the fall in the value of the krone through 2003, low interest rates and solid growth in the real economy will gradually push up inflation. price developments in recent months have, nevertheless, increased the risk that inflation will remain low for a longer period. thank you for allowing me to make the introductory statement at this hearing.

, hong kong and australia, to name a few. and we have also seen the credit markets in these economies freezing up. we haven ’ t come to this yet and we will make sure that we don ’ t. how shall we manage that? the bsp can contribute by : 1. calibrating monetary policy to ensure that there is ample liquidity in the system. the trend decline in inflation and our within - target inflation outlook have given the bsp room to be accommodative. we will, therefore continue to look for opportunities to be supportive of economic growth. 2. keeping our banking system safe. our banks have benefited from the series of reforms implemented in recent years, which have included cleaning up of banks ’ balance sheets, the strengthening of bank capitalization through basel ii, and the improvements in governance structures. we will continue to enhance our macrosurveillance capabilities and further improve supervisory oversight of risk management. to operationalize these, the bsp recently approved the guidelines for internal capital adequacy assessment process ( icaap ). the icaap provides a prudent framework that would force banks to consider their own assessments of business lines and the prospects for these, determine their risk profile and then actively decide the appropriate level of capital to hold. this formalizes the requirement for banks to have a more - forward looking approach to risk management and make them directly link risk to capital. this would improve accountability on the part of banks for their actions and hopefully avoid the situation of poor appreciation of risk that was at the heart of the financial turmoil in the us. 3. creating a stable macro environment, i. e., stable interest rates and exchange rates. this would encourage long - term business planning and lending by banks. economic agents and banks need to continue to be keen to seize opportunities during this downturn and be ready for the upturn. 4. continuing to encourage financial innovation and capital market development. i am often asked whether the bsp would clamp down on financial derivatives and financial innovation, given pundits are pointing to their proliferation as one of the reasons for the current financial turmoil. my answer to that is this – i believe there is a place for financial innovation in market development. its presence provides avenues to address varying risk requirements of investors and users of funds. what i always emphasize, however, is that embracing financial innovation must be coupled with appropriate prudential regulation, including appropriate disclosure and transparency standards. these would ensure that