Almost all components of demand continue to grow, albeit at a more moderate pace. Private consumption will benefit from the healthy improvement in disposable income. Equipment investment is being stimulated by the high rate of utilisation of production capacity and the favourable business outlook in many industries. Residential construction is likely to see a measure of calm. Yet increased investment in commercial and industrial building may offset this development to some extent. The somewhat weaker global economic development – though still favourable overall - will probably continue to have a positive impact on exports. For 2007, we expect overall GDP growth of about 2%. Monetary developments Allow me to explain developments in the financial markets and the monetary aggregates. Two topics merit particular attention: the development of credit and money supply and the exchange rate. In addition to long-term interest rates and exchange rates, loans – among other things – play an important role when changes in key interest rates are transmitted to the economy. What information can we derive from the development of lending activity? Loans are registering constant growth. Mortgage loans, which account for the great majority of all bank loans, have grown at a rate of more than 5% since 2003. This is a reflection of the clearly expansionary monetary policy at that time. The growth rate of mortgage loans has gradually slowed, however, and is now slightly below 5%. This is nevertheless still a high growth rate. Other loans, however, are witnessing stronger growth and are currently expanding by 6%.
Experience has shown that phases of a weaker Swiss franc can be followed by periods in which the franc exhibits an upward trend. Financial market players and businesses should therefore be aware of the exchange rate risks they take. Monetary policy decision The inflation outlook forms the basis for the monetary policy decision. How does this look to us? As has already been pointed out in the considerations on the economic situation, there is likely to be an above-average utilisation of economic resources. The monetary analysis shows that lending is still growing vigorously and that the Swiss franc is trending relatively lower against the euro. Yet the inflation outlook remains favourable. The reasons are three-fold: First, falling oil prices will push inflation down considerably next year, at least during the first six months. Second, the opening of the labour market is making production more flexible, thereby exerting a favourable influence on inflation. Third, the National Bank lifted its interest rates at an early stage. The chief contribution of today's interest rate adjustment is to prevent resources from being over-utilised in 2007 and 2008. As a consequence, inflation is also likely to be muted in 2008 and 2009. 2  BIS Review 123/2006  Inflation forecast graph The new inflation forecast is shown in the graph as a red dashed line. It covers the time span from Q4 2006 to Q4 2009 and depicts the inflation forecast on the assumption that the interest rate remains at 2.00% during this period of time.