So, with the recovery momentum remaining firm but the risks to economic stability rising, the Monetary Policy Committee saw less need for maintaining low interest rates and felt that the monetary policy stance should be adjusted to give priority to economic stability, with the adjustment being gradually paced. This is essentially the rationale behind the decision on Wednesday by the Monetary Policy Committee to raise the policy interest rate by 25 basis points. At this juncture, many of you may wonder whether higher oil prices together with higher domestic interest rates might be too punitive to the health of the domestic economy. Let me say that we have looked carefully at this issue and are of the opinion that the growth momentum at this time is quite firm. Although the adverse effects an growth from higher domestic interest rates will be there, the effects will not be large to the extent that they will derail the ongoing momentum of recovery. This is because the fundamentals of the economy at present are quite good, and with a strong fiscal position, these two factors should allow the economy to flexibly adjust to the negative shocks without interrupting the momentum of growth. On the contrary, the early rise in domestic interest rates will help maintain macroeconomic stability which is cruial for sustaining economic growth in the medium term. Ladies and Gentlemen, A few weeks ago, I had the good fortune of visiting both Melbourne and Sydney and came across this concept of a cleanskin wine.
On the demand side, the  2  BIS Review 50/2004  dampened consumer confidence has moderated the momentum of private consumption in the first half of the year, but private investment and exports have expanded well and have been the key drivers of growth so far this year. On this point, it is comforting to note that domestic demand expansion has benefited increasingly more from the pick-up in credit extension, driven by ample liquidity in the system. Private credit growth was a high 9 percent at end-June. Turning to economic stability, with continued growth, pressure on resources has become more visible this year with output gap continuing to close, inflation rising, the trade surplus narrowing and some tightening in the labour market reported. Overall external stability, on the other hand, remains strong with continued current account surpluses, falling external debt, and higher international reserves. But the higher oil prices and the rebound in investment have evidently put greater pressure on imports and the trade balance. One thing that we have been monitoring more closely this year is financial stability. Some indicators of financial fragilities are rising. These include rising household indebtedness and a very active real estate sector. Although there are no signs of overheating as yet in these two sectors, their developments need to be monitored closely especially with the credit cycle now turning. This is because they have the potential to become a source of financial fragility if their growths are left unchecked.