On the credit market, growth in mortgage lending is slowly receding, with the current rate of increase below 5%. The “other loans” category continues to expand rapidly, while matching observations of the past in comparable phases of the economic cycle. This category is now growing at a rate of about 8– 10%, as at the beginning of the 2000s, when their level in fact considerably exceeded the levels we are currently experiencing. M1 and M2 shrank, which is nothing out of the ordinary during a phase of rising interest rates. When this happens, savings and sight deposits are shifted into time deposits. M1 and M2 are affected by this substitution. M3, which is not affected, is growing at a rate of 2% to 3%, which is appropriate for an expanding economy. Inflationary risks In the current environment, price stability is subject to three types of risk: The first risk is connected with the development in the price of oil. The barrel price for Brent crude rose by 40%, from USD 51.0 in January to USD 71.7 in May. This will lead to higher inflation during the course of the year. Unlike oil price hikes between 2004 and 2006, the most recent rally took place when capacity utilisation was higher. If the current surge in oil prices were to continue, it could affect prices more easily than previously. The second risk is due to the fact that demand is growing at too rapid a pace in relation to the development in production capacity.
Moreover, labour demand continued to be met by a significant influx of labour from abroad. The opening of the labour market within the context of the bilateral agreements with the EU creates additional growth potential. The competitive position of our economy is high, and the recent depreciation of the Swiss franc on the foreign exchange market gave it an additional boost. While exports continued to increase at a rapid pace, their growth rate may slow down somewhat compared with 2006. The healthy state of the economy and the improvement in the labour market have a favourable impact on consumer sentiment. Since the beginning of the year, household spending has been increasing at very steady pace. A continuance of this trend is possible, since the current near full employment is likely to lead to an increase in real wages. During the next quarters, companies will continue to step up equipment investment since the rate of technical capacity utilisation – in particular in the manufacturing sector – is high. Construction investment should stabilise at a high level. BIS Review 67/2007  1  These developments in demand components led us to revise our GDP growth forecast upwards for 2007. For the current year, we now expect growth close to 2.5%. Development in monetary and financial conditions In the Swiss capital market, we have been observing a steady increase in long-term interest rates over the past three months. The yield on 10-year Swiss Confederation bonds reached 3% in May.