The world economy continues to grow and the US economy remains robust despite the interest rate hikes by the Fed and the slight softening in the property market that ensued. The Asian economies are deriving increasing benefits from China's vitality. An economic upturn is also visible in Europe, especially in Germany, even though it is still moderate. In addition, the fact that world growth is generating more demand for investment goods is creating a particularly favourable situation for our exports. We may expect a positive spin-off from this good foreign trade performance for all areas of the Swiss economy – in production as in employment. To date, the rise in sales abroad has been handled through substantial gains in productivity, but we may hope that this will now be followed by a resumption of investment in equipment, along with increased recruitment. Consequently, the overall economic climate in Switzerland is likely to continue improving over the next few months, thereby supporting consumption. We project growth of slightly over 2% for the year as a whole. This return to growth does not constitute a threat to price stability. Our forecasts indicat that average inflation for this year is likely to be about 1%, and the outlook remains just as favourable for 2007. Compared with other countries, Switzerland will continue to enjoy a privileged position in this respect. What may we expect from monetary policy? The inflation forecast we published in March clearly indicates that the current interest rate level is incompatible with long-term price stability.
What is more, the world economy is still characterised by profound imbalances, such as the deficit in US external accounts and the lack of flexibility in the Chinese monetary system. Turning now to monetary policy, there were often considerable disparities in 2005, for instance, the progressive hikes in the rate of interest in the United States at a time when monetary policy in Europe was characterised by a waiting-game approach. Despite these potentially destabilising factors, financial markets remained relatively calm. In currency markets, the dollar picked up in the wake of tighter US monetary policy, while the yen moved only slightly against the Swiss franc. The exchange rate of the euro against the Swiss franc fluctuated within a narrow range, thereby reflecting the strong convergence of fundamentals in Switzerland and the euro area. Over the past few months, the Swiss franc has even trended downward – a decline that is hard to explain given the low rate of Swiss inflation as compared to the rest of Europe. If this trend  2  BIS Review 34/2006  were to accelerate and give rise to an excessive relaxation in monetary conditions with respect to economic developments, a normalisation of interest rates would become even more essential. Generally speaking, the capacity of financial markets to absorb shocks and to cope with imbalances is one result of globalisation and the progress in financial intermediation. In addition to stimulating goods markets, globalisation has also enlarged and deepened financial markets, and is doing so to a growing extent.