Dividing price trends into different categories shows that it was mainly some imported product groups that showed unexpectedly weak development. It is difficult to determine from the outcome of only one month whether or not this is a sign of a more lasting development. Naturally, it is something we will pay attention to in our future assessments of inflation. We can also observe that over the past few years inflation has been kept down by high productivity growth and low import prices. This is partly related to developments in economic activity. However, there are probably also lasting factors behind the low inflationary pressure. We can see similar patterns in some other countries. Amongst other things, it is probably a question of the effects of increased global competition. The durability of this type of structural change is difficult to determine. I intend to return to this in connection with my look back at inflation developments during 2005. A further complication is that house prices and household borrowing have increased rapidly (diagram 3). There are some risks with this type of development that can be difficult to quantify. One cannot entirely rule out the possibility that credit expansion and house prices are being driven up by over-optimistic expectations. This could lead to a situation in future with sudden downward adjustments in house prices and a large increase in household saving.
If we look at the performance of the banking industry over the last decade, the Asian financial crisis clearly marks a watershed. Between 1992 and 1996 our research indicates that the profitability of the average bank in our sample, measured by return on assets, improved by around 0.7 percentage points. It appears that this performance owed little to the macroeconomic environment of the time. Rather, it was due to improved performance at the individual bank level, driven by bank-specific factors such as more efficient operations and improving asset quality. In contrast, between 1997 and 2002 the average return on assets declined by more than 0.7 percentage points. This deterioration was largely driven by macroeconomic variables, with deflation contributing most to the worsening profitability. Bank-specific factors were less significant during this period in explaining both average performance and variations in performance across banks. 2  BIS Review 32/2003  It may seem somewhat obvious to say that the lower profitability of the banks over the last few years has been largely due to the poor economic environment. Certainly, as participants in the syndicated loan market, you will be well aware of the impact of the current sluggish state of the economy on loan demand and margins. But the conclusion does have important implications if we look to the future. If the profitability of the banks has gone down with the economy, equally it should go up with the economy as it improves.