Introduction: resilience to mounting strains

Global growth last year was again very rapid, in spite of higher prices for energy and other commodities. Moreover, core inflation generally stayed low even as headline inflation rose. Yet, as the year wore on, fears began to grow about prospective inflationary pressures. Concerns also began to mount about the growing imbalances in the global economy, not least the low saving and high investment levels in the United States and China, respectively, and record current account imbalances. Against this backdrop, monetary policy tightened in a number of industrial countries. Financial markets for the most part continued to have a very upbeat view of the future, especially for emerging market economies, although in mid-May 2006 uncertainty and volatility both increased. The US dollar, whose longer-term downward movement had been interrupted in 2005 in response to relatively high US policy rates, also began to weaken more sharply.