Economic Developments and Monetary Policy THE WORLD ECONOMY: STRONG PERFORMANCE IN 2004, THOUGH MOMENTUM SLOWED SOMEWHAT IN THE SECOND HALF The global economy expanded strongly in 2004 despite the sharp rise in oil prices, though growth was perceptibly weaker in the second half of the year. The strong U.S. economy lifted global growth, with American household and corporate spending remaining buoyant. Inflationary pressures increased as the economy gained strength and following three years of USD depreciation. In response, the Federal Reserve (Fed) raised the Federal Funds Rate from 1% in June 2004 to 2.75% in March 2005. In Japan, private investment and export of goods and services picked up strongly last year, boosting real GDP growth to its strongest level in eight years. Similarly, the European economies expanded at a faster pace in 2004. For both Japan and Europe, growth was significantly weaker in the second half of the year. The non-Japan Asian economies performed well last year on the back of a favourable external environment. In Northeast Asia, the Chinese economy continued to grow at a robust pace. The rest of that region began the year on a firm footing, but growth slowed in the second half due partly to the downturn in the electronics industry. In Southeast Asia, strong domestic demand cushioned the impact of slower export growth in the second half of the year. The world economy started well in 2005. The U.S. economy remained resilient in spite of high oil prices, while both the Japanese and European economies rebounded strongly in the first quarter of the year. China continued to expand at a rapid pace and led the growth in non-Japan Asia.