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Statement on the Monetary Council Meeting of 21 May

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After reviewing and evaluating recent economic and financial developments, the Monetary Council has raised the central bank base rate by 50 basis points from 8.50% to 9.00%. The decision will take effect on 22 May 2002.

In the Monetary Council's view, the higher-than-expected rate of inflation in April was primarily due to price changes in factors exogenous to monetary policy, although the rapid rise in aggregate demand may also have contributed to stronger increases in the prices of certain products. Thus, the April inflation rate by itself would not have justified a change in monetary conditions.

In the statement released on its meeting of 6 May, the Council expressed its position on the expected course of inflation. In view of the forecasts presented in the Quarterly Report on Inflation, to be released on 22 May, the Council has revised up its inflation expectations, pointing out the risk factors that may push up the expected path of inflation over the next one and a half to two years. Such potential external pressures include imported inflation and oil prices, while the domestic factors are sharp increases in aggregate demand and private sector wage costs.

Recent data have underlined the inflation risks indicated in the statement. Based on the latest indicators and developments, the Council views the effect of general government on demand as being greater than previously anticipated. Data released by the Central Statistical Office showing a gross nominal wage increase of 14.1% in the period January-March also signal a steady rise in inflationary pressure, reflecting that wage outflows in the private sector gathered further pace during the first quarter.

As a result of these changes, inflation expectations have also increased. Greater uncertainty surrounding the prospective course of the economy has led to a rise in yields at 3 to 5 year maturities, in addition to a weakening of the exchange rate.

In the assessment of the Monetary Council, simultaneous demand-pull and cost-push inflationary pressures pose a threat to the disinflation process. Thus, the Council's decision to raise the central bank base rate has been guided by the objective of disinflation, which currently does not allow the easing of monetary conditions.