At its meeting on 20 September 2004, the Monetary Council considered the latest economic and financial developments and left the central bank base rate unchanged at 11.00%.

Macroeconomic data published in the past one month reinforce the Bank’s assessment of the outlook for economic developments published in the latest issue of the Quarterly Report on Inflation. The August outcome for the consumer price index is consistent with the Bank’s forecast for inflation to start declining in the final quarter of 2004.

The Bank has recently received a wealth of information on the factors influencing the outlook for inflation. The slowdown in private sector wage inflation since May appears to be lasting. In addition, a massive decline in the rate of services sector wage inflation is particularly encouraging news with regard to the decline in inflation. Although the price of crude oil has fallen over the past month, it continues to be high. Household consumer expenditure turned out to be higher in 2004 Q2 relative to the Bank’s forecast published in August, which may add to inflationary pressure from the demand side.

According to the revised statistical data on goods trade, whole-economy exports rose at a brisk pace in May–July, which is a positive development in respect of the sustainability of external balance. However, the current high degree of uncertainty surrounding corporate fixed investment requires caution in judging the persistence of the process.

The most recent fiscal developments have reinforced the Council’s view that fiscal policy consolidation may be the most important factor contributing to the fall in uncertainty related to economic balance. The new Government, expected to take office soon, may provide markets with evidence of its commitment to a credible and predictable economic policy by drafting the 2005 budget, if next year’s fiscal processes prove to be consistent with the commitments in the convergence programme. In addition to reducing risks to economic balance, complying with international commitments and implementing fiscal policy in a stringent and consistent manner, the conclusion of a moderate wage agreement for next year may play a key role in reducing inflation risk.