26 February 2007

1    At its meeting on 26 February 2007, the Monetary Council considered the latest economic and financial developments and voted to leave the central bank base rate unchanged at 8.00%.

2   In the February update of the Quarterly Report on Inflation, the central projection conditional on staff’s assumptions is for inflation to fall significantly from 2007 H2, following the high outturns for CPI in the next few months. In the Monetary Council’s judgement, inflation may slow significantly within the period relevant for monetary policy, i.e. in 2008, as a result of very subdued domestic demand and loose labour market conditions. The Bank’s tight policy stance in recent months has also contributed to the current favourable outlook for inflation, which, in turn, is needed to be sustained to meet the medium-term target.

     However, the central projection is surrounded by considerable uncertainties. For the Council, the most important upward risk to inflation is potential rises in price and wage expectations. In this regard, the continued rise in private sector wage growth towards the end of 2006 is a cause for concern. However, the interpretation of information on wage developments may be made more difficult by two factors: (i) wage data may be biased downwards temporarily following the tightening of labour market regulations; and (ii) the timing of irregular payments in the private sector may also have changed, due to rises in tax and contribution rates. In addition, special attention must be given to wage developments in the government sector.

     Another source of uncertainty is the impact on inflation of the slowdown in domestic demand, which may point to lower inflation over the period ahead. Taking into account the extent of the decline in demand expected for 2007–2008, there is considerable uncertainty about the scale of the slowdown and its effect on inflation.

Overall, the Council’s central view is that there remain significant risks to the outlook for inflation. Future developments in inflation expectations are perhaps the most important source of uncertainty. Consistent with its commitment to price stability, the Monetary Council will continue to pay particular attention to inflationary risks; and future developments in wages are of particular importance for the Council in this respect. The Council will aim to ensure that the expected higher rates of inflation in the coming months prove only temporary, and that they do not feed into inflation expectations.

3   The minutes of today’s Council meeting will be published at 2 p.m. on 14 March 2007.


Monetary Council