24 June 2002

1 At its meeting today, the Monetary Council considered the recent economic and financial developments and decided to leave the central bank base rate unchanged at 9.00%.

2 In the Monetary Council's view, the factors pointed out by the members earlier which appeared to hinder disinflation have remained at work. Data released since the latest assessment suggest that private sector wage growth has not slowed and the expansionary effect of general government has remained strong. Anti-cyclical fiscal policy is required for the disinflation process to continue undisturbed and balanced economic growth to remain. Expansive fiscal policy places an unreasonably heavy burden on monetary policy. In the coming period, the Council will pay increased attention to the developments carrying inflationary risks, particularly changes in fiscal policy and household demand. If the unfavourable developments remain, this could prompt a tightening of monetary conditions.

Based on the experiences during the first year since its introduction, the inflation targeting system has served well the authorities' disinflation policy. It is important for monetary policy to retain its credibility that it has accumulated so far. This may help to mitigate the short-term real economic costs of further reducing inflation; however, the combination of an expansive fiscal policy and wage growth incompatible with past productivity gains may add to those costs. Disinflation is necessary to continue, as a more predictable economic environment, coupled with price stability, results in rising fixed investment and permanently higher economic growth. For this reason, the Bank will concentrate its efforts on achieving and maintaining price stability - this may be the contribution of monetary policy to increasing social welfare.

3 At its meeting, the Monetary council has decided to reduce the width of the interest rate corridor by 1 percentage point with effect from 1 September 2002, in order to reduce interbank interest rate volatility and take over the practice followed by the European Central Bank. Accordingly, from 1 September 2002 the boundaries of the interest rate corridor will be as follows:

- The interest rate on the overnight secured loan will equal the base rate plus 1 percentage point;

- The interest rate on the overnight deposit will equal the base rate minus 1 percentage point.