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Central bank: mnb | Type: statement | Date: 2007-09-24

24 September 2007
At its meeting on 24 September 2007, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 25 basis points from 7.75% to 7.50%.
The news since the previous policy meeting has not materially changed the macroeconomic outlook. The Council therefore expects the level of output to remain below potential and inflation to fall gradually over the next two years. If the recent sharp increases in prices of agricultural output, foods and energy do not pass through to other prices, the 3% inflation target can be met in 2009.
From the perspective of second-round inflationary effects, expectations of economic agents influencing price and wage developments have an important role. The significant slowing in domestic demand growth – as evidenced by Q2 GDP data – and the decline in household consumption expenditure may have a disciplinary effect on firms’ wage and price-setting behaviour. However, the Monetary Council will continue to closely monitor indicators which may point to the emergence of sustained inflationary pressure. In this respect, next year’s wage agreements may be indicative.
Although the international financial environment continues to be surrounded by uncertainty, there has recently been a marked improvement in market sentiment towards domestic investments.
In the light of these considerations, the Monetary Council assumes there is room for further reductions in the policy rate. However, upside risks to inflation, coupled with continued uncertainty about the global investment environment, warrants a cautious approach to adjusting interest rates.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 12 October 2007.
Monetary Council