announced an end to quantitative easing and markets started to price in first increases of boj interest rate. this may expose some emerging markets, which have weak fundamentals to a change in investors ’ sentiment, may lead to the depreciation of local em currencies and a significant drop in market liquidity. 11 some risks are also related to the changing structure of our financial markets. since the second half of 2004, the liquidity of offshore spot zloty market has increased significantly and average daily turnover reached almost usd 1 billion. in addition, high nominal values of single transactions between non - residents contribute to a segmentation of the zloty foreign exchange market. this phenomenon is even more visible in the case of the zloty option market. at the same time the consolidation of the polish banking sector, transfer of treasury operations to parent banks and very limited amount of polish banks ’ capital, which determines the scope of risk they can take, limits the liquidity of the domestic market. in the future, financial market for instruments denominated in zlotys could become even more segmented and therefore less effective in absorbing different kinds of risks. 12 this process will accelerate with our accession to the eurozone. experience of some emu members, e. g. finland, indicates that emu membership will be accompanied by a visible contraction of the domestic market. 13 the introduction of the euro will change banks ’ internal organisation of risk and liquidity management. treasury activities will be centralised on a multi - country group level and proprietary trading will be transferred abroad to head offices. this process might be accelerated by the already observed transformation of subsidiaries into branches of foreign banks. domestic outlook let me turn to domestic outlook of the polish economy. the nbp projection released in april - which assumes unchanged interest rates at 4 percent - points to economic growth within the range of 4. 5 to 5. 5 percent in the years 2006 - 2008 and inflation gradually returning to 2. 5 percent target sometime in 2008. the statement issued after the april monetary policy meeting stated, and i quote 14 : “ the council maintains its assessment that with large probability inflation will in 2006 q2 and maybe q3 remain below the inflation target mainly due to short - term factors. if the developments in the economy were consistent with the april nbp inflation projection, then the current level of the reference rate of the central bank would support a gradual return of inflation to the target over the projection horizon and would also be condu

and flexible labor market which can absorb shocks, should they arise. now let me move to the possibility of rising micro - and macroeconomic imbalances. they can take the form of lending booms, current account deficits or increasing inflation pressure. such a set of symptoms in a monetary union member country reveals in most cases one common cause – too low a level of real interest rates. economists have for a long time argued that each economy has an appropriate, long - run level of the real interest rate called the natural rate of interest ( wicksell 1898 ). keeping interest rates at this ( unfortunately unobserved ) level should guarantee that the economy will remain in equilibrium – output will not exceed production capacity and inflation will remain stable ( woodford 2003 ). this is what implicitly or explicitly most inflation targeting central banks are trying to achieve. one of the problems with joining a common currency area might be that real interest rates in this area will be lower than the natural rate of the new member. recent research shows that this might be the case for poland, where the natural rate has remained in the past above the euro area level ( brzozabrzezina 2006 ). for poland, entering the eurozone means lower nominal interest rates ( the spread on long - term rates still exceeds 100 basis points ) and higher inflation ( due to appreciation of the real exchange rate related to the catching up process, with no longer available nominal exchange rate channel ). together this means a drop in real interest rates, which could induce people and enterprises to substantially increase borrowing, and spend the loans on consumption and investment goods. what could be the consequences of this? first, if borrowing accelerates massively, banks may start extending loans without properly checking their customers ’ creditworthiness – this could result in bad debt problems. it is a well known phenomenon ( e. g. demirguc - kunt, detragiache 1998, gourinchas et al. 2001 ) that lending booms are often followed by banking sector crises. fortunately, recent research on the potential for lending booms in poland after euro area accession forecasts a rather moderate increase in lending ( schadler et al. 2005, brzoza - brzezina 2005 ), and shows that the expected credit growth is rather an equilibrium phenomenon – a structural adjustment that should not have negative consequences ( kiss at al. 2006 ). nevertheless, even if a serious lending boom during euro area accession seems unlikely, policy