, jumped substantially as a result of this automatic stabilizer effect. this time last year we knew there would be an element of this type – though the scale of the increase was not anticipated because the rise in unemployment has been much larger than was expected before the global downturn kicked - in. in the background, though, if we are to get back to that millennial share of spending in gnp, there have to be other cutbacks reversing the expansion of the mid - 2000s. that of course is where the report of the mccarthy group comes in. but there is something else new, namely the sharp fall in consumer prices since last year. this has raised the value of real transfer payments and other contractual amounts fixed in nominal terms and worsens the budget deficit, while giving an uncovenanted bonus to some. we have never seen price falls on such a scale. the illusion that money cannot gain in value is something that must be seriously addressed if the budget is to be brought back into line, especially because of its tendency to result in higher real wages, thereby threatening employment. i ’ m sorry to touch on such a sensitive issue, but i think we need to be quite unambiguous about this. in previous times, whenever real wages moved as far ahead of our trading partners as they have since 2000 ( abstracting from a gradual trend in differential average productivity in ireland and abroad ) an inevitable sequence followed. sooner or later unemployment rose, as producers were forced by lack of profitability to shrink or close. but then, the real value of wages was eventually eroded by inflation and depreciation. in the euro zone the second, corrective step, is not going to happen. it is crucially important to recognise that the old automatic stabilizer of real wages – depreciation of the exchange rate – has been put out of action ( and for good reason ). there ’ s no point in getting distracted in this discussion by pointing out inequities in the current structure of wages and salaries or remuneration generally : attempts to fix such inequities and anomalies do not need to get in the way of ensuring that the average real wage structure does not move out of line with that of the indirect competitors for workers in ireland, namely workers abroad. in this context, the trend in irish wage competitiveness over the years is worrying. if average wages in ireland do not get back reasonably close to where they were relative to competitors earlier in this

##s are published, there may also be a comment, phrased in general terms, on how the bank views market expectations. so far, only a few central banks have taken the step of publishing their own forecasts for their policy rates. arguments for and against own forecasts for the repo rate there are currently discussions, both in academic research and in central bank circles, as to whether it is appropriate for central banks to publish their own forecasts for the policy rate. in a moment, i shall describe some advantages and disadvantages of such an approach. at the same time, one must remember that there are a number of advantages and disadvantages to all of the approaches i mentioned earlier, and these must be weighed against one another. when we changed over from keeping the repo rate constant in our forecasting work to basing the forecasts on market expectations, we had made the assessment that the advantages of this system outweighed the disadvantages, compared with using a constant repo rate assumption. the assumption of a constant repo rate worked well in as far as it made communication simple, which i believe was particularly important when establishing the new monetary policy regime and building up credibility for the inflation target. at the same time, it was of course usually an unrealistic assumption that made it difficult for us to make good forecasts. this applied in particular in cases where there were expectations of substantial repo rate adjustments. normally, changes in the repo rate are required to guide inflation towards the target. if we had kept to this assumption for the interest rate, these difficulties would have been particularly prominent when we changed over to making forecasts in a slightly longer time perspective. of course, the assumption of a constant repo rate also made it difficult to compare our forecasts with those of other forecasters and to evaluate our monetary policy. but, perhaps even more importantly, it gave no clear guidance as to how we viewed interest rate developments in the long term. the general public ’ s and the markets ’ expectations of the future interest path are at least as important for the way monetary policy influences the economy as the expectations around the decision on the current interest rate. we left most of these problems behind us when we began making forecasts based on market expectations, as reflected in the so - called implied forward rates. this was because market expectations in most cases provide a much more realistic forecast for the future development of the repo rate. the changeover from a constant repo rate to