Transcript of the introductory statement from the press conference - 5 May 2011

GOVERNOR

First of all, purely for the record, because you already know this, the Bank Board decided by a majority vote to leave the interest rate unchanged. Five Bank Board members voted for this decision and two members voted for increasing rates by 0.25 percentage point.

Now for the reasons for this decision. At this moment, based on the current forecast, it seems that both headline and monetary-policy relevant inflation should be close to the inflation target. Consistent with the forecast is interest rate stability in the near future and a gradual rise in rates that should start in the third quarter – sorry – in the fourth quarter of this year. The risks are broadly balanced. As for the inflation pressures, looking at what the forecast says, it basically says that we are still waiting for inflation pressures from the domestic economy. This means that growth in our economy, which is by no means extreme, will slow further owing to fiscal restriction. Investment in inventories is fading and it seems that growth in external economic activity abroad is slowing and we will not experience more robust growth until next year. In addition to that, the exchange rate is appreciating and the forecast expects it to continue appreciating over the forecast period. All this adds up to stability of rates.

As regards the external environment, it is basically exerting upward rather than downward pressure on inflation. It has all developed in the same direction since the last forecast, but not very markedly. That goes for the price categories I showed just now and for oil prices and commodity prices.

And this leads to the forecast looking the way it does, i.e. we still expect the future to be very similar to the recent past. In other words, headline inflation will stay very close to the inflation target. So will monetary-policy relevant inflation, of course. At this moment we have no strong reasons to expect differences. Something moderately significant will occur from the start of next year for natural gas and cigarettes, but that is all one can speak of and the differences will be small.

As I said, after the stronger impulses I mentioned subside, gross domestic product, or rather its growth, will slow further. This will be due in part to the fact that the annual decline in fixed investment is deepening and we expect a slowdown in capital formation.

I have already told you about interest rates, and I even managed to correct myself. It may be worth noting that the developments abroad have brought the rise in rates forward slightly. Although it looks the same on overall, it has shifted slightly forward. But as I say, it will be in the fourth quarter of this year. And it is also because the solid export performance, among other things, of this economy is continuing, which is of course pushing the exchange rate to levels that are reasonably stronger, but stronger all the same.

When I look at the previous forecast, what strikes me the most is that there are only minimal differences – a slightly stronger exchange rate, slightly lower GDP growth. None of this justifies any dramatic reassessment of our current position.

Now the risks to the inflation forecast. First of all, the list is not very long. In the inflationary direction, we might be positively surprised by our domestic economy, by an earlier renewal of growth impulses, and therefore also inflation impulses, especially as regards domestic demand. In the anti-inflationary direction, we would probably be surprised if the debt problems of some euro area countries, and ultimately of the euro area as a whole, escalated in a manner that would adversely affect demand.

However, this time we also prepared an alternative scenario of the forecast. The alternative scenario captures the effects of the planned changes, or the changes currently planned by the Ministry of Finance, to the reduced VAT rate, i.e. an increase from 10% to 14%. The first-round effect on inflation is slightly above 1 percentage point. Most of it is due to food prices. The rest is due to administered prices and adjusted inflation excluding fuels. Of course, as probably all of you here know, being seasoned veterans, we do not respond to the first-round effects of indirect tax changes. We expect the second-round effects of such a tax change to be very insignificant. I have to say that this assumption proved correct during similar episodes in the past. This was, of course, partly due to our intensive communication and readiness to react to any deviation from this development. The same will apply this time. We assume, in other words, a very small pass-through to other price categories and expectations in particular. But if things turn out differently, we will respond. This effect of course means a decline in GDP growth of slightly less than 0.5 percentage point. And all the rest stems from this.

In chart form it looks something like this. In other words the red line shows the alternative scenario, which would push prices roughly 1 percentage point higher during 2012. Then, of course, this effect subsides as the year-on-year effect unwinds, i.e. as the base period gets to the same level.