Decisions adopted by the Governing Board on the occasion of its 321st regular meeting on 3 November 2005

At its meeting on 3 November 2005, the Governing Board of the Bank of Slovenia inter alia dealt with price developments. Favourable inflationary trends continued in accordance with the spring forecasts of the Bank of Slovenia and the average inflation of 2005 is currently forecasted at 2.6%. The lowest inflation registered so far reflects mainly macroeconomic developments, in particular the lag of demand behind supply capacities and the moderate growth of unit labour costs. Despite the considerably high growth of wages, the growth of labour costs was moderate and was achieved through the slow growth of other payments from the labour income and the reduced payroll taxes. Inflation was additionally lowered by some structural factors that hindered the growth in prices of food, clothing and footwear. The increased inflation in the second half of this year was mostly under the influence of price increases in refined oil products that followed developments on global markets and accounted for over half of the total inflation. The year-on-year growth in core inflation that excludes the impacts of refined oil products, tax rate increases and seasonal food prices floats just below 1%. Inflation would have been even lower, if administered prices on which crude oil prices in world markets do not have a direct influence had also not on average overrun the inflation of non-administered prices by 3.3 percentage points. Low inflation has been achieved in a sustainable manner, keeping both the fiscal balance and the balance of current account, i.e. core macroeconomic equilibria.

According to the macroeconomic forecasts of the Bank of Slovenia, Slovenia is going to meet the Maastricht criterion of price stability at the beginning of the next year and is going to have economic growth of approximately 4%. Regarding the inflation rate, the forecasts show that it should settle at 2.5% in the next two years. However, the continuation of the currently relatively high growth of nominal wages could cause tendencies towards price increases. In addition, the movements of administered prices should be more harmonised with those of non-administered prices and the contribution of energy prices to inflation is expected to be gradually reduced, given the assumption of crude oil prices. With economic growth being at a level close to the potential one, the contribution of external trade is, unlike this year, expected to decrease while the domestic expenditure is expected to increase in the next years. Therefore, the highest medium-term risk to macroeconomic and price stability continues to be a possibility of excessive aggregate demand, mainly in combination with the increased household income. Nevertheless, the Governing Board of the Bank of Slovenia estimates that the mentioned risk is manageable provided the proper response of fiscal policy. Therefore, the forecasted economic developments imply the sustainability of macroeconomic equilibria within the span of forecasts and a stable, low level of inflation, consistent with the euro adoption in 2007.

The Governing Board of the Bank of Slovenia emphasises the importance of the Programme for ERM II Entry and Adoption of the Euro as a guide for economic policies until and after the euro adoption. A commitment of fiscal policy to counter-act inflationary pressures stemming from aggregate demand was one of the conditions for the entry into ERM II and will be a condition for a successful functioning in the Eurosystem. Although there are yet no signs of aggregate demand exceeding the available supply capacity of economy, the expected full convergence of interest rates before the adoption of the euro requires the responsiveness in the fiscal policy. The Bank of Slovenia pays special attention to the risk of overheated economy, since in the regime of a stable exchange rate or in the monetary union the realisation of this risk results in the real appreciation, a loss of competitiveness, temporarily sluggish economic growth and increased unemployment.

The Governing Board of the Bank of Slovenia supports a renewal of the process of structural reforms, a commitment made in the joint declaration upon entry into ERM II. Increased flexibility and adaptability of the labour market should provide more rapid and less painful reallocation of workforce from less perspective sectors to the more perspective ones. By reducing fiscal expenditures tax burden of economy could be decreased. However, it is necessary to consider economic consequences and to assess an impact on the welfare of those affected by such reductions in expenditures.

The implementation of structural reforms should not impede fiscal consolidation efforts and compliance with the provisions of the reformed Stability and Growth Pact. Cutting budget revenues may take place only together with the simultaneous and sustainable cutting in expenditures. In addition, the current and expected favourable macroeconomic environment offers an ideal opportunity to remove the structural deficit in public finance and create a safety margin with respect to requirements of the Stability and Growth Pact. In this way, the room for manoeuvre would be extended for a successful implementation of both macroeconomic and structural policies.