We try to discipline ourselves not to claim too much credit for stable growth. And in forecasting, we have to attend to the uncertainties around our projections of the central outlook. Some numbers may serve to underline that. The MPC’s projections are published as fan charts. The fan-chart standard deviation of output growth at around one year is a little under one percentage point; and of inflation at around two years, roughly 0.5 percentage points. This is not a world in which one should get carried away by fine judgments that alter the central projection for demand by 0.1 or 0.2 percentage points. Yet, as the Bank has documented, 15 assuming that credibility is maintained, the effect of a surprise change in the official interest rate, is judged to be small; maybe less than 0.1 percentage point on the annual rate of inflation two years after a 25bp surprise change maintained for one year. Of course, we are not in fact in the business of aiming to make surprise changes in our policy rate. Against a background of credibility, a lot of practical monetary policy making is not about forestalling major lurches in the economy and inflation via large, abrupt changes in the policy rate. Instead, it has to involve careful analysis of the conjuncture, with transparency to the market. But these numbers do perhaps illustrate the importance of our not getting drawn into absurd degrees of detail, and the risk of signalling that we think we can precisely fine tune demand conditions.
Effects of EU accession The EU accession has led to even better market access for local producers and has given Estonia as well as the other new Member States a kind of "seal of quality" as an investment destination. Already the prospect of the EU accession enhanced these countries' credibility in the eyes of investors. But since the accession, the inflow of funds has been especially strong, as economic situation in the euro area was combined with higher global liquidity. Furthermore, the geography of investors has broadened. The prospect of adopting the euro in a relatively near future has lowered interest margins in several of the new Member States including Estonia and has given an additional boost to investments. The above factors, including convergence, as a background, one may speculate about the length of the current economic cycle, and where exactly we stand in that cycle at the moment. In short, there are some suggestions that we might have entered unusually long economic cycle and may be coming closer to the peak of the cycle. However, many of the current vulnerabilities of the Baltic economies are also tied in with these effects of the EU accession and rapid convergence. Understanding these risks requires careful analysis. Let me now turn to my second topic - challenges the strong economic and credit growth are offering.