Finally, regarding fiscal policy, it is assumed that the consistent framework outlined in the Medium Term Program (MTP) will be implemented and further enhanced by institutional and structural measures. In other words, it is assumed that no public price/tax adjustments would  14  BIS Review 31/2010  be made to lead to unpredictable volatilities in inflation and administered prices would be set in line with inflation targets over the next three years. Moreover, it is assumed that the fiscal stance will remain expansionary – but less so than in 2009 – throughout 2010, and subsequently fiscal tightening would be gradually adopted starting from 2011. In this respect, it is envisaged that the rising debt-to-GDP ratios would reverse their course steadily starting from 2011, and hence the risk premium would not display any significant changes throughout the forecast horizon. Distinguished Guests and Members of the Press, Against this background, assuming policy rates are kept constant for a long period followed by limited rises thereafter, with policy rates staying at single digits throughout the three-year forecast horizon, the medium-term forecasts suggest that, with 70 percent probability, inflation will be between 5.5 and 8.3 percent with a mid-point of 6.9 percent at end-2010; and between 3.4 and 7.0 percent with a mid-point of 5.2 percent by the end of 2011. Furthermore, inflation is expected to decline to 4.9 percent by the end of 2012 (Figure 34).
Taking into account the favorable developments in the credit markets and the moderate recovery in economic activity in the last quarter of 2009, the Monetary Policy Committee (MPC) slowed the pace of rate cuts, and finally decided to keep rates unchanged at the last two meetings. However, it was also noted that lingering problems across the global economy were still a concern and that uncertainties regarding the strength and durability of the recovery remain. Considering these factors, the MPC reiterated that it would be necessary to keep policy rates at low levels for a long period of time. At its January meeting, the MPC indicated that tax adjustments and base effects would cause inflation to rise significantly in the first two months of 2010 and afterwards remain above the target for some time. Noting that the underlying trend implied by core inflation indicators would remain at levels consistent with medium-term targets, the Committee emphasized that, given the levels of resource utilization, the state of labor markets, and global economic conditions, general pricing behavior would not be affected adversely by the temporary rise in inflation, and therefore, inflation would display a declining trend once the transitory factors taper off. Market yields have been broadly shaped by the monetary policy stance during the last quarter of 2009. This is particularly important as it demonstrates the increased effectiveness of monetary policy. Market interest rates slightly increased in October with rising perceptions that the policy rate cut cycle is coming to an end.