All in all, this indicates that growth will be higher than we had assumed in June, even taking into account the fact that expectations of repo rate increases have been adjusted upwards over the summer. The upward revision in growth prospects has not led to any major revision in our inflation assessment. Although the high GDP growth in itself indicates that inflation may rise more rapidly in future, the strong productivity growth is at the same time expected to contribute to cost pressures being lower this year than was assumed in June. Cost developments in the somewhat longer term are very difficult to assess. If productivity continues to develop strongly, companies may postpone recruiting new staff, which would mean a delay in the labour market upturn and continued low cost pressures. However, there are a number of indications that the labour market is now strengthening and a more rapid increase in employment will probably contribute to rising cost pressures in future. During the summer inflation has been slightly higher than expected, which was mainly due to rising energy prices. The inflationary impulse this entails is to some extent counteracted by the low unit labour costs, but inflation this year will probably be slightly higher than we had assumed in our June forecast. Our assessment is that the effects of the energy prices will subside at the beginning of 2007.
However, as with productivity growth, there is a risk that we are underestimating the effects – this could mean that energy prices may continue to rise and that there could be contagion effects pushing up inflation further ahead. During 2007 rising unit labour costs will provide an increasing contribution to inflation and a couple of years ahead underlying inflation is expected to be in line with the target, given a gradual increase in the repo rate. Prospects for economic activity and inflation thus indicate that less expansionary monetary policy is called for in future. This will ensure that inflation is close to the target and that developments in the real  4  BIS Review 87/2006  economy are balanced. Given this, we chose, in line with the repo rate path expected by the market, to raise the repo rate by 0.25 percentage points at the monetary policy meeting in August. The assessment of the prospects for economic activity and inflation over the coming years that we made then showed it would be reasonable to also assume that the gradual repo rate increases will need to continue. I see no reason to change this assessment today. Thank you. BIS Review 87/2006  5