I agree with the evaluation by the IMF. Economy is in the stage of smooth adjustment; the growth of investments has decreased, especially in the real estate sector. Also, there are signs of slowdown in private consumption. It is a natural part of business cycle - periods of faster growth alternate with periods of slower growth.

The economic growth of 4.5 per cent forecasted by Eesti Pank for the year 2008 is not an unexpected and sharp fall but a deceleration of economic growth which is in the interests of sound economy. The annual growth of 4.5 per cent means that the Estonian economy is still developing more than two times faster than the euro area economy. According to our economic forecast real GDP growth will accelerate again towards the end of 2008.

The competitiveness of Estonian companies on the external market is still strong and profitability high. It is important to take into account that a slowdown will occur mainly in domestic demand.

Now, a few words on inflation. I fully agree that great attention must be paid on price increase. Firstly, a slightly higher inflation in Estonia compared to inflation in the euro area is natural since the level of prices increases along with income growth. Secondly, the fixed exchange rate of the Estonian kroon against the euro is the best guarantee for a moderate inflation in Estonia. Due to fixed exchange rate the price dynamics of consumer goods and durable consumer goods in Estonia has broadly been similar to price dynamics elsewhere in Europe. The growth has been faster particularly in the services sector since people have more money to pay for the services due to higher incomes. Furthermore, as services are labour-intensive the rapid growth of wages and salaries in the past few years is reflected in higher prices in services.

Indeed, the current inflation that is higher than average reflects a price increase in the services sector, mainly in the last year and in the first half of the current year. As already mentioned, wages and salaries have a large share in services prices. Accordingly, one of the main reasons for inflation is a wage growth that is considerably outpacing productivity. Along with the slowdown in wage growth the price increase will also be smaller.

It is our opinion that the developments taking place in economy support a decline in domestic price pressures. The inflation number for October reflects a few positive aspects. The increase in food prices left aside, the price increase of other goods and services in October was only 0.3 per cent compared to the previous month. Furthermore, recent change in construction price index reflects a deceleration of price and wage growth in the construction sector.

Notwithstanding the aforementioned, the coming months will witness a relatively rapid price growth due to increase in food prices in the global market and rise in excise duties, planned for January and July. Inflation will start to decline in the second half of the next year and according to the current estimates will fall to the level of 4 per cent in 2009.

Once again, I would like to stress that one of the main reasons for the current temporary inflation level that is higher than average is the rapid development in the last couple of years, particularly the growth of domestic demand and real estate market. The impact of these factors is already weakening and therefore, the domestic price pressures are also decreasing.

Finally, a few comments on wages and salaries. A wage growth that is considerably outpacing productivity cannot continue. Otherwise, the competitiveness of Estonian companies will fall and their market share will decrease. In the economy as a whole, times of 20 per cent growth are passing.

At the same time, it is evident that Estonia is no longer a country of cheap labour and this is an important achievement. The long-term success of Estonian economy and companies does not depend on wages and salaries lower than today. Our successfulness depends on the skill to produce and provide goods and services with a greater and more complex value added. In order to be able to do that the need to invest in equipment, technology, know-how and education remains. Our estimate is that Estonia's economic situation continues to be favourable for such investments.

On monetary and exchange rate policy I have a very clear message. The fixed exchange rate of the Estonian kroon has been one of the main factors of success in the re-independent Estonia. There is absolutely no need to change the current policy. No social group would gain from a change and no one is planning to adjust the exchange rate of the kroon.