Česká národní banka


CNB > Monetary policy > CNB Board decisions > 1999 > 25 February 1999

Minutes of the CNB Board Meeting on 25 February 1999

Present at the meeting: Josef Tošovský (Governor), Oldřich Dědek (Vice-Governor), Zdeněk Tůma (Vice-Governor), Miroslav Hrnčíř (Chief Executive Director), Luděk Niedermayer (Chief Executive Director), Pavel Racocha (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)

The board meeting opened with a summary of the new data on economic development. Price index growth has been significantly restrained. Data on economic activity in Q4 indicate that the economic slump is more severe than first expected. Rising unemployment will more than likely increase the uncertainty that was reflected in a higher propensity to save and curbed consumption in 1998. In the short run, the effect of suppressed domestic demand can be expected to continue, i.e. household consumption will only be slightly affected by growing real disposable household incomes. It is also unlikely that investment demand will send out a stronger demand impulse.

Economic recovery could be spurred on in particular by exports, although substantial incentive from foreign demand is not very likely because of slowing economic activity in EU countries and increasing competition from Asian economies. Other factors that could possibly affect export were also examined. One opinion was given that there is a risk that the growth lag in Central Europe might develop even further. It was mentioned, though, that this particular region is not decisive for the domestic economy. A sharp drop in performance could, in any case, complicate the recovery process in the Czech economy.

The board meeting continued with a discussion on the possible monetary policy response. Two options were considered: lowering rates or leaving rates at the set level. The first option was discussed in connection to the fact that the internal as well as external environment has significantly changed. Due to this change, quantifying the various effects is now more complicated. The economic policy mix was also examined. In a period of economic growth, it could be described as a transition from restrictive policy to more relaxed policy. Fiscal policy, even with the non-standard character of some expenditures, aims at expansion. Wage policy can be characterised in a similar way. Monetary policy embraced a strategy of sharp interest rate cuts, and also the weakening of the koruna exchange rate has contributed to softening of monetary conditions. In a period of economic decline, assessing the impact of the same economic policy mix is considerably more difficult.

Also mentioned was the issue of a deflationary spiral and the opinion that it is probably good to differentiate the positive factors of the decline caused by a drop in the prices of import commodities and technology from technological advances and growing competition. It was stated that setting the parameters for monetary policy should be assessed especially from the side of maintaining macroeconomic stability. Keeping this stability intact is a condition for maintaining economic growth, and therefore reaching the medium-term inflation target for the year 2000 is also an important consideration.

The option of leaving rates at the set level was considered in connection to the actual risks involved. After the sharp rate cuts last year, it was not possible to immediately assess the overall impact of monetary policy measures. It was said that monetary policy had fulfilled its role through lowering rates and cannot take the place of other economic policies. Domestic inflation risk factors were also discussed during the meeting. One serious concern is wage development. Unbalanced development on the labour market is to a large extent caused by the inconsistency of wage demands with a low inflation environment and the resulting extreme growth in nominal wages. In relation to rising unemployment, the average wage is increasing faster than disposable household incomes. It was also mentioned that in the short run, these inflationary pressures are not significant.

The link between domestic price development and the exchange rate was also discussed. In the short run, less favourable foreign prices than were seen in 1998 could be expected. In addition, it is not very likely that the koruna exchange rate will be as strong as it was last year, because the interest differential has been lowered. Furthermore, increased uneasiness has been seen recently on financial markets. In the last period, the koruna had depreciated 10% against the euro, and the capital market took a downward turn as well. A lower differential indicates that the koruna will now react more sensitively to risk premiums and reflect news on the state of the economy. One point mentioned was that in a period of economic decline, an inflation impulse sent by currency depreciation can be lower than indicated by estimates based on previous data. On the other hand, it was stated that the link between exchange rate and price development is fairly strong and reacts relatively fast.

At the close of the meeting, the CNB Bank Board decided by a majority vote not to change the settings of the CNB monetary policy instruments.

Author of the Minutes: Kateřina Šmídková, CNB, Council of Advisers

Comments are welcome on the following email address: Katerina.Smidkova@cnb.cz