Česká národní banka

Minutes of the Extraordinary CNB Board Meeting on 11 March 1999

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

The CNB board opened the meeting by assessing the current monetary and economic situation. This assessment was based primarily on new developments that had occurred last week, inevitably shaping trends in the future as well. The published indices confirmed the prior expectations on current price developments which can at this time be classified as deflationary in some price groups. Up until now, the effects of exchange rate depreciation from the beginning of this year have not shown up in the actual level of prices. Reasons for this include not only the standard time lag of this transmission, but also the continuation of strongly curbed demand and probably even the existence of reserves that to a certain extent allow companies to absorb anticipated import price growth.

The bank board has identified the information on the decline in industrial and construction production as an important signal. The scope of this decline shows that the sharp economic slump in Q4 will probably not end. The bank board has also taken into consideration information on the steady expansion of the money supply in the first months of the year which is not consistent with the existing low inflation levels and the observed decline in economic performance. Current data do not allow identification of the extent of change in the trend of money aggregate development and the extent the money supply reflects current institutional and methodological changes.

Published information on inflation and on a performance decline in the important sectors of the economy, as well as the interest rate cuts up to 29 January 1999, have not generated exchange rate movements that would cause values to be incompatible with the Czech National Bank's inflation targets. Even though the interest rate differential with respect to other world currencies has been significantly reduced, bank board members stated that, so far, room for cutting interest rates still exists at a level that would better correspond to the established inflation trends and the sharp economic decline. The board continued with a discussion on the amount of room available for cutting rates as well as the link that should be attributed to short- and medium-term risks during decision-making. Nevertheless, it was stated that there is no change in the characteristic risks from the last meeting, i.e. notably the monetary effects of expansive wage and cash revenue development as well as the state budget deficit. This, along with completing the process of falling import prices, will shape price levels in the second half of this year and the beginning of next year.

Recently, the complexity of the bank board's decision-making process has been heightened considerably by substantial changes in the macroeconomic environment (production, demand and inflation). This has had such a large impact that it is not possible to directly rely on the previously analysed and identified links for the full range of economic variables. For this reason, current inflation forecasts move within a relatively wide band.

The bank board's main topic of discussion was a proposal to lower the rate base for the CNB 14D repo by 0.5 percentage points. Some bank board members, though, recommended lowering the rate to a lesser degree, i.e. only by 0.25 percentage points. Reasons for this proposal mainly involve concerns that possible inadequate reactions of the foreign exchange market might drive the koruna to depreciate to a high level and in turn affect inflation.

Following the discussion, the bank board decided by a majority vote to lower the base repo rate by 0.5 percentage points from 8 - 7.5%, effective 12 March 1999. In connection to this decision, the discount rate was lowered by 1.5 percentage points to 6%, and the Lombard rate by 2.5 percentage points to 10%.

Author of the Minutes: Petr Krejčí, CNB, Adviser to the Board

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