Česká národní banka


Minutes of the Bank Board Meeting on 27 May 1999

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

During the meeting on monetary and economic developments, the bank board paid special attention to the analysis of some events that have occurred in past weeks. Information on industrial and construction output indicates the likelihood of a larger-than-expected decline in GDP for Q1. Economic developments around the world and particularly in Europe will complicate the Czech Republic's position on international markets.

On the demand side, the impact of this year's wage growth, a slowdown in the dynamics of savings deposits and more opportunities to buy on credit have in all probability led to a rise in retail sales. It was stated that overestimation of the inflation level in wage negotiations this year has contributed to high unemployment and weaker competitiveness of the Czech economy. Nevertheless, due to more binding budget constraints, this will not occur again.

The money supply has been increasing in recent months more than originally expected. One view was discussed that although money supply growth in a standard situation could be considered expansive - in the light of low inflation and output developments - a more significant factor for the current situation is the status of koruna credits, which is still lower than a year ago. The main element influencing faster M2 growth is net foreign assets.

The actual exchange rate level and developments correspond in principle to the achieved level of external balance. The board extensively discussed the possible effects of the reduction in the current interest rate differential on the financial account as well as the anticipated halt in the process of lowering interest rates on world financial markets. Koruna depreciation at the beginning of the year has so far only had an impact on rising fuel prices. Curbed domestic demand continues to guard against any serious impact on the prices of other products and services. Food prices have developed in a very specific way, affected not only by lowered domestic demand, but also by worsening prospects in export and strong competitive pressure from inexpensive imports. Favourable forecasts for this year's harvest indicate that these factors will continue to have an impact for some months to come. It was mentioned that food prices are to a large extent independent of monetary policy settings and that even the demand mechanism has a very limited capacity in this area.

This extraordinary development in food prices in particular and its short-term perspective have led to another reassessment, i.e. lowering the short-term net inflation forecast. It can be expected that, in relation to food price stagnation, any future developments in consumer prices will be slower than the CNB had expected when the original 1999 short-term inflation target had been set. Accordingly, year-on-year net inflation growth should be about one percentage point below the control target's boundary in December. On the other hand, the basic medium-term target forecast for the end of 2000, announced at the end of 1997 during approval of the inflation target strategy, will not change.

The bank board decided by a majority vote to leave interest rates unchanged.

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

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