Česká národní banka


CNB > Monetary policy > CNB Board decisions > 1999 > 2 September 1999

Minutes of the Bank Board Meeting on 2 September 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)
Pavel Mertlík (Minister of Finance) - present for part of the meeting.

The CNB Board opened the meeting with an assessment of monetary developments in relation to the changing conditions at home and abroad. Inflation risk in the Czech Republic has been mainly associated with rising cost factors: a significant increase in unit labour costs in industry has also been accompanied by rising crude oil prices. Domestic demand has already shown clear signs of recovery. One of the most important changes abroad is strengthening economic growth in EU countries, accompanied by certain price recovery.

The main criterion for CNB monetary policy decisions is the end of the year 2000. Current net inflation forecasts range between 2.5% and 5.5%, year-on-year, with an asymmetric mean value of 3.7%. In this context, the Bank Board discussed net inflation development and its anticipated move below the mean inflation target at the end of 2000. It was stated that this particular expectation has been generated by expected food prices, which are not as directly affected by monetary policy as the other components of net inflation.

The Bank Board devoted a significant amount of time to discussing the outlook of budget performance for next year. It was stated that, assuming prudential behaviour in the fiscal area, demand growth would not be a source of direct, inflationary shock and, hence, would not lead again to monetary policy tightening. Namely, the Ministry of Finance should not let the state budget deficit exceed its currently projected level, and real household income growth should be maintained at the level of the expected rise in productivity.

The transfer of koruna to foreign exchange instruments is a new factor that the Bank Board takes into account when making decisions. The ease and accessibility of these instruments and the low transaction costs involved have led to more prudence when decisions are made on lowering interest rates. Although the interest rate differential in relation to the euro has remained relatively large, there is a very small differential in comparison to some of the European countries outside the EMU mechanism (e.g. Great Britain and Norway), as well as in comparison to the USD. Therefore, the relevance of these currencies to the koruna should not be overlooked.

The members of the Bank Board agreed that the current, or respectively slightly lowered, two-week repo rate reached a level, which, in the absence of unforeseen shocks, can be expected to be stable in the relatively longer term. It was stressed during the discussion that lowering the discount rate should not send incorrect signals for possible future cuts in the repo rate. One view prevailed during the discussion that lowering the discount rate by 0.5 percentage points accompanied by a sharp reduction in the Lombard rate (by two percentage points) is a reflection of the achieved conditions towards stability. This would also mean significantly reducing the space for future movements in the repo rate. Market players are also expected to interpret the correction in this way.

At the end of the meeting, the Bank Board decided, by a majority vote, to lower the CNB two-week repo rate from 6.25% to 6% (by 0.25 percentage points), the discount rate from 6% to 5.5% (by 0.5 percentage points) and the Lombard rate from 10% to 8% (by two percentage points), effective 3 September 1999.

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

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