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CNB > Monetary policy > CNB Board decisions > 1999 > 26 October 1999

Minutes of the Bank Board Meeting on 26 October 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 Racocha (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)

At the 10th meeting on economic and monetary developments, the Board carefully reviewed the new inflation forecast for the year 2000. According to this forecast, net inflation was heading towards the lower boundary of the medium-term inflation target with a risk of reaching even lower levels.

The main reason for lowering the inflation forecast was the knowledge that in a period of stagnation or restrained growth, standard transmission of cost and demand factors to price growth is considerably slower, and its intensity is weaker. Earlier forecasts, nonetheless, had predicted faster and stronger transmission. The relatively long period of low inflation generated lower inflation expectations that have continued to prevail even in current conditions where signs of demand and economic recovery are more and more apparent. The assumption of koruna appreciation motivated by additional foreign capital inflow had also contributed to a lower inflation forecast for next year.

A major part of the discussion was centred on the issue of the koruna exchange rate as well as factors that could have an effect on its development. The Board discussed in particular the results of the standard technical analyses of conditions on the foreign exchange market, the mechanism creating equilibrium on this market and the fundamental variables that could affect the exchange rate in the longer term. The Board added that the current situation on the market did not call for foreign exchange intervention, although future intervention could not be ruled out, a priori.

M2's current lead over nominal GDP could possibly be connected to the prospect of stronger-than-expected economic recovery. The structure of money supply growth was affected mainly by the rapid rise in net foreign assets, relating, in turn, to the manner in which some non-resident privatisation activities had been financed. The very first signs of yet another recovery in domestic credit issue were observed. Hence, the money supply had not yet been assessed as an acute inflationary risk.

Discussion on the likelihood of higher-than-predicted inflation was focused on, among other things, the risk of immediately employing a substantial, though one-time, transfer of external funds related to the Government's privatisation efforts, which could overstimulate domestic consumption. This particular issue will be the subject of negotiations with the Ministry of Finance. There will also be discussions with trade union leaders on the issue of acceptable wage growth for next year. The Board stressed the necessity of continually monitoring these two potential inflation risks, so that monetary policy could respond appropriately should any unfavourable developments occur. Anchoring low inflation expectations through effective communication with the public was indicated as an essential condition for favourable developments. Other risks concerned fall under the category of factors not affected by monetary policy. Therefore, should any of these factors develop, some divergence in reaching the inflation target would be unavoidable.

Board members agreed that net inflation for the end of 2000, which was set in 1997 as the CNB's basic medium-term inflation target, could not be questioned. In such an environment, it is adequate through monetary policy to aim for the lower border of the inflation target. On the other hand, it is inconceivable that, in the interest of hitting the target as accurately as possible, measures would be implemented causing economic decline, renewed negative expectations and which would interfere with the disinflationary process and lead to higher costs in years to come.

At the end of the meeting, the Board decided by a majority vote to lower the CNB two-week repo rate from 5.75% to 5.5% (by 0.25 percentage points), the discount rate from 5.5% to 5% (by 0.5 percentage points), and the Lombard rate from 8% to 7.5% (by 0.5 percentage points), effective 27 October 1999.

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

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