Česká národní banka


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

Minutes of the Bank Board Meeting on 25 November 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)

At its meeting, the CNB Board devoted a considerable amount of time discussing the analysis of monetary factors, which in various degrees, were either in support of maintaining the two-week repo rate at its current level or slightly lowering the rate.

Even in the light of existing uncertainties, most of the board members considered the argument for slightly lowering short-term interest rates to be the more dominant of the two. Considering that the CNB inflation forecast is situated right below the lower border of the inflation target for the end of next year, an additional small cut in the two-week repo rate would be consistent with reaching the target near its lower border. It was stressed that efforts to reach the inflation target at the end of the year 2000 must also take into consideration the aim of minimising inflation volatility in 2001. In other words, efforts to reach the inflation target next year should not initiate an accelerating inflation trend in future years. Therefore, an optimal strategy in this particular situation would be to aim for the lower border of the inflation target instead of the mid-point.

It was stated that in spite of indicators of economic recovery in some areas, economic activity as a whole had still not picked up, which was reflected in the low level of demand inflation pressures.

Given these conditions, the discussions that followed were focused on continued support of economic growth and improving the financial situation in the business sector. As a reminder, it was mentioned that even the CNB's meeting with trade union leaders had indicated that wage inflation pressures would ease up next year, seeing that a consensus was reached on assessing expected inflation and overall macroeconomic developments for the year 2000. Another prevailing view during the meeting was that the impact of cost inflation pressures stemming from commodity price growth on world markets - especially crude oil - could continue to be restrained by slow demand recovery.

It was mentioned during the meeting that the new three-year government plan for easing price regulations indicated that there would be a sharp increase in regulated prices at the beginning of next year. Consequently, the income effect could cause net inflation to slow even more in the short run.

Acceleration of the money supply's lead over GDP was another topic discussed during the meeting. It was stated that this development was accompanied by substantial shifts in the sector and time structure of M2. Gains were seen in transaction money, especially in currency. The interpretation of the increase in money supply dynamics and the effects that it would have on future inflation development were ambiguous. In this context, it was expressed that in a period of economic recovery, higher M2 dynamics most probably signal that transaction money growth is caused by higher GDP dynamics. Improved business sector profitability and the effect of capital inflow on the creation of deposits were mentioned as a potential source of money supply growth - a large part of which was the result of an increase in corporate deposits.

In analysing external factors, there was agreement that the interest rate differential would continue to narrow as a result of an expected increase in interest rates abroad. One view was expressed that the Czech economy was stable enough that any further cut in interest rates would not have a destabilising effect on the macroeconomy. With such a small interest rate differential, maintaining an overall macroeconomic balance was put forth as a necessary condition for preventing potential exchange rate turbulence.

It was stated that the exchange rate's tendency to appreciate had led to tightening of monetary conditions. Hence, the Board intensively discussed the possibility of intervening on the foreign exchange market to weaken the nominal exchange rate. The central bank would carefully monitor the exchange rate, and if any extreme appreciation should occur, the bank would take appropriate measures to employ the monetary policy instruments that it had at its disposal.

Future inflation risks had been mainly identified in two areas. Food price growth was difficult to predict due to its non-standard development in the past. If the current economic problems had been caused by supply-side rigidity, even a slight recovery in the economy could prompt internal or external imbalances.

The Board also discussed the expected impact of interest rate cuts on the various sectors of the economy. It was mentioned that cutting interest rates would lead to lowering the business sector's debt burden, which could, in turn, help improve the supply side of the economy. On the other hand, there is a high likelihood that a repo rate cut would affect client deposit rates only partially. The notion of downward rate rigidity was the result of an analysis of the cost and revenue sides of the balances of commercial banks and of depositor preference.

The Board decided by a majority vote to lower the CNB two-week repo rate from 5.50% to 5.25% (by 0.25 percentage points), effective 26 November 1999.

Author of the Minutes: Tibor Hlédik, CNB, Council of Advisers

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