Česká národní banka


CNB > Monetary policy > CNB Board decisions > 1999 > 21 December 1999

Minutes of the Bank Board Meeting on 21 December 1999

Present at the meeting: Josef Tošovský (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)

The Board opened the meeting with an assessment of the newly available information on GDP and the implications involved in reaching the inflation target next year. It was stressed that the data on GDP for Q3 1999 corresponded to the central bank's forecast and therefore did not introduce any information that would lead to reassessment of the macroeconomic situation. Net export continued to improve, while inventories declined. Sales in industrial enterprises were rising, and investment to the manufacturing industry was picking up. Economic growth acceleration in Europe can also be expected to generate an adequate reaction on the supply side of the Czech economy.

In the area of consumer demand, no unexpected developments were present signalling stronger inflation pressures. Money supply growth continued its strong lead over nominal GDP, though this development was not considered to be a risk in the short run. M2 dynamics were determined by the net foreign assets entry, while domestic credit issue continued to stagnate. One hypothesis was made that even a part of the financial resources channelled to other countries was used for investment in the Czech economy. The structure of money supply growth had recently indicated a significant rise in highly transactional money, especially M1 and currency. Business sector deposits had also recorded an increase.

In view of new developments, the conditions for reaching the inflation target next year had not changed. The Board still considered a monetary policy aiming towards the lower border of the inflation target for the end of 2000 as optimal - taking advantage of the positive effects of the current disinflationary process as well. This strategy should also encourage lower inflation volatility in 2001.

The Board also discussed the impact of current oil prices on domestic inflation and the development of these prices in the future, especially in the light of koruna depreciation vis-à-vis the USD. Considering that the inflation forecast is based on the assumption that the year-on-year increase in oil prices will start to decline by the second half of next year, any deviation in this scenario would be a significant risk to the forecast. It is expected that the gradual reversal in agricultural producer prices will ease the currently strong anti-inflationary effects of food prices.

Similar to the last meeting on monetary developments, a considerable amount of time was spent discussing exchange rate developments. During the discussion, board members agreed on the importance of guarding against inadequate appreciation of the koruna's nominal exchange rate. In addition to divergence from the inflation target in 2000, such a development could also complicate anticipated economic recovery owing to a decline in export competitiveness.

The meeting also focused on expected future inflation developments in the forthcoming period. As of 1 January 2000, there will be a relatively sharp rise in regulated prices. This development could cause inflation expectations to rise in the short run. On the longer-term horizon, though, it would most probably slow net inflation because of the income effect. One view was put forth that, under current conditions, changing interest rates would not be desirable.

The Board decided by a unanimously vote to leave the two-week repo rate at its current level.

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

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