Minutes of the CNB Board Meeting on 19 February 1998

The Board stated that the January price increases were higher than indicated in last month's analyses, in consumer prices as well as industrial and agricultural producer prices and prices of services. After the January price surge, the short-term inflation forecast moved in the upper part of the interval for the 1998 inflation target. An opinion was expressed that the January price rise could mostly be explained by cost factors and that because of low demand, a correction of monthly price increases could be expected in the months to follow. Yet, some Board members pointed to the risk of inertia in accumulated demand pressures and a potential threat to the short-term inflation target.

With respect to domestic demand development in the medium-term horizon, it was stated that the money supply growth was stable and should not lead to higher domestic demand growth in the future. The data on real household consumption in Q3 1997 indicated a growth rate decrease generated to a large extent by price movements. Further developments in this area would depend on ongoing wage bargaining. A balanced state budget predetermined the level of government consumption. Growth in credits to the business sector, slowed by prudential bank behaviour, did not create space for investment acceleration.

Wage and exchange rate developments were identified as the sources of uncertainty in the short-time horizon of several upcoming months. All members agreed that, due to difficulties in predicting the January price corrections, and the necessity of not subjugating monetary policy decisions to short-term effects, the decision on raising interest rates should not be based on the unexpectedly high month-on-month price rise in the first month of 1998.

Based on an evaluation of the economic situation, the Board decided to maintain the repo rate at the current level. In this way, a consensus was reached to reject the alternative of raising interest rates. This alternative was under consideration because of the effects of short-term inflationary impulses, including the risk of aggravating inflation expectations due to inflation development in January.