Minutes of the CNB Board Meeting on 19 March 1998

The Bank Board discussed two alternatives of monetary policy measures: raising the repo rate or maintaining it at its current level. In March, a debate concerning the above alternatives was generated by new information, signalling that the risks of higher future inflation might outweigh the favourable trends in the economy.

This discussion on repo rate raising was incited first of all by unfavourable developments in major price indices (CPI, PPI and CPIx). After the first two months of 1998, the indices signalled that without an adequate policy response, net inflation in December 1998 might exceed the upper limit of the target interval. At the same time, available CPI forecasts suggested that target net inflation should rather be in the middle of this interval to compensate for the expected higher CPI inflation. The upward slope of the interest yield curve indicated that inflation expectations were not sufficiently settled on the disinflation trajectory. Hence, it was important to strengthen the credibility of the medium-term inflation target. It was said during the discussion that, although the observed exchange rate development supported the gradual reduction of inflation, it would not be desirable to shift the weight of the monetary transmission mechanism from the interest rate to the exchange rate channel.

The Board preferred using the repo rate to signal its intention to defend the target as opposed to significantly increasing the repo rate. The Board took into consideration that expected demand inflationary pressure decreased. The development of monetary aggregates corresponded to the inflation target. The external imbalance and the exchange rate did not indicate any significant external inflationary impulses. However, possible strengthening of the exchange rate was not considered to be sustainable in the medium-term.

The Board identified a series of uncertainties when deciding on the extent of the repo rate change. It was not clear to what extent the January and February data on inflation development were affected by a reaction of the private sector to administrative measures and by the effort to reflect various inflationary impulses in annual re-pricing. It was difficult to classify the effects of public sector behaviour on economic development and for this reason, the Government initiative aimed at making fiscal operations more transparent was supported. The sustainability of the relatively favourable wage development particularly in the public sector and deficit tendencies in the area of public finance outside the state budget were also subjects of discussion.

After extensive discussion, the Board decided by a majority vote to increase the 2W repo rate by 0.25 p.p. to 15%.