Minutes of the Board Meeting on 2 July 1998

The Board evaluated changes that have taken place in the Czech economy and abroad since the last evaluation of the macroeconomic situation on 28 May 1998. The Board stated that the new May and June data confirmed a gradual decline in demand and inflationary pressures. The change in the slope of the yield curve indicated a fall in inflation expectations. It was said that if inflation expectations continued to decline in the future and nominal interest rates remained unchanged, real interest rates would rise. Furthermore, the inflationary impact occurring during the freeing up of regulated prices would not necessarily show up in total inflation due to the income effect. The nominal exchange rate and commodity prices on world markets have a positive effect on inflation in the short run. The opinion was expressed that due to the Asian crisis, a further decline in world commodity prices could not be ruled out.

It was stated that since the inflation forecast depends on the initial exogenous assumptions, under certain conditions, the inflation forecast showed an inflationary trajectory that came very close to the lower boundary of the inflation target range. Attention was drawn to responding in advance to decreasing demand due to time lags with which monetary policy instruments affect economic and subsequently inflation development.

The Board specified a number of risk factors which in the short or medium run could adversely affect inflation. The situation on world financial markets was identified as one of the risk factors which due to very volatile capital movements could negatively influence disinflation development. The CNB's alternative strategies were considered as possible responses to the vigorous strengthening of the koruna's nominal exchange rate. It was stated that due to the short-term effectiveness of these strategies and possible undesired secondary effects, no central bank intervention was desirable at that time.

Different wage development in the public and private sectors was identified as a factor which might negatively affect the growth of the productivity of labour and lead to renewed demand pressures.

It was stated that the current account and its non-debt financing would have a significant influence on the sustainability of the disinflationary process. The development on world financial markets, a potential decline in foreign demand and the Czech economy's high import propensity of production were identified as the main risk factors of sustainable development.

Fiscal policy was assessed from a cyclical and structural point of view. Since economic growth was lower than in previous years, public finance performance could not be evaluated exclusively on the basis of the balance. Concentration should be on the structural aspect of the deficit. In this respect, the current development in the fiscal area was not identified as a key factor in terms of demand pressures. However, any likely increase in the public finance deficit was viewed as undesirable because of its inflationary effect.

In closing, the Board decided not to change instruments of monetary policy, and required an elaboration of additional analysis of inflation factors.