Minutes of the Board Meeting on 30 July 1998

The CNB Bank Board mentioned during the meeting that positive trends were beginning to show up in inflation development. In June, year-on-year net inflation was pushed to the upper limit of the target interval for 1998. By the end of the year, values are expected to be near the lower limit of the interval. After inflation acceleration in the second half of last year, the growth tendency diminished, and conditions for maintaining the disinflationary process had been set in place. This positive occurrence was caused among others by the favourable development in exogenous factors, e.g. world commodity prices. The anti-inflationary effects of these factors could, nevertheless, be temporary in nature.

The Bank Board was in agreement that the likelihood of meeting the inflation target after 1998 is high. Cost and demand factors have been experiencing positive development. The short-term risk potential for the inflation target up to the end of 1998 was regarded as insignificant. An increase in the yield curve's inverse slope suggested that inflation expectations decreased. Moreover, financial markets indicated that the central bank's disinflation strategy could have positive effects on the business sector even in the short run. A steady decline in long-term interest rates means lower costs for long-term investment. It was mentioned that the Czech economy reacts in a standard way to fiscal and monetary stimuli. This implies that the inflationary process is well controllable by the central bank.

One of the main medium-range inflation risks is considered to be the rigidity of nominal wage growth which in the case of decreasing inflation leads to real wage acceleration. The discrepancies in the wage growth in the public and private sectors were also mentioned as a potential inflationary risk. It was stressed that respecting the disinflationary trend during wage negotiations is an important condition for ensuring the continuation of the disinflationary process. Other medium-range risk factor includes growing import propensity of demand, which in case of growing demand pressures could once again lead to external imbalance.

In a discussion on optimal monetary policy response to the short-term exogenous factors influencing inflation, it was stated that instead of actively eliminating such exogenous effects, it is better to concentrate on stabilising the actual effects.

In conclusion, the CNB Board decided unanimously not to make a change in the monetary policy instruments.