Minutes of the Bank Board Meeting of 27 August 1998

Present at the meeting: Josef Tošovský (Governor), Pavel Kysilka (Vice-Governor), Jan Vít (Vice-Governor), Miroslav Hrnčíř (Chief Executive Director), Ota Kaftan (Chief Executive Director), Jiří Pospíšil (Chief Executive Director).

The CNB Bank Board assessed the monetary situation following the recent cut in key central bank interest rates on 13 August 1998.

The Board evaluated the short- and medium-term risk factors connected to the escalation of the Russian crisis. It was stated that the likelihood that Russian economic instability would have a direct adverse effect on the Czech Republic is relatively low, because the Czech economy has very few trade and financial market ties to Russia. The secondary effect of the crisis, assuming that it would spread to Central Europe, was seen as a more serious threat considering the importance of this region to Czech export.

It was mentioned that after the steady decline in world commodity prices in the recent past, some corrections in the opposite direction could be expected. Nevertheless, a hypothesis was put forward indicating that the effects of the Russian and Asian crises on the world commodity market would interfere with these corrections. The impact of this exogenous factor was considered to be a significant element in assessing current inflation development.

Unclear objectives in the area of the general government budget were considered to be a significant source of uncertainty. It was stressed that relatively favourable results in public sector performance could have positive or negative macroeconomic implications depending on the economic cycle or the strength of capital flows. Little improvement in the efficiency of government administration, which in turn produced wage pressures in the public sector, was indicated as a significant risk factor that could affect the medium-term disinflation process. In connection to this, it was mentioned that falling inflation this year in regard to the forward-looking character of monetary policy will not lead to continued cuts in interest rates should imprudent fiscal development or wage policies develop.

In a discussion about the effect of interest rates on the volume of granted credits, stress was put on the prompt development and approval of a legal and institutional framework that would improve the position of creditors. Changes in this area could lead to improved interest rate policies of banks vis-à-vis the business sector and consequently to the strengthening influence of interest rates in the transmission mechanism.

In closing, the Board stated that due to the short amount of time since the last change in monetary policy instruments, no new economic information is available at this time that could seriously affect the medium-term inflation outlook. The Board unanimously decided not to change the set monetary policy instruments.