Minutes of the Bank Board Meeting on 24 September 1998

Present at the meeting: Josef Tošovský (Governor), Ota Kaftan (Chief Executive Director), Luděk Niedermayer (Chief Executive Director), Jiří Pospíšil (Chief Executive Director)

The CNB Board stated that in the short run, the disinflation outlook is positive and will create space for further policy easing. As long as there is no significant change in external exogenous factors in the next few months, net inflation and inflation in general should continue to decline. It was expressed that the correct monetary policy response to the expected inflation decline will largely depend on quantification of the impact of the exchange rate and foreign price movement on the price level and on the assessment of future demand effects over a longer period of time.

In a discussion about future demand, stress was put on the analysis of the factors that shape household consumption. An opinion was expressed that as a result of expected unemployment growth and a general reassessment of future incomes in connection to economic development, households' propensity to save has increased. Doubts were raised as to whether this factor could be maintained for a longer period because of the possible effects of the anticipated slowdown of price corrections in the area of energy and rents on savings.

In relation to future household consumption, the expected wage developments were also discussed. Inertia in nominal wage growth (downward rigidity), the potential negative effect of the expected wage growth in the budgetary sphere on wage negotiations in the private sector and an expected drop in inflation for next year indicate a risk of excessive real wage growth in the economy next year. The growing unemployment rate which negatively affects the wage negotiation position of employees and an expected increase in household savings were, on the other hand, shown to be factors that could dampen the onset of demand-led inflation associated with possible unfavourable wage development.

The board agreed that a lack of a clear conception for the state budget has led to continued uncertainty. In assessing demand effects, public finance performance was still considered to be one of the main sources of uncertainty. In addition to the possible impact of demand pressures resulting from the structural part of the expected public finance deficit, future price developments are threatened due to uncertainty about economic growth estimates for next year and price elasticity of demand for commodities which, according to government intentions, should be connected to higher consumer taxes.

The causes of the decline in economic growth were assessed from a cyclical and structural standpoint. During the discussion, a difference of opinion was expressed in how to perceive the intensity of the restrictive effects of macroeconomic instruments and longer-term microeconomic structural problems.

The discussion continued with the balance of trade, the extent of improvements in the balance after the elimination of price effects and the risk of reoccurrence of an external imbalance in the case of strengthening domestic demand. It was stressed that in respect to the external equilibrium, gradual lowering of the current account deficit is a key factor due to its difficult financing in current economic conditions.

After analysing the effects of future demand and cost factors on net inflation, the CNB Board, in a majority vote, decided to cut the two-week repo rate from 14% to 13.5%.