Minutes of the CNB Board Meeting on 12 November 1998

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

During discussions on setting the inflation target for 1999, the CNB Board assessed the current data on economic and monetary developments. The source of this new data is CNB analysts' reassessment of inflation forecasts for the end of this year and for 1999. It was stated that the existing macroeconomic framework possesses a strong anti-inflation character that will temporarily push net inflation values, especially at the beginning of next year, even further below the announced medium-term target.

The main cause of the unexpectedly sharp drop in inflation in the second half of 1998 was a supply shock generated by world economic developments and prices of imported commodities. This shock interacted in the Czech economy with the effects of restrictive pressure from the previously set parameters of monetary and fiscal policy. Significant improvement in the external and internal macroeconomic equilibrium is connected to capital inflow and koruna appreciation which puts further restrictions on monetary conditions.

Current world economic indicators reveal that in less stabilised regions there is reduced risk of the global effects of a crisis. Internal factors indicate a clear tendency towards more prudent wage development even though there are doubts as to whether this trend will continue into next year. Money supply growth will move more in the lower part of the permitted range. Due to behavioural changes in the group of large domestic banks, credit activity will decline to a certain extent.
Inflation expectations are positive, as confirmed by the inverse slope of the yield curves and the population's continued propensity to save.

CNB Board members agreed that at this time, there is a reasonably large amount of room for cutting interest rates. At the same time, members refused the notion that interest rates alone affect the performance of the economy and its recovery and stressed that a fundamental condition for renewing growth is the implementation of essential structural, institutional and legislative changes. In particular, questions were raised concerning the transmission mechanism and the time lag effects of monetary policy decision-making on domestic demand as well as the impact of the expected non-linear course of inflation for monetary policy adjustments next year.

A proposal was made during assessment of the 1999 inflation outlook to ease monetary policy further by cutting interest rates. In this context, some indications from the previous period were given that attempts by politicians to influence the board decision-making process could possibly cause misinterpretation of any adopted measures. The need to adopt a short-term inflation target for 1999 that would be consistent with the current forecast was also stressed.

By a majority vote, the bank board decided to cut the CNB two-week repo rate by one percentage point from 12.5 to 11.5%, effective 13 November 1998.