Minutes of the CNB Board Meeting on 3 December 1998

Present at the meeting: Josef Tošovský (Governor), Jan Vít (Vice-Governor), Pavel Kysilka (Vice-Governor), Miroslav Hrnčíř (Chief Executive Director), Luděk Niedermayer (Chief Executive Director), Jiří Pospíšil (Chief Executive Director)
Ivo Svoboda (Czech Minister of Finance)

On the basis of the regularly issued report on monetary and economic development, the CNB Board assessed the setting of monetary policy parameters in relation to expected inflation development and the macroeconomic situation in the Czech Republic. All members of the board agreed that further room exists for cutting interest rates. Nevertheless, the current situation does not indicate that any significant change in the credit activity of commercial banks will occur.
Evaluation of the criteria for specifying the optimal interest rate level and identifying the sensitivity limits of the exchange rate and savings deposits for interest rate changes was the main topic of discussion. From this standpoint, deciding on rate changes is now more complex than in the past. The level of interest rates from the first half of 1996 can be used as a benchmark for assessing real interest rates on newly granted credits.

The board assessed the likelihood of various economic scenarios in the Czech Republic in relation to changing international as well as domestic conditions. A quick recovery based on demand growth was, nonetheless, seen as the least realistic of all.

Board members stressed once again that the main cause of net inflation falling well below the set range is the unexpected, sharp drop in the prices of raw materials and food on world markets. The world economic situation indicates that the period of extremely slow inflation will likely continue even well into next year. This provides more space for flexible monetary policy in the future.

The board has taken into consideration the current information on lowering interest rates in the majority of Western European countries and views it as a signal of long-term suppression of demand-led inflation impulses.

At the close of the discussion and after a careful examination of the analyses and current data, the CNB Board decided unanimously to cut the two-week repo rate by one percentage point from 11.5 to 10.5%, effective 4 December 1998. The next bank board meeting on monetary and economic development will take place on 28 January 1999.

Author of the Minutes: Petr Krejčí, CNB, Adviser to the Board

Comments are welcome on the following email address: research@cnb.cz