Minutes of the Bank Board Meeting on 27 January 2000

Present at the meeting: Josef Tošovský (Governor), Oldřich Dědek (Vice-Governor), Zdeněk Tůma (Vice-Governor), Miroslav Hrnčíř (Chief Executive Director), Luděk Niedermayer (Chief Executive Director), Pavel Racocha (Chief Executive Director)

The Board opened the meeting with a discussion of the specific features distinguishing price development in the year 2000 from developments in the past two years. The Czech economy in 1998 and the first half of 1999 was characterised by a combination of low cost and demand pressures that were reflected in a falling rate of inflation. By the second half of 1999, cost pressures had started to build up, particularly as a result of transmission from abroad. Demand pressures, on the other hand, were kept under control. GDP growth had begun to coincide with domestic demand growth. As cost pressures gradually lessen in the second half of 2000, demand pressures would again slowly emerge.

The Board assessed the inflation forecast and the risks involved. Despite the risk of the baseline scenario converging more on the inflation side, the current setting of monetary policy parameters corresponded to the medium-term monetary strategy. The midpoint of the net inflation projection was aimed towards the inflation target's lower boundary for the year 2000. The latest data on growth in retail sales, industrial production and in other areas revealed that economic recovery should be stronger than the previous data on GDP had indicated. The beginning of 2000 would also be a period of heightened uncertainty on global oil markets. It was further stated that the international environment would be characterised by a slightly rising inflation rate as well as possible increases in the interest rates of key central banks.

Discussion during the board meeting also focused on factors that require a more systematic approach of analysis. The process of introducing financial innovations to the Czech market would continue in the year 2000. The new financial instruments had indicated dynamic growth. Privatisation of the banking sector would also continue. In view of these events, it was mentioned that the economic links monitored up to this point could change in character in the medium term.

The Board also discussed the hypothesis that, in the real economy, two sectors existed with divergent rates of development. Therefore, as the one segment linked to effective foreign direct investment grew very quickly, the impact of the slow segment caused the aggregate data to show up only as very modest growth. In this regard, it was mentioned that the balanced share of investment in relation to GDP was very difficult to characterise in a clear manner. Although investment to fixed capital declined in the last period, by international comparison, the Czech economy still registered a relatively high share of investment in GDP. A substantial portion of investment was directed to infrastructure and ecology projects, which interfered with results when comparing the investment values of other countries.

At the close of the meeting, members were invited to vote on the setting of monetary instruments. The Board decided unanimously to leave the CNB two-week repo rate at its current level (5.25%).

Author of the Minutes: Kateřina Šmídková, CNB, Council of Advisers

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