Minutes of the Bank Board Meeting on 24 February 2000

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

The Board opened the meeting with an assessment of the macroeconomic outlook. It was confirmed that most of the newly available economic information corresponded to the inflation forecast. A sharp rise in the value of the dollar was the only real factor causing any technical changes in the expected forecast. Inflation data continued to correspond to CNB projections and the inflation target for the year 2000. Anticipated wage development and inflation expectations were also consistent with the target.

GDP growth would be supported by a moderate increase in domestic demand, possibly causing the trade deficit to slightly worsen as well. Dynamic foreign demand could also contribute to GDP growth. Keeping rates at their present level was indicated as an appropriate response to the macroeconomic outlook.

The Board then turned to other problematic areas. In addition to the standard fiscal policy approaches, using the public budget deficit indicator (based on the Maastricht method) was also proposed. This method makes it possible to assess public budget deficits in the same manner as the EU. It was expressed that while larger companies trading with foreign countries do not, as a rule, have problems securing loans, some companies operating on the domestic market, including prosperous companies, have difficulties obtaining capital. This problem is structural in nature and cannot be solved with monetary policy instruments.

The Board also discussed matters related to the balance of payments, the exchange rate and monetary policy response. Three types of potential capital inflow were identified. Inflow connected to completing privatisation has only a temporary effect. Provided macroeconomic conditions require it, monetary policy could respond with foreign exchange intervention and by setting up a special account that would help distribute the impact of the depleted privatisation funds over a longer period of time. Inflow of foreign direct investment is often connected to green-field projects. If contributing to productivity growth, this type of investment inflow would not necessarily have a negative effect on the external imbalance, even in the presence of exchange rate appreciation. In this context, it was mentioned that exchange rate flexibility is an important feature used by monetary strategy during EU convergence. The third type involves the potential inflow of speculative capital, which could be renewed if key investors direct their interests more to emerging markets. Czech assets will also become more attractive now that the Czech Republic is closer to being included in the first wave of EU candidate countries.

At the close of the meeting, 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