Minutes of the Bank Board Meeting on 27 April 2000

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

The Board opened the meeting by reviewing the report on monetary and economic development, which included a revision of the inflation forecast. Board members agreed that the new inflation forecast for the end of 2000 (CPIx 2.2%-3.5%; CPI 2.9%-3.9%) reflected a higher likelihood that this year's target would not be reached. It was mentioned that, in respect to the outlook for 2001, the forecast corresponded to the recently announced inflation target (CPIx = 3% ± 1 percentage point).

It was repeatedly confirmed that even though there is a high likelihood of reaching a lower level of inflation than the inflation target had indicated for this year, this could not be grounds for allowing monetary policy to increase the volatility of prices. One reason is the costs connected to the monetary restriction that would inevitably follow. In addition, the effects of monetary policy decisions had become increasingly relevant for 2001 in relation to the time horizon.

The Board paid special attention to the consistency of lowering the inflation forecast and to the slight upward shift in the economic growth estimate this year (between 0.5%-2.5%). In view of low inflationary expectations, particularly on the labour market and which, in turn, helped curb some of the cost and demand inflation pressures, adjustments in the forecast for consumer prices and GDP in the opposite direction had been taken into consideration. In addition, a rise in foreign direct investment had positively affected developments on the supply side. In this respect, board members discussed various scenarios for gradually closing in the gap between actual and potential output. Some data on economic development in Q1, which registered substantial year-on-year growth (retail sales, nominal wages, production in industry and construction, and VAT collections), had been influenced in part by a very low comparison base - the economic recession was at its height in 1999 Q1. It was also mentioned that, for example, high sales for certain products that significantly increased retail sales (mobile telephones, new types of personal automobiles), had no impact on inflation owing to a consumer basket that no longer fully reflected current consumption patterns. Existing notions of rising GDP growth for this year are moderate and have no effect on inflation development. The Board also reviewed the data on the slight rise in koruna credit issue from the start of this year, while data on domestic credit issue were compared to the business sector's foreign position, which reflected an inflow of resources from abroad.

The Board also took into account the effects of the interest rate increase in the eurozone and the overall rise in this year's economic growth estimates in this area. Another area of concern was the sustainability of very slow food price growth. The real likelihood of these risks had been accounted for in the new inflation forecast.

Board members favourably assessed the results of intervening on the foreign exchange market in March this year. The koruna vis-à-vis the euro weakened and then remained at a relatively stable level. By easing monetary conditions, this development helped create better assumptions for the trade balance. It was confirmed that any decisions on further intervention would depend on the actual monetary and economic situation at hand.

At the close of the meeting, the Board decided, by a majority vote, to leave the CNB two-week repo rate at its current level.

Author of the Minutes: Petr Krejčí, Adviser to the Governor

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