Minutes of the Bank Board Meeting on 27 July 2000

Present at the meeting: Zdeněk Tůma (Vice-Governor), Miroslav Hrnčíř (Chief Executive Director), Luděk Niedermayer (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)

The Board opened the meeting with a discussion on the July projection of economic variables for the following twelve months. Information presented during the discussion suggested that the pace of economic recovery in the Czech Republic had been accelerating, while keeping the low inflation environment intact. It was also mentioned that the inflation forecast corresponded to the target for 2001.

According to a number of indicators and new data on GDP, the economic growth estimate had risen to 1.7-2.7 per cent. The majority of signals - for example, in the areas of industrial production or the labour market - coincided with the conditions of faster recovery, which was approaching the upper boundary of the predicted interval. A few indicators - for example, construction production - corresponded to dynamics at the lower boundary of the interval.

It was expressed that inflation would most likely fluctuate around the attained level rather than accelerating further. The effects of oil and food price volatility should surface in the short run. This would, nevertheless, involve only corrections in relative prices and not general inflation movements. The Board also discussed the possible impact that faster growth might have on inflation and the current account.

For the medium-term outlook, it was agreed that two alternative scenarios on the sources of economic recovery should be analysed. According to the first scenario, the main catalyst for recovery was the sensitivity of the domestic economy to foreign demand. According to the second scenario, recovery's driving force was the growing capacity of the Czech economy whose performance and productivity would increase under the influence of foreign direct investment, among other things.

The importance of defining the scenarios and evaluating their relevance in the upcoming period was stressed during the meeting, because each of the scenarios would influence economic developments and monetary policy in a different way. If supply constraints prevail in the economy, along with the rigid functioning of some of markets, then faster recovery would generate unbalanced tendencies - on the current account in particular - and inflationary pressures. It was expressed that the consistency of projections should be monitored and that the newly available information should be examined and compared to both scenarios.

The Board focused a part of their discussion on the issue of coordinating economic policies. In context with the previous discussion, one view was expressed that the desired acceleration of economic recovery, and in particular maintaining this recovery, is possible only if the needed level of the external equilibrium is preserved. Some risks could be reduced by employing a common approach for monetary, foreign exchange and fiscal policy, whose principles were described in the material on coordination of economic policies in a period of capital inflow. The role of the privatisation account was mentioned. This account could help prevent any extreme appreciation of the koruna's exchange rate.

Also discussed during the meeting was the issue of whether the accumulation of obligations that are now being undertaken by the government sector could reduce the role of fiscal policy in the future as an automatic stabiliser of the economic cycle. One view was expressed that if acceleration in recovery were to occur and if fiscal policy deepened the economic cycle, then there would be a danger of repeating some of the same problems of the mid-1990s. It was also mentioned that the structure of public debt financing had an effect on the Czech financial market.

At the close of the meeting, board members were invited to vote on the settings of monetary policy 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