Inflation report - attachment
II/2001

The CNB´s monetary policy rates

Monetary policy rates, i.e. the rates set by the CNB, consist of the limit rate for two-week repo operations (the "2W repo rate"), the discount rate and the Lombard rate. The 2W repo rate is the main instrument of CNB monetary policy. Its level affects short-term interest rates on the money market. Yields for longer maturities are market-derived and reflect inflation expectations and other factors. The discount and Lombard rates create the corridor for movements of short-term interest rates on the money market. The overnight deposit facility (for surplus liquidity which commercial banks do not manage to deposit on the money market) is remunerated at the discount rate, and the overnight lending facility (for lack of liquidity which banks fail to acquire on the money market) is remunerated at the Lombard rate.

In the past, there existed no fixed rule for setting the relationship between the individual monetary policy rates. The width of the corridor between the discount rate and Lombard rate (which was 2.5 percentage points prior to 22 February) and the location of the 2W repo rate within this corridor were perceived by the money market as signals of the likely future trend in monetary policy.
At its meeting on 22 February 2001, the CNB Bank Board decided on the following changes:

  • to place the 2W repo rate in the middle of the corridor formed by the discount rate and Lombard rate;
  • to narrow the corridor to 2 percentage points, so that in future the discount rate will equal the 2W repo rate minus 1 percentage point and the Lombard rate will equal the 2W repo rate plus 1 percentage point;
  • in exceptional cases it will be possible to deviate from these principles;
  • to lower all the monetary policy rates (the 2W repo rate from 5.25% to 5%, the discount rate from 5% to 4% and the Lombard rate from 7.5% to 6%).

The CNB views the domestic money market as sufficiently developed, stable and liquid for the corridor created by the discount and Lombard rates to be narrowed to 2 percentage points. At the medium-term horizon, the CNB expects low inflation and stable macroeconomic development. This allows the CNB's system of monetary policy rates to be aligned with that of the European Central Bank. In this particular arrangement, the discount and Lombard rates lose their signalling capacity in monetary policy.