1) CNB BASIC AIMS FOR THE FIRST THREE QUARTERS FULFILLED
2) MONETARY DEVELOPMENT REGULATED THROUGH INDIRECT INSTRUMENTS OF MANAGEMENT
3) THE CNB CONTINUES TO STERILISE EXCESSIVE BANKING SYSTEM RESERVES
4) THE CNB INCREASES MRR ON THE BASIS OF THE FIRST SIX MONTHS' DEVELOPMENT
5) THE LOMBARD RATE IS LOWERED TO 10.5%
6) FURTHER MEASURES UNDERTAKEN IN MONEY MARKET MANAGEMENT
7) THE CNB ENDS ITS ROLE AS A MARKET MAKER
8) DAILY MANAGEMENT OF BANKING SECTOR LIQUIDITY
9) FOREIGN EXCHANGE RATE REMAINS UNCHANGED
1) The basic aim of the CNB 1994 monetary policy continues to be ensuring the internal and external stability of the currency. Under 1994 conditions this means to keep the inflation rate under 10% and maintain a stable exchange rate of the Czech crown vis-a-vis freely convertible currencies as the significant stabilising anchor of macroeconomic balance during the transformation period. Monetary developments to date indicate the accomplishment of these basic aims. Inflationary development measured by the consumer price index amounted to 7.9% at the end of September. The balance of payments development hitherto enables continuation of the policy of a stable nominal exchange rate of the Czech crown.
2) The 1994 CNB monetary policy is also founded on the regulation of a basic monetary interim target - the money supply as defined by the monetary aggregate M2. This year, estimates of its growth are grounded on an anticipated slight increase in the gross domestic product and an inflation rate under 10%. However, money supply regulation is based only on indirect methods of management. The methods of CNB monetary management include a stable foreign exchange rate, CNB interest rates (discount and Lombard), minimum reserves requirement, refinancing and open-market operations.
When evaluating the adequacy of the monetary development, the CNB also considers supplementary monetary aggregates, especially developments of credits, net foreign assets and net credit to government. The overall developments of the economy and velocity of money are significant criteria.
3) The monetary development in the monitored period was especially influenced by a strong inflow of foreign resources, which increased the liquidity of commercial banks and their possibilities to issue credits. The CNB was forced to continue to partially sterilise the free reserves in the banking system in the interest of keeping the growth of the monetary aggregate within the intentions of the CNB monetary programme. As in 1993, sterilisation was carried out through the issue of CNB bills, and through free-market operations with T-bills, NPF and CNB bills.
4) However, the growing inflow of foreign resources continued to be accompanied by commercial banks' credit activities driven by their shareholders' interests. This caused the development of M2 to deviate from the monetary programme at the close of the first six months. On the basis of an analysis carried out, this development of the money supply, and especially, fear for its continuation, appeared to be a possible spur to future inflationary development. This led the CNB to change the amount of minimum reserves requirement (MRR) for demand deposits from 9% to 12%, effective August 4, this year. The amount of minimum reserves requirement for time deposits remained unchanged, i.e. 3%. This measure has drawn approximately CZK 10 bn from the banking sector.
5) The Lombard rate was adjusted in the period when money supply growth was slow. The rate was lowered from 11.5% to 10.5% (effective April 8 this year) following stable price development and the overall trend of interest rates on the money market. The change in the Lombard rate was aimed at reducing the difference between the two main rates, the discount and Lombard rates.
6) In addition, further adjustments to the monetary instruments were carried out to continue implementation of CNB measures to gradually improve money market management. Effective March 1 this year, the CNB shortened to 14 days the cycle for maintaining the amount of minimum reserves requirement in order to make them more even and indirectly reduce the fluctuation of free reserves in the banking system and the volatility of interest rates on the inter-bank deposit market. In June, a gradual increase in the percentage of coverage by securities of drawn refinancing credits was completed. This means that refinancing credits are only extended against a 100% coverage by securities.
7) Development of short-term securities and an increase in the volume of bond portfolios held by commercial banks enabled restriction of CNB participation in this market. The function of the CNB as a 100% guarantor of market liquidity started to negatively affect the development of inter-bank trading (pushing out other potential market makers) and make the CNB role in influencing the liquidity of banks and interest rate levels more difficult. With the aim to emphasise a systemic approach towards liquidity management of the entire banking sector, in accordance with decision-making criteria of the central bank, the CNB role as a market maker on short-term securities was gradually terminated starting August 18 this year. Quotation of the purchase price was cancelled first, and then quotation of the sale price.
8) At the same time, a system of daily management of banking sector liquidity was gradually implemented through free-market operations based on the daily prediction of the supply of reserves, and by a comparison of this prediction with the final demand for reserves. The CNB decision whether to intervene is based on strict systemic criteria - the banking system is assessed as a whole, i.e. a deficit (or surplus) of reserves of an individual bank provides no reason for supplementing (or withdrawing) liquidity, provided the system as a whole is balanced. Daily operations are aimed at enabling banks to even out the levels of their free reserves so as to prevent large day-to-day fluctuations in the banks' liquidity. The reduction of interest rates volatility on the money market, CNB operations being consistent and transparent, is a further target which is no less important.
9) Despite the fact the favourable price development and ongoing inflow of foreign resources generate some expectations of revaluation with the public, the CNB continues to maintain the exchange rate of the Czech crown vis-a-vis freely convertible currencies. The equilibrium of the balance of payments current account is a basic starting point for a policy of maintaining a stable nominal exchange rate of the Czech crown against freely convertible currencies. The development of the capital account is creating favourable preconditions for the liberalisation of capital flows. February's relaxation of the obligation for foreign exchange residents - juridical entities and entrepreneurs to offer foreign exchange means was one of the gradual steps taken to expand Czech crown convertibility. This measure liberalised entrepreneurs' possibilities to establish foreign exchange accounts and led to the expansion of commercial banks' services so as to hedge against exchange rate risks.