CNB Board members backed Feb 22 rate cut by 6-1

The Board also agreed unanimously to lower the discount rate to 4 pct and the Lombard rate to 6 pct. The discount and Lombard rates would continue to change in proportion to the repo rate. However, the Board reserves the right to deviate from this rule in exceptional cases. In this particular arrangement, the discount and Lombard rates lose their signalling capacity in monetary policy, the minutes say.

In cutting the rates, the Board was motivated by the growing probability that the Jan 2001 figures, coupled with a slight appreciation trend in the crown's exchange rate, had increased the likelihood of net inflation being in the lower half of the inflation target of between 2-4 pct at the end of 2001. The slow recovery in economic growth had also suggested that lowering rates might be an appropriate monetary policy response, according to the minutes.

On the other hand, leaving rates at their current level was also considered. A view was expressed that the growth dynamics of the economy had now exceeded potential growth. The low level of real deposit rates was another argument given. Attention was given to growing fiscal deficits. It was expressed that some of the risks given as arguments for not changing the rates were medium-range in nature and that it would be appropriate to react to them as they actually occur, according to the minutes.

The Board focused a part of their discussion on the exchange rate which in the last few weeks has been below Kc35.00/EUR. It was mentioned that the crown had once again exhibited a slight appreciation tendency. This may be in line with productivity growth, but, besides that, the exchange rate in upcoming years would be influenced by capital inflow. Foreign exchange intervention is a central bank instrument that the Board is prepared to use, if the need should arise, the minutes say.