The first one relates to the comparability of the CNB’s forecast with the rest of the forecasts produced by the ESCB members. As I mentioned earlier, the CNB produces an unconditional forecast that includes a reaction function of the central bank. However, this is not the case with the rest of the ESCB members. Although there is a tendency towards the use of unconditional forecasts and the Bank of England and Sveriges Riksbank have started to use at least the trajectory of the short-term interest rate derived from the money market term structure instead of an assumption of a constant short-term interest rate as a base for their forecasts, conditional forecasting still plays a crucial role among the ESCB members. This, of course, seriously reduces the comparability of the results. Second, the forecasting system and the modelling framework have not yet been adjusted to our expected entry into the ERM II and the euro area. ERM II participation clearly raises the question of consistency between the “low” inflation environment required by the Maastricht inflation criterion and stability of the nominal exchange rate, both in a converging economy. Recent experience among the new EU member countries provides some evidence on the difficulties of fulfilling the Maastricht inflation criterion amid a stable exchange rate. The issue to be solved is to what extent the forecasting system should reflect the dualism of the targets, or whether the policy rule should consider the inflation target only, leaving the exchange rate as a fully endogenous variable.

The inflation forecast is not only an important internal decision-making tool, but also a crucial communication device. Monetary policy has become considerably more transparent over recent decades. It is now commonly believed that open communication of monetary policy is beneficial to the stability and predictability of its transmission into the economy, and is also crucial for the accountability of an independent central bank. As a result, the inflation forecast, including its underlying assumptions and policy implications, is openly explained to the public. Nonetheless, we must always bear in mind that even highly developed, technically advanced and wellorganised forecasting procedures are not an automatic pilot for inflation-targeting central banks. They are no more – but also no less – than an important input into the monetary policy process. Eventually, the decision is always based not only on the central forecast itself, but also on the decision-makers’ discussions about all the associated risks. Good analytical tools, however, can be helpful even in this respect, by enabling the simulation of different alternative scenarios in a consistent manner. Let me now turn to the progress we have achieved so far in building our forecasting system at the Czech National Bank, where we now have nine years of experience with inflation targeting. The new regime was introduced in a challenging situation, after a period of currency turmoil in May 1997, which ended the fixed exchange rate period and resulted in higher inflation and rising inflation expectations. The economy needed a new nominal anchor in order to return to a disinflation path.