has increased dramatically, reflecting numerous currency crises and a growing consensus on the undesirability of conventional currency pegs. moreover, the inflation targeting regime has gained much more weight among the group of countries with floating rates. inflation targeting, or following svensson “ inflation forecast targeting ”, has placed the forecasting process at the heart of monetary policy decision - making. under inflation targeting, the forecasting process centres on future price developments. this does not necessarily mean, though, that central bankers are obsessed with inflation. in fact, inflation targeting requires us to assess all the available information, including real economic developments, monetary analysis and the external balance of the economy, in a systematic and complex way. it is hence more demanding from the point of view of consistency than the alternative monetary strategies. of course, the latter require a consistent system for analysis and forecasting. 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. inflation targeting was chosen as “ the best of all bad ” alternatives at the time. such a sudden switch from a fixed exchange rate system to inflation targeting

down in line with growth deceleration. several idiosyncratic factors are put forward to explain this uniqueness of our macroeconomic situation : supply bottlenecks, particularly in infrastructure, bis central bankers ’ speeches sectoral imbalances, rise in wages without a corresponding increase in productivity, higher fiscal deficit and larger depreciation of the exchange rate than in the case of our peers. reserve bank ’ s action to curb inflation 32. to control inflation, the reserve bank reversed the crisis period ’ s accommodative monetary stance in quick order. we raised the policy interest rate ( repo rate ) 13 times, cumulatively by 375 basis points ( bps ) – from 4. 75 per cent to 8. 5 per cent. also we raised the reserve requirement on banks – the cash reserve ratio ( crr ) – by 100 bps from 5 per cent to 6 per cent. monetary policy is known to work with lags, and as a consequence of the tight monetary policy, wpi inflation which peaked at 10. 9 per cent in april 2010, has come down to 6. 6 per cent in january 2013. 33. in response to deceleration in growth and decline in inflation, the reserve bank eased the monetary policy stance starting january 2012 cutting both the repo rate ( by 75 bps ) and the crr ( by 200 bps ). criticism against reserve bank ’ s monetary policy stance 34. the reserve bank has been criticized for its anti - inflationary stance. let me address some of the main strands of that criticism if only to illustrate the dilemmas that we face in managing the growth - inflation trade - off. monetary policy has only stifled growth, but has not tamed inflation 35. by far the most common criticism has been that tight monetary policy has stifled growth but has not tamed inflation. my response to this criticism is the following. first, inflation has come off from its peak by over about 4 percentage points. admittedly, growth too has moderated. however, the reserve bank ’ s anti - inflation stance is motivated by the dictum that inflation is inimical to growth and that only in a situation of price stability can consumers and investors make informed choices. 36. it is important also to note that in order to contain inflation, monetary policy seeks to curb demand which, in turn, restrains growth. as per this logic, reduction in growth is an inevitable outcome of tight monetary policy. but this sacrifice is only