such a system, the role of forecasting is smaller than with the floating exchange rate regime and concentrates on balance of payments analysis and perhaps also monetary analysis. the countries with floating exchange rates, on the other hand, often experimented with money targeting, which pushed monetary analysis to the forefront. however, since the early 1990s the number of countries with floating exchange rates 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 around future price developments. this does not necessarily mean, though, that central bankers are obsessed with inflation. in fact, inflation targeting requires assessing all the available information, including real economic developments, monetary analysis and external balance of the economy, in a systematic and complex way. it is hence more demanding from this point of view than the alternative monetary strategies. 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. after this general introduction, let me now briefly speak about the progress we have so far achieved in forecasting at the czech national bank. we now have more than five 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

important role. milton friedman ( friedman and schwartz, 1963 ) stated that a restrictive monetary policy does not depend on the support of fiscal policy. but this claim was formulated for a situation with limited bank liquidity. we are in a different situation. we are living in excess liquidity. it is easy for banks to finance government debt. it is easy for governments to issue new bonds. this can easily lead to further inflation. that is why i have said at the press conferences after all our monetary policy meetings that reducing government deficits is another important precondition for reducing inflation in the long term ( see also cochrane, 2023, for example ). as a board, we also discussed that if budget deficits remain high, we will need to maintain higher interest rates to keep inflation at 2 %. essentially, this means that our hypothetical / modelbased neutral rate r * would be increased due to continued fiscal deficits. this is a similar reasoning to schnabel ( 2024 ). lessons and current strategy overall, we have learned our lessons. we have decided to ask for the first external assessment of monetary policy in the history of the cnb. the review will consist of three independent parts : » a team led by two professors from the university of economics in prague ( martin mandel and karel bruna ) will focus on our core model as well as on the interaction between the central bank ’ s monetary policy and government fiscal policy. » john muellbauer from the university of oxford will review the model and subsequent monetary policy recommendations. » finally, roman sustek from queen mary university of london will focus on the individual parts of the model and discuss whether it is appropriate to have only one core model. the bank board will discuss the results of these assessments and we expect to publish the conclusions early next year. that was the story and development of the second assumption we made at the beginning about the causes of inflation. this demand - or money - induced inflation can be more persistent. now for the current situation. our key interest rate is now 5. 25 %. we have cautiously lowered interest rates since december 2023. in december, we lowered the interest rate from 7 % by 25 basis points. then by 50 basis points to 6. 25 % in february. then by 50 to 5. 75 % in march. then by 50 to 5. 25 % in may. the debate at the next meeting at the end of june will probably be about whether to cut by