frequent numerical target misses. nevertheless, the czech republic enjoys low inflation, and inflation expectations seem to be firmly anchored at low levels at present. monetary policy decision - making is rule - based and transparent, thereby enhancing the credibility of the cnb. such a framework allows an independent central bank to commit credibly to its long - term goal of price stability, and at the same time preserves enough discretion for an active anti - cyclical monetary policy that takes into account not only inflation, but also other factors such as variability of output.

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 required a radical and fast change in the central bank ’ s mentality. this was perhaps the biggest challenge that the cnb had to face. over the past five years it has involved much work on improving our forecasting tools, leading to substantial development in our internal analytical processes. these changes culminated a year ago, when the cnb settled on a new forecasting process. this integrates expert judgement and short - term analyses - which were the key pillars of the cnb ’ s forecasting tool - kit in the first years of inflation targeting - with a small - scale macroeconomic model developed by the cnb ’ s staff with the assistance of the international monetary fund. an important element of this step was a switch from a forecast with a fixed - interest - rate assumption to an unconditional forecast that includes a reaction - function of the central bank. our current quarterly projection model is a small - scale model belonging to the first generation. it is thus fairly simple and arguably misses many important links in the economy. nevertheless, it is already quite close to the state - of - the - art among the inflation - targeting central banks around the world, and intense work is in progress to build a higher - generation model. the good standard of our current forecasting know - how is reflected, among other things, in our ability to start providing technical assistance in the forecasting field to some other central banks in transition and emerging market economies. in line with the transparency philosophy of inflation targeting, the czech national bank published a book called “ the czech national bank ’ s forecasting and policy analysis system ” last year. this book describes not only the core forecasting model itself, but also the whole process of creating the final integrated forecast. the model has also been published in a professional journal, the czech journal of economics and finance. to conclude, i would like to emphasise that the development of our forecasting and analysis system has been part of a wider evolutionary process that the czech inflation targeting regime has gone through. during the first years, many of the details were adjusted in response to the changing needs, challenging experience and evolving thinking of the central bank. the first years of the new regime were not easy, and included