Policy Council was the need to close the gap between the growth of domestic demand and the GDP. The NBP
influenced interest rates during the year both directly via the rates offered on open market operations, and indirectly,
through the rate on Lombard facilities. The purpose of this was to adjust interest rates in line with the threat of
inflation.
From the second quarter inflation was declining and domestic demand growth was also slowing. Due to
these circumstances the Council reduced the interest rates both in May and July. Due to the further rapid decrease in
both ongoing and forecast inflation and the diminishing pace of domestic demand growth, yet another decision was
made to cut rates; this time from October. The same factors as in October lay behind the next cut in NBP base rates
in December this year.
The mechanism for setting zloty exchange rates against other currencies remained unchanged in 1998. The
regime in place continued to be that of a crawling band used to determine the permissible deviation of market
exchange rates from central parity. In view of the visible decline in inflation and the need to impact inflationary
expectations, the MPC cut the monthly rate of crawling devaluation three times this year, lowering it from 1 per cent
to 0.8 per cent February 26, to 0.6 per cent on July 17, and to 0.5 per cent on September 10. At the same time, to
allow exchange rates to move more freely, the MPC also broadened the permissible trading band relative to central
parity on two occasions: on February 26 it was extended from ± 7 per cent to ± 10 per cent and on October 28 to ±
12.5 per cent.