A well-established inflation-targeting regime co-exists with a budget stance that has loosened beyond automatic stabilisers. This imbalance in the policy mix has unwelcome consequences for Czech macroeconomic conditions and must be resolved by a closer co-operation of monetary and fiscal policy. Monetary conditions have tightened considerably through till mid-2002 as a consequence of strong currency appreciation. The pace of appreciation was partly19 due to the government dissaving being in part financed by privatisation sales to foreign investors. As the pace of appreciation went beyond its recent average, in order to contain the mounting shocks on competitiveness and output, monetary and fiscal authorities agreed to moderate appreciation pressures by slowing down the conversion of privatisation proceeds and to convert at least part of the proceeds directly in the CNB, out of the foreign exchange market. This agreement softened somewhat the monetary conditions from the second half of 2002, but the fiscal drift continues and financial market tensions -- which would normally result from crowding out -- have only been avoided up to date because of subdued domestic business investment. The conflict between ambitious monetary objectives and a large structural deficit is not sustainable, and a more radical fiscal consolidation than currently envisaged is needed.