Present at the meeting: Josef Tošovský (Governor), Jan Vít (Vice-Governor), Pavel Kysilka (Vice-Governor), Miroslav Hrnčíř (Chief Executive Director), Ota Kaftan (Chief Executive Director), Luděk Niedermayer (Chief Executive Director), Jiří Pospíšil (Chief Executive Director)

The bank board opened the meeting by assessing the current economic and monetary situation as well as the outlook for the future. In addition, the board examined the possible effects of the monetary crisis in Brazil and crisis escalation in Russia. Gradual weakening of the economic growth forecast for the Czech Republic's main business partners and the effects of the launch of the euro in eleven EU member countries were also carefully considered. Current financial market development and assessment of new data on the Czech economy and inflation were used as a framework for the discussion.

On the basis of the analysis provided, the members of the bank board agreed that, given current and expected developments, there is no indication that the CNB should change the manner in which it handles monetary policy. In the upcoming months, very low price indices will prevail in the Czech economy due to external factors and low overall domestic demand. Nevertheless, the fact that the low inflation environment does not correspond to settings in other areas is a more pending issue for the near future (especially wage agreements and budget revenues). There are growing signs of a negative reversal in the balance of trade and current account, and price-cost competitiveness of domestic production, i.e. especially an increase in the growth of unit labour cost, could cause even more complications. Short-term capital inflow is also a risk still involved. These trends indicated that the koruna exchange rate in the first half of January was not completely compatible with the inflation forecast and the CNB's inflation targets.

The exchange rate's sensitivity to interest rate changes was carefully discussed during the meeting. The board concluded that any decision to lower rates further would not cause the nominal exchange rate to deviate in an undesirable fashion. During the discussion on minimum reserve requirements, it was again stressed that further steps will be considered in connection to the short-term programme and the implementation of already approved rate cuts (up to 28 Jan. 1999).

The board confirmed its conclusion that the period of very low inflation will continue throughout a large part of 1999 due to international developments. This low inflation in turn creates room for flexible monetary policy. On the basis of the submitted proposal and the discussion, the board decided by a majority vote to lower the CNB two-week repo rate by 0.75 percentage points from 9.5% to 8.75%, effective 18 January 1999.

Author of the Minutes: Petr Krejčí, CNB, Adviser to the Board

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