Česká národní banka

CNB > Monetary policy > CNB Board decisions > 1999 > 28 January 1999

Minutes of the CNB Board Meeting on 28 January 1999

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), Jiří Pospíšil (Chief Executive Director)

The Bank board opened the meeting with its regular assessment of the monetary and economic situation. In particular, members evaluated the new developments that have taken place since the last meeting. Information on the progress and expected results of wage negotiations and data on the high December trade balance deficit were considered to be the most pending issues on the agenda. The board also expressed discontent over the possible effects of changes in the government economic forecast which had been implemented immediately following the approval of the state budget.

The board members stated once again that the most serious risk this year involves inconsistencies in wage and price developments. The unprecedented turn in inflation has come into conflict with steadily rising wages which secure collective agreements in the business sphere. With the anticipated stagnation in the economy, growth of average real wages has once again significantly deviated from productivity. Given that, from a macroeconomic standpoint, labour costs have the largest share of the overall level of costs and prices, growth in unit labour costs could negatively affect domestic economic competitiveness this year. One warning signal already visible is the balance of trade results for the last two months.

The risk of an external imbalance developing again has become even more of a reality considering that the factors that positively affected the trade balance and current account last year are not expected in 1999, i.e. growing foreign demand and slowing domestic demand and extremely favourable terms of trade. Foreign demand in 1999 will generate slowed economic growth for the Czech Republic's main business partners and rigid price competitiveness worldwide, especially for countries that have gone through or are going through an exchange rate crisis. Possible loss of competitiveness in parts of the Czech economy while maintaining anticipated wage growth intact could lead to a sharp increase in unemployment as well as to social unrest. Therefore, from a monetary standpoint, more pronounced exchange rate corrections, although not desired, could be imminent.

The Bank board stressed that, to a certain extent, these risks have a latent character and that it is still possible to lower the likelihood of their development. As a reminder during the meeting, the significance of the dialogue between the government and other partners was also emphasised. This dialogue should contribute to the elimination of these risks. If the need arises to defend against further declines in the economy with the risk of a deflation spiral, stimulation of the supply side of the economy can play an important role. In every case, lowering interest rates would be one feasible option for dealing with such a situation. The nature of the exchange rate movement which has been seen recently has not significantly changed the rationale for correcting interest rates. Maintaining the CNB's inflation target for 1999 was again considered to be realistic. Bank board decision-making will nonetheless be more contingent on the risk areas discussed.

On the basis of the detailed monetary and economic analysis and the related discussion, the members of the Bank board decided unanimously to lower the CNB two-week repo rate by 0.75 percentage points from 8.75% to 8%, effective 29 January 1999.

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

Comments are welcome on the following email address: research@cnb.cz