Minutes of the Extraordinary Board Meeting on 21 January 2002

Present at the meeting: Zdeněk Tůma (Governor), Luděk Niedermayer (Vice-Governor), Michaela Erbenová (Chief Executive Director), Jan Frait (Chief Executive Director), Pavel Racocha (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)

The Board discussed the exchange rate of the Czech koruna and the changes in monetary conditions following the Government's meeting on 16 January 2002. The material "Strategy for resolving the exchange rate effects of capital inflow from the privatisation of state assets and other exchange rate incomes of the state" was approved at this meeting. The rapid strengthening of the koruna observed at the end of 2001 was primarily linked to the anticipation of converting a significant part of the state's foreign exchange incomes into Czech koruna. It was stated that considering the extent of the approved measures, the exchange rate was likely to shift back to a level corresponding to the economic fundamentals.

However, the exchange rate did not react in this way, and as a result, monetary conditions were disproportionately tightened. This tightening had occurred at a time when inflationary pressures were low. Board members also took into consideration the fact that liquidity was reduced on the foreign exchange market after the Government's meeting. It was expressed that monetary policy measures leading to looser monetary conditions, if adopted during the regular meeting on monetary policy at the end of January, would more than likely need to respond to a stronger deviation in the exchange rate. Members, therefore, agreed during the discussion to react immediately to the situation by lowering the base rates and to accompany this measure with exchange rate intervention.

Effective 22 January 2002, the Board decided unanimously to lower the CNB two-week repo rate by 0.25 percentage points to 4.50% and to lower the discount and Lombard rates by 0.25 percentage points to 3.50% and 5.50%, respectively. The Board also decided unanimously to intervene on the foreign exchange market.

Author of the Minutes: Kateřina Šmídková, Adviser to the Board

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