Decisions adopted by the Governing Board on 1 July 2008

1. At today’s meeting the Governing Board of the Bank of Slovenia was briefed on current economic and financial trends. 
   The macroeconomic imbalances have not diminished since the release of the most recent Price Stability Report in April, and indeed have increased further. Secondary effects of price rises can be discerned on wages. In addition, there is the impact of public sector wage reform on wage growth. The gap between domestic saving and investment can be seen in the widening of the current account deficit and in the increase in net external debt. Inflation remains high.
   The latest figures on the economy reveal increased inflationary pressures from the international environment. The forecast movement of foreign demand remains unchanged. Domestic demand is slowing less quickly than expected, and economic growth remains above the estimated growth in supply potential. There is a risk that a sustained period of low real interest rates could encourage growth in domestic demand above the level envisaged in the baseline projection in April’s Price Stability Report. It is more likely that inflation will be higher than forecast in the projection, while for economic growth it is more likely that it will be lower than forecast. The uncertainty surrounding future economic developments remains high. The price competitiveness indicator, which has recently shown significant real appreciation of the euro in Slovenia, thus warns of a possible increase in the gap by which import growth is outpacing export growth.
   The nature of economic, financial and price developments around the world is focusing the attention of leading global central banks on how to properly reduce inflationary expectations. In the euro area national economic policies must support the policy of the European Central Bank so that any higher inflation in individual countries remains within the boundaries of the Maastricht criterion. Slovenia’s deviations from the criterion are considerable. As a result of the secondary effects of price rises on wage growth, and given the possibility that a link will arise between price rises, increased production costs, and thus further price rises, in order to reduce inflationary expectations it is necessary to rethink economic policy within national competence, and probably also to make changes. Without such action, there will be no guarantee of the required price stability in the euro area.
   
2. The Governing Board was also briefed on current bank operations, and developments on the capital markets.