July 2 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's June 23
monetary policy meeting, released on Friday.
Present at the meeting: Zdenek Tuma (Governor), Mojmir Hampl
(Vice-Governor), Miroslav Singer (Vice-Governor), Robert Holman
(Chief Executive Director), Pavel Rezabek (Chief Executive
Director), Vladimir Tomsik (Chief Executive Director), Eva
Zamrazilova (Chief Executive Director).
The meeting opened with a presentation of the fourth
situation report assessing the new information and its effect on
the fulfilment of the risks of the inflation forecast contained
in the third situation report.
The new situation report assessed the risks in relation to
the forecast overall as being broadly balanced. The higher
inflation observed in May was an upside risk to inflation.
The deviation of inflation by 0.3 percentage points from the
forecast had been caused by higher-than-expected growth in fuel
prices and regulated prices.
By contrast, the indicators of the domestic real economy
were generally anti-inflationary: annual GDP growth had been 0.7
percentage points lower than forecasted, the decline in total
employment had increased, and wage growth had been lower than
expected.
A further decline in the interest rate outlook in the euro
area was also fostering lower inflation, or lower domestic
interest rates, especially at the more distant forecast horizon.
As regards the monetary conditions, slightly higher
short-term market interest rates were acting towards
lower-than-forecasted inflation, whereas the exchange rate of
the Czech koruna was weaker against both the euro and the
dollar.
In the discussion that followed the presentation of the
situation report, the Board agreed that the balance of risks to
the inflation forecast was currently broadly balanced.
However, it was also said that the general uncertainties of
the forecast were still comparatively high. Some of the board
members also expressed doubts about the mutual consistency of
some of the available macroeconomic indicators.
In this context, the better-than-expected evolution of
household consumption in the first quarter of 2010 was
discussed. This had been inconsistent with the evolution of
retail sales and wage growth.
It was pointed out that any revision of demand towards lower
private consumption would represent an additional
anti-inflationary risk.
In the discussion of the lower-than-forecasted GDP growth
and the structure of GDP formation, mention was made of the
sharp decline in construction output.
It was said that this reflected households' reluctance to
spend combined with government austerity measures.
As regards the upside risks to inflation, some of the board
members emphasised the evolution of prices of oil and other
commodities.
However, it was also argued that although the
higher-than-forecasted inflation had been driven primarily by
higher fuel prices, the outlook for dollar prices of oil had
been revised downwards.
In this context, mention was also made of the hypothesis of
possible growth in the commodity price bubble in response to the
international monetary policy easing.
The impacts of high growth in commodity prices on inflation
might be more sizeable than usual, even in a situation of low
demand, because producers' margins had already been squeezed to
low levels and probably could not be reduced much further.
The Board also spent quite some time discussing fiscal
policy in the Czech Republic and elsewhere. It was said that the
current development of domestic public finances suggested the
possibility of a higher government deficit this year.
By contrast, the planned budget austerity measures could
mean a lower than currently forecasted deficit for next year.
Fiscal policy could therefore foster lower economic growth and
lower inflation next year.
Against this, however, it was said that the anti-growth
impacts of a well-executed fiscal consolidation could be only
short term and that such consolidation could conversely generate
significant stabilising and pro-growth effects associated with
increased confidence.
With regard to the planned fiscal austerity measures in
other countries, some of the board members mentioned that the
euro area could be heading towards a different economic policy
mix, with tighter fiscal policy and looser monetary policy.
The Board went on to discuss the rise in the risk premium in
the domestic money market, which might be affected by contagion
from abroad due to the fiscal problems in certain countries.
In this regard, doubts were repeatedly raised about the
forecast assumption of a decline in the spread between
short-term market rates and the key monetary policy rate, which
has not materialised for quite some time now.
On the other hand, however, it was mentioned that the
impacts of the adverse developments in the euro area on the
Czech economy might be at least partially offset by asymmetrical
trends across the euro area countries, with the Czech economy
being linked to the stronger of these countries.
At the close of the meeting the Board decided unanimously to
leave the two-week repo rate unchanged at 0.75 percent. Governor
Tuma, Vice-Governor Hampl, Vice-Governor Singer, Chief Executive
Director Holman, Chief Executive Director Rezabek, Chief
Executive Director Tomsik and Chief Executive Director
Zamrazilova voted in favour of this decision.
