April 3 (Reuters) - Following is the full text of the
minutes from the Czech central bank (CNB) governing board's
March 26 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), Vladimir Tomsik (Chief Executive
Director), Eva Zamrazilova (Chief Executive Director).
The meeting opened with a presentation of the second
situation report assessing the newly available information and
its impact on the risks to the fulfilment of the inflation
forecast from the first situation report.
The main inflationary factor was a smaller-than-expected
fall in annual inflation, which in February had been 0.5
percentage points above the forecast. This deviation had been
due to food prices and fuel prices in roughly equal measure.
Another upside risk to the forecast was easier monetary
conditions owing to a weaker exchange rate and to lower market
interest rates. The main downside factor was a change in the
external outlook, with a further deepening of the economic
decline in the euro area, lower world inflation and lower
foreign interest rates expected. Domestic GDP growth had
responded to the sharp downswing in foreign economic activity,
having come in 1.3 percentage points below the prediction in
2008 Q4.
After the presentation of the situation report, the Board
discussed the new information and the risks to the February
forecast. The Board agreed that the uncertainty associated with
future developments was very high. Some of the board members
argued that this uncertainty was acting in both directions. It
was said that the key factor for the Board's decision-making was
the ratio of the relative weight of demand disinflation to the
cost-push inflation factors. It was also said that in the
present uncertain situation the model results had less
relevance, hence the deviation of actual inflation from the
prediction also had less significance than under standard
conditions.
A large part of the aforementioned uncertainty was
associated with external developments. Doubts were expressed
about whether the forecast for renewed economic growth in the
USA at the turn of 2009 and 2010 was realistic. The Board also
discussed the risk of a further potential deterioration in the
external outlook. In the context of an expected reduction of
interest rates in the euro area, it was said that this reduction
might lead to an appreciation of the koruna exchange rate to the
levels predicted by the forecast, which, in turn, might weaken
the domestic upside risks to inflation. In this context,
however, the opinion was expressed that the expected lowering of
interest rates by the ECB would be a response to an economic
deterioration in the euro area, which, via a fall in Czech
exports, a current account deterioration and a rise in the risk
premium, might conversely generate depreciation pressures,
constituting an upside risk to inflation. Turning to the
downside risks, the effect of world energy prices was also
mentioned. It was also said that by comparison with many other
economies, the Czech situation was more favourable, as the
symmetry of the inflation risks allowed the CNB to concentrate
on targeting inflation in the longer run.
In the context of the structure of the fall in GDP growth in
2008 Q4, the sharp decline in the contribution of net exports
was discussed in particular. Some of the board members expressed
their conviction that the depreciation of the exchange rate in
the second half of 2008 might make Czech exporters more
competitive and thus partly soften the impacts of the downswing
in external economic activity. In addition, the negative error
of the prediction for growth in government final consumption
expenditure was mentioned. Although at first glance this might
suggest a rather surprising fiscal restriction, it had been
caused merely by an error in the estimate of the government
consumption deflator. The structure of the growth in fixed
investment was also discussed. Here, in addition to a decrease
in the contribution of investment in buildings and structures,
there had been a rather illogical positive contribution of
investment in transport equipment. The contribution of these two
demand components to the total economic growth, however, had
been relatively small.
Considerable attention was also given to developments in the
labour market, where the number of vacancies was continuing to
fall and unemployment was on the rise. Based on the current
shape of the Beveridge curve, a hypothesis of a possible
structural deterioration in the labour market was put forward.
The board members also discussed the potential impacts of the
fall in labour productivity in industry and construction and the
related sharp rise in nominal unit wage costs. In this context,
the upside risk of these costs on inflation was mentioned, but
the prevailing view overall was that this rise was only
temporary in nature. Nominal unit wage costs would decline again
via a slowdown in wage growth and via further lay-offs, both of
which would have an anti-inflationary effect. Many other
uncertainties and distortions were also associated with
developments in the labour market. In particular, the Board
discussed the possible distortion of the average wage statistics
due to reductions in working hours, the distortion of wage
growth associated with tax optimisation at the end of 2007, the
mismatch between average wage growth and hourly wage growth, and
the surprising rise in employment in the tertiary sector.
Some of the board members discussed the transmission of the
fall in monetary policy rates to client loan rates, as rates on
new loans to non-financial corporations were decreasing, rates
on loans for housing purposes were flat and rates on consumer
credit were rising. The prevailing view was that the liquidity
situation had improved since the autumn and that the response of
client interest rates was logically consistent with the client
risk profile structure. The comparatively high growth in the
money supply, driven mainly by growth in currency in
circulation, was also mentioned as a partial upside inflation
factor.
At the close of the meeting the Board decided unanimously to
leave the two-week repo rate unchanged at 1.75 percent. Governor
Tuma, Vice-Governor Hampl, Vice-Governor Singer, Chief Executive
Director Holman, Chief Executive Director Tomsik and Chief
Executive Director Zamrazilova voted in favour of this decision.
(Reporting by Mirka Krufova in Prague)
