Aug 15 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's August 7
monetary policy meeting, released on Friday.
Present at the meeting: Zdenek Tuma (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 fifth
situation report containing the new macroeconomic forecast. This
was the first forecast prepared using the new core prediction
model, which better captures the interactions between economic
agents. Despite slowing slightly in the second quarter of 2008,
consumer price inflation had remained well above the
inflation-target tolerance band. The current high inflation,
however, was still assessed as being a transitory phenomenon
mainly reflecting changes to indirect taxes, whose first-round
effects had accounted for more than two percentage points of
headline inflation, increasing regulated prices (including the
introduction of fees in health care) and the exceptionally high
food price growth at the end of last year, which, however, was
gradually easing.
The current economic phase was assessed as being a decline
from the peak of the business cycle, accompanied by domestic
inflation pressures. However, the strong appreciation of the
exchange rate was offsetting these domestic inflationary
pressures by depressing import prices and by affecting the
demand side of the economy. GDP growth was slowing, as evidenced
by several leading indicators.
At the forecast horizon inflation would be falling towards
the inflation target after the unwinding of the effect of the
tax and price shocks that occurred in late 2007 and early 2008,
thanks to the anti-inflationary effect of the current
appreciation of the koruna and a gradual decline in inflation
pressures from the domestic economy. GDP growth would continue
slowing in the coming quarters owing to the dampening effect of
the very strong exchange rate and weak external demand on export
growth and also as a result of slowing gross capital formation.
Nominal wage growth in the business sector could also be
expected to decline from its present values.
Consistent with the forecast was a declining interest rate
path for the rest of 2008 and broad interest rate stability for
most of 2009.
After the presentation of the situation report, the Board
discussed the new forecast and the risks associated with it. The
board members agreed that the domestic economy was slowing and
that the inflationary pressures were weakening as a result. The
ongoing correction in the commodity markets was identified as an
additional downside risk to inflation.
At the start of the discussion, it was said that the current
situation was very complicated. While it was relatively certain
that economic growth was going to slow in both the domestic and
external economy, the future path of inflation was far less
predictable. The present situation was described as being a
combination of three shocks: an inflationary shock to prices of
food and energy-producing commodities, an external
anti-inflationary demand shock and an exchange rate appreciation
shock.
Wage growth, which might be higher than forecasted, was
identified as an upside risk to inflation. The recently observed
high growth in nominal unit wage costs was mentioned. In the
subsequent discussion, however, the majority of the board
members cast some doubt on this risk by referring to the
deteriorating financial condition of businesses, which would not
be able to accept employees' demands. It was mentioned that
although corporations' current profitability was better than in
2002 and 2003, data on their financial performance revealed that
their liquidity had fallen sharply. This was confirmed by the
credit data, as operating loans had risen significantly while
investment loans had fallen. The opinion was expressed that the
combination of falling corporate liquidity and greater
unwillingness of the banking sector to finance corporations
might be an additional anti-inflationary factor.
The exchange rate remained a downside risk to inflation. On
the one hand, it was said that the current exchange rate level
would inevitably have repercussions both for real economic
activity and for inflation. On the other hand, concerns were
also expressed about an excessive correction of the exchange
rate, which might be supported by the slowing economic growth.
It was said that a reduction of interest rates was to a large
extent already contained in the current exchange rate level, and
that if rates were not lowered the exchange rate might
strengthen again.
The Board also discussed in detail the outlook for domestic
economic growth, in particular the effect of the individual
components of domestic demand on the expected downswing in GDP
growth. It was debated whether the slowdown in growth would
arise via a downturn in consumer and investment demand, or
whether it would be triggered by the expected decline in net
exports. On the one hand, the case was made for a higher
contribution of net exports to economic growth. On the other
hand, however, it was also said that the observed still strong
export growth might be persisting thanks only to the longer lag
in its response to the appreciation of the exchange rate.
The recent correction in the commodity markets was
identified as a downside risk to inflation, as commodity prices
might stabilise at lower levels than assumed by the forecast. It
was mentioned that this development might be linked with cooling
economic growth and falling consumer confidence abroad. The
opinion was expressed that at the forecast horizon commodity
prices could be expected to decline further, or at least not
start rising again.
At the close of the meeting the Board decided unanimously to
lower the CNB two-week repo rate to 3.50 percent, effective 8
August 2008. At the same time it decided to lower the discount
rate and Lombard rate by the same amount, to 2.50 percent and
4.50 percent respectively. Governor Tuma, 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.
(Reporting by Mirka Krufova in Prague)
