Oct 2 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's September 24
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 sixth
situation report assessing the new information and the current
balance of risks to the fulfilment of the August macroeconomic
forecast. The main downside risks included the actual inflation
outturn, as in July and August consumer prices had risen more
slowly than forecasted, and also the exchange rate, which had
appreciated significantly since the publication of the forecast.
Conversely, higher-than-expected oil prices on world markets and
the evolution of investment, which was worse than that of the
other components of GDP, were assessed as upside risks to
inflation.
In the discussion that followed the presentation of the
situation report, the prevailing view in the Board was that the
resulting balance of risks to the fulfilment of the August
forecast was anti-inflationary, although the members differed in
their opinions about the intensity of the risk. Some thought
that the upside and downside factors were broadly balanced, but
opinions were also repeatedly expressed that it was highly
likely the inflation target would be significantly undershot
unless monetary policy was eased.
The Board stated that there was still quite a high risk
premium between monetary policy rates and money market rates.
The opinion was expressed that a decline in the risk premium
would de facto mean an additional easing of the monetary and
financial conditions. Against this, however, it was said that
any reduction of the risk premium might be accompanied by more
intense appreciation pressures, which would eliminate the
stimulating effect of the decline in market rates.
There was a consensus that the economic decline in the major
European economies and in the Czech Republic was likely to halt
gradually, and the nature of the potential recovery was
discussed. The prevailing view was that economic growth would be
substantially slower in the coming years than before the
outbreak of the financial and economic crisis, but that the
Czech economic convergence process was not likely to stop. The
rate of growth of potential output might also slow, so the lower
economic growth would not necessarily have an anti-inflationary
effect and consequently would not necessitate a monetary policy
easing. However, the opinion was also expressed that as a result
of the slow growth the existing surplus capacity would not be
used and would thus tame inflation.
The current labour market situation was discussed. A
slower-than-expected wage decline in industry and construction
was mentioned as a risk of higher inflation in the future. It
was said that the unexpectedly rapid growth observed in nominal
unit wage costs might start to pass through to prices and might
thus be a harbinger of higher inflation. However, the opinion
was also repeatedly expressed that the labour market would not
be a source of inflation pressures, owing to rising unemployment
and the possibility that private and public sector wages would
fall, as indicated by ongoing negotiations on wage cuts across
the board.
The board members viewed possible continued growth in world
oil prices as a risk of higher future inflation. This risk,
however, was partially offset by a weaker dollar exchange rate.
It was said that the excellent harvest and the fall in
agricultural commodity prices was conversely a significant
anti-inflationary factor.
The fiscal measures currently under debate and their
implications for inflation and monetary policy were also
discussed. The Board mostly agreed that if the measures were
approved, they would constitute a desirable fiscal consolidation
that would lead to lower than originally expected public budget
deficits and would reduce the risk of potential future
imbalances and public debt financing problems.
The Board stated that the fiscal measures would imply a
restriction of demand, which would have an anti-inflationary
effect. An increase in indirect taxes would also probably form
part of the fiscal measures. The Board agreed, however, that
monetary policy - as in the past - should not respond to the
first-round effects of tax changes on inflation. As for the
second-round effects of the changes to indirect taxes, it was
said repeatedly that in an environment of depressed demand and
surplus capacity they should be very small. However, the opinion
was also expressed that considerable uncertainty surrounded the
resulting direction of effect of the "fiscal package" on prices.
This uncertainty made it impossible to class it as a clear
downside risk to inflation.
The effect of the proposed fiscal measures on the financial
market was also discussed. It was said that the reduced need to
issue government bonds that would ensue from a lower than
previously expected deficit would reduce the risk of the private
sector being crowded out of the capital market and foster a
reduction in long-term rates. The opinion was also repeatedly
expressed that the proposed fiscal measures, which would be
still the exception rather than the rule in the current
international context, might foster an image of the Czech
Republic as country with prudent fiscal policy and help to
reduce its perceived risk. Monetary policy might then have to
deal with increased appreciation pressures on the koruna, a
likely side effect of this favourable development.
It was said in the discussion that monetary policy should
take into account not only the attainment of the inflation
target in consumer prices, but also long-term financial
stability. It was argued that asset market imbalances might
arise given the very low nominal rates. On this point, however,
it was said that this long-term argument had less relevance for
the present rate decision because, for example, property prices
were currently falling, hence there was no current risk of
bubbles forming.
Doubts were repeatedly expressed about whether an interest
rate reduction would, in the present situation, have the desired
effect on lending, the exchange rate and thus inflation at the
monetary policy transmission horizon. It was argued, however,
that a rate cut might cause an exchange rate correction, as it
would come as a surprise. In connection with the potential
continued build-up of anti-inflationary risks, and with regard
to the already limited rate-lowering options of monetary policy,
the Board also debated other monetary policy instruments that
could be used to affect the exchange rate dynamics and establish
an easier monetary policy.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 1.25 percent.
Five members voted in favour of this decision: Vice-Governor
Hampl, Chief Executive Director Holman, Chief Executive Director
Rezabek, Chief Executive Director Tomsik and Chief Executive
Director Zamrazilova. Two members voted for lowering rates by
0.25 percentage point: Governor Tuma and Vice-Governor Singer.
(Reporting by Mirka Krufova)
