Feb 13 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's Feb. 5
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 first
situation report containing the new macroeconomic forecast.
Headline inflation had fallen significantly in 2008 Q4 and in
December was within the tolerance band of the inflation target.
The domestic economy was continuing to decline from the peak of
the business cycle. This decline was faster than assumed by the
previous forecast owing to a sharp downswing in external demand.
Domestic inflationary pressures were subsiding rapidly, but the
anti-inflationary pressures arising from the past appreciation
of the exchange rate were also fading as a result of a
depreciating exchange rate. The initial inflation pressures were
assessed as being anti-inflationary, but their intensity had
decreased owing to the weakening exchange rate.
According to the new forecast, inflation would fall this
year and would approach zero in mid-2009. Inflation would come
down thanks to the unwinding of the inflationary price shocks
that had occurred in late 2007 and early 2008 and to a decline
in prices of food and energy-producing materials. At the end of
this year inflation would start rising, and in the first half of
next year it would approach the new 2 percent inflation target
valid from the beginning of 2010. As a result of the unwinding
of the first-round effects of changes to indirect taxes,
monetary-policy relevant inflation would coincide with the
headline inflation forecast as from the second half of this
year. The forecast expected a sharp slowdown in economic growth
owing to the global financial and economic crisis. Zero or
slightly negative growth was expected on average this year, and
growth of around 1 percent was foreseen in 2010 due to a gradual
recovery of external demand. The nominal exchange rate would
initially correct its depreciation observed at the beginning of
this year and would then be broadly stable. Consistent with the
forecast was a decline in interest rates.
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 appropriate response to the
current situation was to lower rates. It was also said that the
current rate reduction phase might now be at an end. Compared to
the previous forecast there had been an exceptionally large
revision of the outlook for the external environment in the
anti-inflationary direction. In particular, growth and inflation
in the euro area, foreign interest rates and prices of
energy-producing materials were all lower. There was agreement
that the risk of a deeper and longer-lasting global economic
crisis was acting towards lower growth of the domestic economy.
The main upside factor for inflation identified in the
discussion of the risks of the forecast was a weaker exchange
rate.
The Board agreed that the Czech economy, which is highly
open, would be hard hit by the slump in external demand. The
prevailing view was that the impact of the reduction in external
demand on the Czech economy would be strong because of the high
concentration of production in certain branches of
manufacturing. A slump in production capacity utilisation would
imply a need to adapt to the new market conditions in the Czech
economy and abroad. It was said that the latest industrial
production and foreign trade statistics suggested the risk of a
deeper-than-forecasted decline in economic activity. It was
repeatedly said that the sharp decline in demand would be
reflected above all in decreasing investment and exports. In the
context of the decline in demand, it was also said that
corporations would react to the lower demand by cutting their
labour costs. It was said that subdued growth in nominal wages
would be only partly offset by low inflation, and in this
context it was said that household consumption growth might be
lower than forecasted. The Board agreed that government
consumption would be the only component of economic growth to
record positive growth over the entire forecast horizon. In the
discussion of the risks to economic growth, it was said that
monetary policy would not avert the approaching recession, but
could influence the real economy next year.
In connection with the risk of lower economic growth, it was
repeatedly said that the lower demand might be associated with
higher anti-inflationary pressures. The concern was expressed
that inflation would converge towards the inflation target from
below more slowly than the forecast suggested. It was also said,
however, that inflation expectations at the one-year horizon
were close to the inflation target. An increase in government
spending, which might be undertaken in an effort to mitigate the
current crisis, could be an upside risk to inflation in the
longer run.
The Board then discussed lending activity. It was said that
lending activity was falling mainly because of lower demand for
loans. It was also said that operational financing of businesses
by banks was also decreasing. In this connection, concern was
expressed about the potential risk of a credit crunch. Against
this, it was said that banks had sufficient funds but remained
cautious in the current period of uncertainty.
The Board discussed the effectiveness of transmission from
monetary policy rates to the real economy. It was said that the
effectiveness of the interest rate channel of transmission
remained low. In this context, it was said that only a sizeable
rate reduction could have an effect on the real economy. The
opinion was also expressed, though, that a change in monetary
policy rates would pass through to market rates gradually and
that the gap between market rates and monetary policy rates had
narrowed recently.
In the context of the debate of monetary policy transmission
mechanisms, it was said that a change in monetary policy rates
might also act via the exchange rate channel and that the
exchange rate affects the economy more quickly than interest
rates. It was also said, however, that the effect of monetary
policy on the exchange rate was limited in the current
situation. The Board agreed that the exchange rate was
encumbered with considerable uncertainty, but that a weaker
exchange rate would reduce the scope for lowering monetary
policy rates.
At the close of the meeting the Board decided by a majority
vote to lower the CNB two-week repo rate by 0.50 percentage
point to 1.75 percent, effective 6 February 2009. At the same
time it decided to lower the discount rate and Lombard rate by
the same amount, to 0.75 percent and 2.75 percent respectively.
Four members voted in favour of this decision: Governor Tuma,
Vice-Governor Singer, Chief Executive Director Tomsik and Chief
Executive Director Zamrazilova. Chief Executive Director Holman
voted for lowering the rates by 0.25 percentage point and Chief
Executive Director Rezabek for lowering the rates by 0.75
percentage point.
(Reporting by Mirka Krufova in Prague)
