April 2 (Reuters) - Following is the full text of the
minutes from the Czech central bank (CNB) governing board's
March 25 monetary policy meeting, released on Friday.
Present at the meeting: Zdenek Tuma (Governor), Mojmir Hampl
(Vice-Governor), Miroslav Singer (Vice-Governor), Pavel Rezabek
(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 new information and its effect on
the fulfilment of the risks of the February macroeconomic
forecast. The new situation report assessed the risks in
relation to the forecast overall as being moderately
anti-inflationary. The main downside risk to inflation was a
change in the external outlook, in particular an assumed later
and slower rise in market interest rates in the euro area. As
for the domestic economy, the quarter-on-quarter upswing in GDP
growth assumed in the forecast had materialised in 2009 Q4. In
year-on-year terms, GDP had continued falling, doing so faster
than the forecast had assumed. Turning to the structure of GDP,
quite a sizeable downward revision had been made to household
consumption, although this had been partly offset by upward
revisions to other components of demand. Consumer price
inflation in February had been 0.3 percentage points lower than
forecasted. The deviation of inflation from the forecast had
been driven mainly by a deeper decline in adjusted inflation
excluding fuels.
In the discussion that followed the presentation of the
situation report, the Board agreed that in addition to high
uncertainty regarding future trends, monetary policy
decision-making was encumbered with uncertainty concerning the
interpretation of the statistics on past trends. The historical
statistical indicators may have been deflected by the extreme
growth shocks and might be less reliable than under normal
circumstances. In this context, the revision of the consumer
basket made at the start of 2010 was discussed. This had also
been reflected in (lower-than-forecasted) inflation in February.
It was mentioned that the weights of food and tradable
commodities in the consumer basket had increased at the expense
of nontradables and services, and that this was
counter-intuitive for a converging economy. It was argued that
the change in weights might have been linked with the one-off
supply shocks to world food prices in 2008 and that the strong
exchange rate and the contraction in tourism that year might
have also played a role.
Another major uncertainty also discussed by the Board was
the evolution of wages and related nominal unit wage costs. In
this regard, there was a discrepancy in growth in wage-cost
pressures between the different series (National Accounts versus
the Labour Force Survey). The arguments made in the discussions
of the last two situation reports were repeated, namely that the
high wage growth in late 2009 might have been linked with a
lower sickness rate and with mostly low-wage employees having
been laid off during the crisis. Tax optimisation was forwarded
as an explanation of the high wage growth: payment of some
bonuses for 2009 may have been brought forward to 2009 in
response to the raising of social and health insurance ceilings.
Overall, the Board agreed that wage growth seemed to be a
two-sided risk.
In connection with the revision of the GDP structure, most
of the board members expressed their belief that the revision
was in line with their expectations and that the February
forecast's assumption of a W-shaped economic recovery was thus
unchanged. The Board agreed that the recovery in the Czech
Republic would be driven primarily by exports. In this context,
the Board discussed the external economy, and in particular the
deferral of the rate-raising cycle in the euro area and its
potential implications for the exchange rate of the Czech
koruna. Some of the board members expressed their concern about
whether an excessive appreciation of the koruna might endanger
the aforementioned economic recovery scenario through lower
export growth than assumed in the forecast. By contrast, some of
the board members expressed the concern that if no will to
stabilise the fiscal situation was shown at the transmission
horizon, this might foster depreciation of the koruna or limit
its appreciation. In the fiscal context, mention was made of
Ricardian equivalence concerning the upward effect of fiscal
deficits on the savings rate, which would lead in the
anti-inflationary direction.
In relation to the outlook for slower growth in foreign
short-term rates, the opinion was expressed that foreign
medium-term and long-term rates might be of greater significance
for the Czech economy going forward. Here, differentiation might
occur across the euro area, depending, among other things, on
the member states' fiscal situations. In the discussion of
external developments, some of the board members mentioned the
outlook for prices of oil and other commodities, which might be
indicating that a recovery is already starting in some parts of
the world. It was said that this was the only major upside risk
to inflation.
The Board also spent quite some time discussing the
effectiveness of monetary policy during the crisis. In this
context, the forecast assumption regarding the rate of decline
of the still high risk premium between monetary policy rates and
3M PRIBOR interbank rates was repeatedly discussed. Some of the
board members expressed their doubts about this assumption. Also
mentioned was the issue of whether the potential monetary policy
rate movement might be weakened by an opposite movement of this
premium. In addition, the strength and speed of the transmission
of short-term market rates to client rates on loans to the
private sector, which might also be weakened, was discussed. The
high uncertainty associated with the estimates of this
transmission was also mentioned. In the context of the possible
weakening of the transmission of monetary policy rates and
related risks, some of the board members expressed a preference
for monetary policy stability.
The Board also discussed how the prevailing downside risks
to inflation were affecting the domestic interest rate outlook.
Most of the board members agreed that the assumptions of the
February forecast were essentially materialising and that
despite the existence of anti-inflationary risks interest rates
were close to bottoming out. Their assumed future growth would
be later and slower compared to the current forecast. However,
some of the board members expressed the view that the
aforementioned anti-inflationary risks were so significant that
a downward movement of interest rates could be imagined if they
were to materialise.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 1 percentage.
Four members voted in favour of this decision: Governor Tuma,
Vice-Governor Hampl, Chief Executive Director Rezabek and Chief
Executive Director Zamrazilova. Two members voted for lowering
rates by 0.25 percentage point: Vice-Governor Singer and Chief
Executive Director Tomsik.
(Reporting by Mirka Krufova; editing by John Stonestreet)
