Dec 23 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's December 17
monetary policy meeting, released on Tuesday.
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 eighth
situation report, supplemented with an analysis of statistical
data published after the report had been finalised. Both the
situation report and the assessment of the latest data implied a
clear anti-inflationary balance of risks for the forecast. The
main downside risks included the economic downturn abroad, the
decline in global commodity prices, the lower-than-expected
current inflation, slower domestic economic growth and also the
evolution of client interest rates and rates on the interbank
market. The weaker exchange rate of the koruna presented an
upside risk to inflation.
After the presentation of the situation report, the Board
discussed the newly available information and agreed that the
balance of risks to the fulfilment of the current forecast was
tilted significantly towards the downside. It was said in the
discussion that the new information both from the domestic
economy and from abroad was signalling different-than-expected
developments. The current forecast was thus a much weaker guide
for decision-making than usually. The need to stabilise
inflation expectations while bearing in mind the risk of sharp
disinflation was among the principal arguments for a more
significant rate reduction.
The Board agreed that the external environment in particular
was a source of sizeable anti-inflationary shocks. It was said
that an unprecedented downward revision of the outlook for
economic growth abroad was occurring. The fall in external
demand was described as being a result of a typical excess
capacity crisis, and that this excess capacity, moreover, was
concentrated in key branches for the domestic manufacturing
industry. The Board agreed that the high openness of the Czech
economy meant that this adverse shock would transmit to it
rapidly and strongly. There was also agreement that the current
rapid decline in global commodity prices and the near-term
outlook for those prices constituted an additional sizeable
anti-inflationary shock. The opinion was also expressed that
optimum monetary policy-making should be the priority, even at
the cost of more difficult communication.
The incomplete and lagged pass-through of the changes in
monetary policy rates to market rates and to client interest
rates was discussed, as were the monetary policy implications of
this phenomenon. The opinion was repeatedly expressed that in
order to steer interest rates relevant to the economy in the
desired way, the imperfect transmission of monetary policy rates
had to be compensated for by making larger changes to monetary
policy rates. Against this, however, it was said that although
the pass-through was lagged and that market and client rates
contained additional credit and other premia, most of the
changes in the CNB's rates ultimately transmitted to interest
rates relevant to the economy. It was also said that owing to
the year-end it was unreasonable to expect any change in rates
to have a major effect this year. Therefore, it might be useful,
given the persisting uncertainty, to spread the monetary policy
measures more over time.
Potential disturbances to financial intermediation by
domestic banks were mentioned as another potential downside risk
to inflation. Although domestic banks had sufficient capital,
they might start to rein in their lending in response to the
increased uncertainty and negative expectations linked with the
world financial crisis and the downswing in the real economy.
In the context of the debate of monetary policy transmission
mechanisms, attention was given to the effect of the exchange
rate on the real economy and on inflation. The Board agreed that
in the present situation the weaker exchange rate was having a
stabilising effect on the domestic economy. The opinion was
expressed that external demand was currently having a stronger
effect on the domestic economy than the exchange rate. Against
this, it was said that the exchange rate transmission channel
was ensuring relatively rapid transmission of the monetary
policy impulse to the economy.
The Board discussed the risks to the koruna exchange rate
going forward. The uncertainty in this regard was generally an
argument for a gradual adjustment of monetary policy rates.
Regarding the effect of the interest rate differential on the
exchange rate, the prevailing view was that the differential
between koruna monetary policy rates and ECB rates was now
playing only a very small role. In support of a greater
reduction in rates, however, it was repeatedly said that a major
widening of the differential in favour of the Czech currency --
for example following a larger reduction in foreign rates --
might foster a possible change in the exchange rate trend and a
return to appreciation of the koruna. However, it was also said
that the probability of a further weakening of the koruna seemed
higher than the probability of a return to a stronger koruna.
The opinion was also expressed, though, that the costs of the
less likely appreciation would be asymmetrically high, and the
Board's next regular monetary policy meeting was not due to take
place until February, whereas a sizeable fall in foreign rates
could be expected in the interim. Conversely, the arguments for
a more cautious approach included concerns of triggering a
precipitous weakening of the exchange rate as a possible
consequence of a too-large change in domestic 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 2.25 percent, effective 18 December 2008. At the same
time it decided to lower the discount rate and Lombard rate by
the same amount, to 1.25 percent and 3.25 percent respectively.
Four members voted in favour of this decision: Governor Tuma,
Chief Executive Director Holman, Chief Executive Director Tomsik
and Chief Executive Director Zamrazilova. Vice-Governor Hampl
voted for lowering the repo rate by 0.75 percentage point and
Vice-Governor Singer for lowering the rates by 1 percentage
point.
(Reporting by Jason Hovet in Prague)
