Feb 11 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's February 3
monetary policy meeting, released on Friday.
Present at the meeting: Miroslav Singer (Governor), Mojmir
Hampl (Vice-Governor), Vladimir Tomsik (Vice-Governor), Robert
Holman (Chief Executive Director), Kamil Janacek (Chief
Executive Director), Pavel Rezabek (Chief Executive Director),
Eva Zamrazilova (Chief Executive Director).
The meeting opened with a presentation of the first
situation report containing the new macroeconomic forecast.
According to this forecast, the domestic economy would continue
to be characterised by modest recovery and stable inflation
close to the 2 percent target. By comparison with the previous
forecast, the outlook for economic growth in the euro area had
been increased, especially for the near term, and this had in
turn increased the domestic growth forecast. The outlook for
commodity price growth was also higher. Together with food
prices, commodity prices were currently the most significant
source of inflation pressures. These inflation pressures were
being suppressed by exchange rate developments. The forecast was
not expecting any major changes to indirect taxes. According to
the forecast, domestic GDP growth would be 2.4 percent in 2010.
According to the February forecast, both headline inflation
and monetary-policy relevant inflation would be close to the
inflation target at the monetary policy horizon. Growth in
administered prices would contribute to consumer price
inflation. The inflation pressures caused by the growth in
commodity and food prices were easing at the monetary policy
horizon. Adjusted inflation would turn from negative to positive
in 2011 Q3. GDP growth would temporarily slow to 1.6 percent in
2011 as a result of fiscal consolidation, a decline in some
specific investments and investment in inventories, and slowing
growth in external economic activity. Growth would pick up again
in 2012. The nominal exchange rate was gradually appreciating at
the forecast horizon. Consistent with the forecast was stability
of market interest rates close to their current levels
initially, followed by gradual rise in rates as from the end of
2011. The risks of the forecast, described in three alternative
scenarios, were linked with external developments, were pointed
in both directions, and were balanced overall.
After the presentation of the situation report, the Board
began its discussion. The opinion was repeatedly expressed that
rates should be left at the existing level because there were no
demand-pull inflation pressures apparent in the domestic economy
and the cost-push pressures were temporary and were being
suppressed by exchange rate developments. On the other hand, it
was repeatedly said that rates should be increased because the
cost-pull inflation pressures could be sustained and because
demand-pull inflation pressures might arise as a result of a
faster household consumption recovery and a faster export
recovery than assumed by the forecast.
It was said several times that the difference between these
two views was due not to a fundamentally different assessment of
the economic situation, but rather to a different emphasis
placed on the individual risks of the forecast. The Board agreed
that the risks associated with the February forecast were
significant and were pointed in both directions, and that it
would be necessary to assess on an ongoing basis whether any of
the alternative forecast scenarios were materialising. In this
context, it was repeatedly said that a premature rate increase
might have larger negative impact on the economy than a delayed
increase, because in the present situation the cost-push
inflationary pressures were prevailing and a continuation of the
debt crisis in Europe could not be ruled out. It was also said
several times that an increase in rates would clearly signal the
end of the crisis and that it would not have negative economic
impacts, because - given the length of transmission - it would
not start to act until 2012 H1, when growth would accelerate.
The Board went on to discuss the inflationary and
anti-inflationary risks of the forecast in detail. It was said
that a very slight rise in demand pressures generated by wage
growth could be expected at the forecast horizon. This rise,
moreover, would be suppressed by low import prices, so no upside
risks to inflation were apparent. It was also said that the
possibility of sustained, not temporary, growth in commodity and
food prices was an upside risk. It was said that commodity price
growth would be supported by the global liquidity overhang. In
this context, it was said that the commodity price growth
should, however, be observed in koruna terms and that a more
appropriate forecast in the food area would be to expect an
average harvest and therefore a temporary rise in food prices.
The opinion was also expressed that, given the convergence
phase, a slower equilibrium rate of appreciation of the koruna
could be expected and that import prices would therefore not
necessarily suppress the domestic demand pressures sufficiently.
In connection with the risks of the inflation forecast, the
board also discussed the growth outlook. It was said that a
potential faster recovery of domestic growth was one of the
upside risks to inflation. However, it was also said that it was
necessary to consider the possibility of an escalation of the
debt crisis in the euro area, which, on the contrary, would lead
to a slowdown in growth. It was also said that fiscal
consolidation would foster slower growth in all segments in
2011. It was said several times that the recovery in the euro
area could be faster than assumed in the forecast, and that
growth in net exports could contribute more strongly to domestic
growth by comparison with the forecast. The opinion was also
expressed several times that household consumption could recover
more quickly if the saving rate recorded no cyclical increase,
as assumed by the forecast, and continued to show a downward
trend. On the other hand, it was repeatedly said that households
found themselves in a time of great uncertainty, as demonstrated
by the high unemployment rate, and that consumption growth was
therefore unlikely to accelerate. It was also said that the
end-of-year sales figures might show (like in Germany) that
household consumption growth was not accelerating. It was
repeatedly said that the changes in the structure of M2 were
indicating a preference for liquidity among households and that
this liquidity was a potential source of consumption growth. In
this context, however, it was said several times that a
preference for liquidity could also be identified as a downside
risk to inflation, because this change in the M2 structure could
slow the creation of credit.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 0.75 percent.
Four members voted in favour of this decision: Governor Singer,
Vice-Governor Hampl, Vice-Governor Tomsik, and Chief Executive
Director Rezabek. Three members voted for increasing rates by
0.25 percentage point: Chief Executive Director Holman, Chief
Executive Director Janacek and Chief Executive Director
Zamrazilova.
(Reporting by Mirka Krufova)
