May 15 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's May 7
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 third
situation report containing the new macroeconomic forecast. In
the first quarter of this year, inflation had fallen below the
inflation target and towards the lower boundary of the tolerance
band. GDP had decreased, nominal wage growth was slowing and
unemployment was rising sharply. Owing to the deepening global
economic crisis, the economic situation had been less favourable
in this period than assumed by the previous forecast. The rapid
depreciation of the exchange rate in late 2008 and early 2009
was generating inflationary pressures which were being partly
offset by the anti-inflationary domestic market environment.
According to the new forecast, inflation would continue
falling this year but would start to edge up again next year and
reach the 2 percent target at the end of 2010. It was estimated
that domestic economic activity would fall by 2.4 percent this
year but that the economy would show modest growth next year.
According the forecast, the exchange rate of the koruna would
probably in the second quarter 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
this year followed by a modest rise in 2010.
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 risks of the forecast were broadly
balanced but that a high level of uncertainty persisted. The
main downside risk to inflation was judged to be the potential
deeper and longer-lasting recession abroad. The future path of
the koruna exchange rate was seen as a possible substantial risk
in both directions.
In the discussion of the outlook for economic activity, it
was emphasised that according to the forecast the largest part
of the adverse shock had already hit the economy and that the
situation should gradually start to change for the better.
However, doubts were repeatedly expressed about whether the
turnaround was already happening and, if so, whether it was
sustainable. Attention was drawn in the debate to the effect
measures such as car-scrapping incentives, i.e. to the fact that
the signs of improvement were coming from areas in which one-off
support measures were being implemented, measures whose effects
would probably be only short-lived. The risk that the external
situation might be worse than assumed by the forecast was
therefore mentioned. Moreover, domestic private consumption
might weaken further owing to unfavourable expectations, a
rising saving rate and falling employment.
The next subject of debate was the financial condition of
corporations. Concerns were raised that the current situation
might be significantly worse than shown by the most recently
reported data for 2008 Q4 and that many more firms would be
loss-making this year. Another adverse phenomenon was rising
insolvency, which was also afflicting some export markets to a
significant extent. Against this, however, it was said
repeatedly that the situation was not entirely bad and that many
firms were still managing to cut costs, win orders and generate
profits.
There was broad agreement that the forecast correctly
identified weak wage-cost pressures, which were acting in the
anti-inflationary direction. However, the magnitude of this
effect was discussed. The observed rapid growth in unit wage
costs might indicate that the labour market might be less
anti-inflationary than assumed by the baseline scenario of the
forecast. However, it was added that these higher unit costs
might reflect adjustment by firms to the reduced output level
and might be only temporary. It was said repeatedly that the
deteriorating financial condition of corporations and rising
rate of unemployment would depress wage growth.
The Board agreed that the future path of the koruna exchange
rate constituted a significant risk for the forecast on both
sides. The opinion was expressed that given the expected rapid
rise in public budget deficits there could be some loss of
investor confidence and that a rate reduction might trigger a
further wave of depreciation of the koruna. Against this,
however, it was said that the relevance of this argument was
reduced by the symmetrical worsening of the external fiscal
situation, as the deficits would be large in most countries. The
opinion was also expressed that the inflationary consequences of
a weakening of the koruna might now be subdued, as the available
data suggested that the impacts of a weaker exchange rate on
domestic prices were less intense in the present situation of
weak demand. It was also said in the discussion that the
excessive appreciation that might occur if the interest rate
differential widened was also a relevant risk.
The Board discussed in depth the current situation in
financial intermediation. The opinion was expressed that some
improvement had occurred since the autumn, when the markets had
been frozen. Market rates were responding better to monetary
policy and banks were now restructuring their balance sheets and
starting to lend again. Against this, however, it was said that
the situation differed from bank to bank. The larger banks were
now tending to lend more, but the credit volumes issued via
smaller banks were still falling. In addition, interest rates on
client loans where in some cases rising, and this was tightening
the monetary conditions.
In this context, the pass-through from monetary policy rates
to market rates was discussed. The forecast was assuming gradual
convergence of the relevant money market rates towards CNB rates
and thus an autonomous easing of the interest rate conditions.
The Board agreed, however, that this gap was by no means
guaranteed to narrow. This was seen as significant downside risk
to inflation and an argument for lowering rates. In this
context, the opinion was also expressed that the expected need
to fund the rising public finance deficit might lead to an
increase in rates of medium and long maturities.
The prevailing view was that if normal conditions had not
yet been restored on the financial market, there were grounds
for monetary policy to play a more active role to compensate for
the non-functional parts of the financial sector. It was also
said, however, that the current repo rate level was not
hindering economic growth and that a further reduction in rates
might not be helpful. On the contrary, excessively low rates,
especially if they were in place for an extended period, might
disrupt financial stability in the longer term.
As regards inflation expectations, it was said that a
decrease could be expected. For the first time ever, headline
inflation - which is what the public follows - would be lower
than monetary-policy relevant inflation. This might be joined by
an expected sharp fall in prices of electricity and other
consumer basket items that can significantly affect inflation
expectations. Anchored inflation expectations were an argument
for lower monetary policy rates. At the forecast horizon
inflation was converging to the inflation target from below and
was not expected to reach it until the end of 2010.
At the close of the meeting the Board decided by a majority
vote to lower the CNB two-week repo rate by 0.25 percentage
point to 1.50 percent, effective 11 May 2009. At the same time
it decided to lower the discount rate and Lombard rate by the
same amount, to 0.50 percent and 2.50 percent respectively. Five
members voted in favour of this decision: Governor Tuma,
Vice-Governor Hampl, Vice-Governor Singer, Chief Executive
Director Tomsik and Chief Executive Director Rezabek. Two
members voted for leaving the rates unchanged: Chief Executive
Director Holman and Chief Executive Director Zamrazilova.
(Reporting by Mirka Krufova in Prague)
