April 1 (Reuters) - Following is the full text of the
minutes from the Czech central bank (CNB) governing board's
March 24 monetary policy meeting, released on Friday.
Present at the meeting: Miroslav Singer (Governor), Mojmir
Hampl (Vice-Governor), Vladimir Tomsik (Vice-Governor), Lubomir
Lizal (Chief Executive Director), Pavel Rezabek (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 inflation forecast contained
in the first situation report. The new situation report assessed
the risks in relation to the forecast for headline inflation as
being on the upside overall and those in relation to the
forecast for monetary-policy relevant inflation as being broadly
balanced overall. With regard to the future path of interest
rates, the risks were heading upwards. The main external upside
risks to inflation were the current high global commodity prices
and the outlook for external interest rates. The main upside
risk from the domestic economy was the planned increase in the
VAT rate in 2012. The main downside risks to inflation were weak
inflationary pressures from the domestic economy and a slightly
stronger koruna-euro exchange rate. In February, consumer price
inflation had been 0.3 percentage point lower than forecasted,
mainly because of lower growth in food prices.
In the Bank Board's discussion that followed the
presentation of the situation report, the prevailing opinion was
that the risks were balanced and that the appropriate response
was to leave rates at the current level. However, the opinion
was also expressed that the current external situation
represented a strong upside risk to inflation and that a rate
increase was desirable. It was said several times that the
current situation was best captured by the baseline scenario in
the first situation report combined with the alternative
scenarios of higher commodity prices and escalation of the euro
area debt crisis.
The Board then discussed the domestic economic situation in
more detail. The prevailing opinion among the board members was
that the current situation - characterised by
lower-than-forecasted GDP, inflation and wages and
higher-than-forecasted unemployment - was not signalling the
existence of any demand-pull inflation pressures from the
domestic economy. The Board discussed the monetary policy
impacts of the potential VAT changes in 2012 in quite some
depth. The Board agreed that the VAT changes posed an upside
risk to headline inflation and would have negative impacts on
household consumption. However, the prevailing opinion was that
inflation expectations were well anchored and that the rise in
headline inflation due to the VAT changes would be only
temporary, as evidenced by historical experience.
It was said several times that rising fuel prices, VAT
changes and rent deregulation would affect household consumption
generally in all sectors, which could further reduce the demand
pressures. It was also said that the labour market situation did
not represent a risk as regards growth in demand pressures
either. It was said that wage bargaining was not indicating
faster wage growth and that any labour market recovery would
mostly concern low-income workers, which did not represent a
wage growth risk either. In a discussion of food prices, it was
noted that food prices would probably come down and that the
recent rise in food prices might act as a cushion against full
pass-through of the VAT changes to prices.
The Board then discussed the external situation. The
commodity price outlook was identified as being important. It
was said that commodity prices currently did not represent a
major upside risk to inflation and forward contracts suggested
that they would not rise any further. Some of the board members
expressed uncertainty about how long the elevated commodity
prices would last. The opinion was also expressed that the
growth in commodity prices was now already spilling over to
production prices and that it was only a matter of time before
consumer prices would start to rise. However, it was repeatedly
said that owing to weak domestic demand, the observed cost
pressures represented by the commodity price growth were not
currently an inflation risk. It was noted that oil prices were
playing a role in the large difference between adjusted and
headline inflation in both the domestic and external economy.
Other issues discussed relating to the external outlook
included Germany's economic growth prospects and the potential
fiscal problems in some other euro area countries. The majority
of the board members regarded the economic situation in Germany
as stable and consistent with the forecast. The expected
slowdown in German economic growth was a result of fiscal
restriction, which had started earlier than in other countries.
A faster recovery in Germany would probably have to be caused by
a sharp upturn in external demand. The opinion was also
expressed that the German economy was nearing full capacity
utilisation and was in danger of overheating. It was repeatedly
said that the fiscal problems in some euro area countries would
probably continue and possibly escalate. On this topic, it was
said that any fiscal transfers in the euro area would not
necessarily mean growth in demand pressures in the euro area.
The board members then turned their attention to the
monetary aggregate M2. Some of the board members pointed to the
possibility of analysing the present economic situation from the
point of view of inflation as a monetary phenomenon. Monetary
aggregate growth in the Czech Republic and in the euro area was
currently subdued and not indicating any danger of inflation. It
was said that, when seen through the lens of inflation as a
monetary phenomenon, neither the VAT changes nor the commodity
price growth would have any major impacts other than on
household consumption.
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.
Five members voted in favour of this decision: Governor Singer,
Vice-Governor Hampl, Vice-Governor Tomsik, Chief Executive
Director Lizal and Chief Executive Director Rezabek. Chief
Executive Director Zamrazilova voted for increasing rates by
0.25 percentage point.
(Reporting by Mirka Krufova)
