Aug 13 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's August 5
monetary policy meeting, released on Friday.
Present at the meeting: Miroslav Singer (Governor), Vladimir
Tomsik (Vice-Governor), Kamil Janacek (Chief Executive
Director), Pavel Rezabek (Chief Executive Director), Eva
Zamrazilova (Chief Executive Director).
The meeting opened with a presentation of the fifth
situation report containing the new macroeconomic forecast. The
domestic economic situation was characterised by modest economic
growth. Inflation was in the lower half of the tolerance band
around the inflation target and was gradually rising. Net
inflation was steadily rebounding from its previous low values.
Headline inflation was also being affected by this year's
upswing in regulated price inflation, due, among other things,
to renewed growth in natural gas prices. The labour market was
still being affected by the fading recession. Wage growth had
slowed sharply, while the general unemployment rate was expected
to peak in the next few quarters.
According to the new forecast, inflation would be close to
the inflation target at the monetary policy horizon and the
economic recovery would be modest. Full-year growth for 2010 was
now estimated at 1.6 percent. The new forecast was predicting
full-year growth of 1.8 percent in 2011 and almost 3 percent in
2012. GDP growth in 2010 and 2011 would be stimulated by
investment activity related to gradual replenishment of
inventories and by net exports. From 2011 onwards, household
consumption would also recover gradually. This outlook for
economic activity did not yet include the effects of the planned
consolidation of public budgets. The exchange rate would be
gradually appreciating at the forecast horizon. Consistent with
the forecast was stability of market interest rates close to
their current levels initially, followed by a gradual rise in
rates as from 2011 H2.
After the presentation of the situation report, the Board
began its discussion. The board members agreed that the
appropriate monetary policy response was to leave rates at the
current level. It was also said that the risks were distributed
on either side around the new forecast and that they could
currently be identified as slightly anti-inflationary overall.
It was said repeatedly that the current exchange rate and the
demand effect of the planned fiscal consolidation were among the
downside risks to inflation, while the upside risks of the new
forecast included potentially faster growth in commodity and
food prices.
The Board assessed inflation and the inflation forecast. It
was said repeatedly that according to the new forecast both
headline inflation and monetary-policy relevant inflation would
be close to the inflation target and that such a stable outlook
was quite a rare occurrence. The board members agreed that the
current interest rate settings were therefore appropriate.
The Board went on to discuss the risks that should be
considered in relation to the stable outlook. The opinion was
expressed that given the forecast risks it was not possible to
anticipate any future change in rates unequivocally. It was also
said that maintaining rates at a low level in the long term
could pose a risk in terms of financial stability. It was said
several times that there was a need to closely monitor the
relatively rapid recovery of the German economy. This recovery
was identified as surprising given the original expectation that
the US economy would be the main source of recovery. It was said
that this recovery might speed up the recovery in Czech exports
and growth in European consumer prices and foreign interest
rates relative to the new forecast. The opinion was repeatedly
expressed that the surprising recovery might also paradoxically
represent a downside risk to inflation in relation to the new
forecast, because it might foster appreciation of the koruna via
a recovery in exports and growth in foreign interest rates.
However, the opinion was also expressed that this recovery might
also be an upside risk to inflation if European consumer price
inflation was to rise, as such a rise could pass through
indirectly to domestic inflation via import prices and growth in
currently squeezed margins.
The Board examined the issue of profit margins in more
detail. The board members considered how likely it was that
profit margins would return to their pre-crisis levels. It was
said that profit margins had been squeezed to low values at the
time of the crisis. It was said several times that producers had
responded to the reduction in margins by cutting costs and that
margins would therefore not necessarily increase again now.
However, it was also said several times that a return to higher
margins was possible as soon as the economy began to recover
more quickly and that this possibility should be viewed as an
upside risk to inflation. In this context it was said that
potential output was currently falling as a result of the crisis
and that this might also generate inflation pressures. On the
other hand, it was said that the fall in potential output was
being generated by the elimination of excess capacity and
therefore did not represent a significant inflationary risk.
The Board went on to discuss other potential upside risks to
inflation. It was said several times that the inflationary risks
of the forecast were more on the cost side than on the demand
side and that in particular the recent trend in commodity and
food prices should be viewed as an inflationary risk of the
current forecast. However, the opinion was also expressed that a
stronger exchange rate of the koruna might dampen any inflation
pressures stemming from growth in commodity and food prices. It
was also said that a faster-than-expected economic recovery
might affect the labour market. In this context it was said that
unemployment might peak earlier than suggested by the new
forecast. The historical data on which the forecast was based
were indicating a greater burden on the labour market owing to
one-off restructuring, but this restructuring was no longer
encumbering the economy. It was also said that demographic
trends were easing the pressure on the labour market.
Conversely, it was said that the planned fiscal cuts would very
probably slow growth in some sectors and that this slowdown
would ease the wage pressures in the event of any faster
recovery in demand for Czech exports.
The Board noted that the forecast did not include
information on the changes being planned by the new government
in the fiscal policy area. This information would be
incorporated into the next forecast, because a more precise
knowledge of the as yet unavailable legislation implementing the
planned changes was needed before they could be taken into
account comprehensively. The Board agreed that in this sense the
next forecast would be important and the fiscal policy
sensitivity scenario illustrating the potential demand effects
was a key piece of information. It was said several times that
the sensitivity scenario showed that these demand effects were
an anti-inflationary risk of the new forecast.
At the close of the meeting the Board decided unanimously to
leave the two-week repo rate unchanged at 0.75 percent. Governor
Singer, Vice-Governor Tomsik, Chief Executive Director Janacek,
Chief Executive Director Rezabek and Chief Executive Director
Zamrazilova voted in favour of this decision.
(Reporting by Mirka Krufova)
