Oct 3 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's Sept. 25
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).
The meeting opened with a presentation of the sixth
situation report assessing the newly available information and
its impact on the risks to the fulfilment of the inflation
forecast from the fifth situation report. The new situation
report assessed the risks in relation to the forecast as being
slightly anti-inflationary overall.
At 6.5 percent, inflation in August had been 0.3 percentage
point lower than forecasted. The lower inflation in August had
been due mainly to slower food price growth and lower fuel
prices. The assumption regarding the effects of the changes to
indirect taxes and regulated prices was materialising. By
contrast, adjusted inflation excluding fuels had been 0.2
percentage point higher than forecasted. Domestic economic
growth in the second quarter of 2008 had been slightly lower
compared to the forecast and wage growth in the business sector
had also remained below the forecast. The exchange rate, which
had, on average, appreciated more markedly than forecasted
during the third quarter, was also acting in a slightly
anti-inflationary direction.
The outlook for external developments was uncertain owing to
the deepening global financial market crisis. Information
available during the preparation of the situation report
suggested a risk of an anti-inflationary effect of the external
environment. It was also possible that the outlook for domestic
regulated prices of energy would be lowered due to falling world
energy prices. Short-term risks associated with developments in
prices of food and fuels were also assessed as being on the
downside.
After the presentation of the situation report, the Board
began its discussion. The Board agreed that the overall balance
of risks posed a slight downside risk to inflation. Information
on the deepening global financial market crisis indicated
additional risks in both directions, which were, moreover,
surrounded by considerable uncertainty. The new data were also
very volatile. The Board stated that the slowdown in economic
growth owing to the worse external demand outlook could be more
significant than forecasted.
In connection with expected future inflation developments it
was said that inflation would gradually return to the current
inflation target of 3 percent. It was added, however, that
inflation at the monetary policy horizon would still be above
the point inflation target of 2 percent valid from the beginning
of 2010. The opinion was expressed that rates should remain
unchanged in view of the new inflation target. It was said that
a declining interest rate path until the end of 2008 was
consistent with the baseline scenario of the forecast from the
fifth situation report and that the degree of uncertainty of the
forecast had been expressed using an alternative scenario, with
which higher interest rates and their later return to lower
levels by comparison with the baseline scenario were consistent.
Against this, it was pointed out that reality could also deviate
from the forecast in the opposite direction, which was currently
the case.
It was repeatedly mentioned in the discussion of the
forecast risks that the slightly higher adjusted inflation
excluding fuels could pose an upside risk to inflation. It was
said several times that the current higher inflation could feed
through into inflation expectations. The opinion was also
expressed that the high inflation had already fed through into
inflation expectations and therefore inflation would not slow
and return rapidly towards the inflation target. It was also
said that it was unclear whether wages would act in the
inflationary or anti-inflationary direction.
The Board discussed in detail the global financial crisis
and its potential impacts on the Czech economy. It was mentioned
that the outlook for external demand was deteriorating
significantly and the effects of the financial crisis would
undoubtedly also appear in Europe. It could therefore be
expected that domestic economic growth would be lower than
forecasted. It was also said that no immediate impacts of the
financial crisis on the Czech financial sector were currently
visible. It was repeatedly said that the effects of the
financial crisis on external demand could not be expected to
unwind rapidly. It was also argued that global developments were
uncertain and it was difficult to assess the impact of the
financial crisis. The fluctuations in the dollar's exchange
rate, which was very sensitive to news concerning the crisis,
were mentioned in the respect.
The Board stated that the recent evolution of the exchange
rate posed a downside risk to the inflation forecast. There was
consensus that future exchange rate movements were subject to
great uncertainty. A stronger-than-forecasted exchange rate
could be a result of the koruna's continued role of a 'safe
haven'. However, it was also argued that the koruna would partly
lose this position following the unwinding of the crisis and
might depreciate. It was also said that the ECB probably would
not decrease its rates in the nearest months and therefore a CNB
interest rate cut would widen the negative interest rate
differential. As a result, the exchange rate could depreciate
more markedly. Against this, however, it was stated that a
similar interest rate differential had been recorded in the past
without having significant effects on the exchange rate. The
point was also made that the exchange rate of the koruna would
still show considerable year-on-year appreciation even after
this potential weakening.
It was said during the discussion that prices of oil and
food were a downside risk to the inflation forecast. The
short-term outlook for these commodities was more favourable by
comparison with the forecast. In the case of food prices, this
was indicated by the much better harvest than last year and the
expected lower demand for food. It was also said that the
exchange rate of the dollar was dampening the changes in oil
prices. The opinion was also repeatedly expressed that the
outlook for prices of oil and food was surrounded by great
uncertainty.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 3.50 percent.
Four members voted in favour of this decision: Governor Tuma,
Vice-Governor Hampl, Chief Executive Director Holman and Chief
Executive Director Tomsik. Two members voted for lowering rates
by 0.25 percentage point: Vice-Governor Singer and Chief
Executive Director Rezabek.
(Reporting by Mirka Krufova in Prague)
