May 16 (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 new
macroeconomic forecast contained in the third situation report.
The forecast still assessed the current high inflation as a
transitory phenomenon caused primarily by changes to indirect
taxes and by rapid growth in regulated prices and food prices.
The real economy was at the peak of the business cycle and its
current effect was assessed as inflationary. The estimate of the
real marginal cost gap, which measures the effect of the real
economy on inflation, had been increased significantly compared
to the previous forecast, owing in particular to
higher-than-forecasted GDP growth and unexpectedly high adjusted
inflation excluding fuels, which, moreover, had occurred amid a
faster decline in import prices.
The new forecast expected inflation to decline gradually. At
the monetary policy horizon, i.e. in the first three quarters of
2009, headline inflation was expected to be in the lower half of
the inflation-target tolerance band. This would create the right
conditions for hitting the 2 percent inflation target in 2010.
The expected fall in inflation would be fostered by an unwinding
of the temporary effect of taxes and regulated prices and by
rapid closure of the positive output gap. By 2009, the real
economy was expected to turn anti-inflationary, as a result of a
tight exchange rate component of the monetary conditions,
restrictive fiscal policy and weaker external demand. The
forecast expected the interest rate component of the monetary
conditions to remain slightly easy.
Consistent with the macroeconomic forecast and its
assumptions was broad stability in nominal interest rates
initially, followed by a decline still in 2008 and stability in
2009.
After the presentation of the situation report, the Board
discussed the new forecast and the risks associated with it. The
board members agreed that there were many mutually conflicting
tendencies in both the domestic and external economy and that
this implied an unusually high degree of uncertainty for the
decision-making process. The frequently mentioned risks included
the future evolution of global commodity prices (in particular
food prices) and the development of the global financial crisis
and its effect on the real economy and inflation in the most
important economies.
The Board discussed the outlook for the domestic economy in
detail. The rapid unwinding of the inflationary effect of the
real economy was an important factor in the forecast as regards
the return of inflation towards the target. However, it was said
in the debate that the GDP growth forecast in the baseline
scenario was among the most pessimistic as compared to the
estimates of other institutions. A smaller-than-expected
downswing in GDP growth might thus present an upside risk to
inflation in the baseline scenario. One possibility discussed in
this context was a more diffuse or weaker effect of the exchange
rate component of the real monetary conditions on economic
activity. A potential reason for a changed effect of the
exchange rate shock was the greater use of exchange rate risk
hedging than in the past. Against this, however, it was said
that although firms might be managing their risks better, the
exchange rate effect could not be avoided entirely.
One argument in favour of continued robust economic growth
was the still high level of consumer confidence. On the other
hand, attention was drawn to the current signals of weakening
export activity, and it was also emphasised that the previous
monetary policy rate increases had not yet fully manifested
themselves. It was also said repeatedly in the discussion that
demand would probably be contained by an increase in the saving
rate linked with the tax reform. Demand should also be weakened
by a decline in real wages due to inflation. In addition, it was
likely that the exchange rate shock would temporarily slow
investment activity, and a dampening effect on the labour market
could also be expected.
The transmission of the exchange rate shock to prices was
also discussed. The prevailing view was that the
anti-inflationary effect of the strong exchange rate would be
significant, thanks mainly to effective competition in the
tradable goods sector. In this context, however, the opinion was
expressed that given the current high level of demand there was
a risk of slower transmission of the appreciation to prices. It
was said that the experience of intense disinflation in 2002
after a previous rapid appreciation of the koruna might be of
only limited relevance, as the cyclical position of the economy
was different at that time.
The Board also discussed the labour market situation. Some
of the board members assessed this market as being tight and
emphasised the inflation risk of excessively high growth in
wages and nominal unit wage costs. In addition, attention was
drawn to the rapid fall in unemployment and to the fact that the
unemployment rate was probably getting below the
non-accelerating inflation level. Against this, the opinion was
expressed that the labour market was open and that the inflow of
foreign workers would counteract the wage growth pressures. It
was said repeatedly that the inflation pressures in the wage
area were not particularly significant at present.
In the debate, some of the board members expressed doubts
that the baseline scenario of the forecast could be regarded as
the most probable. The risk scenario based on the model variant
assuming more intense propagation of the cost shocks to
inflation expectations and to inflation in other price
categories, and also generally slower monetary policy
transmission, was suggesting a potential risk of higher
inflation and thus also the need for a higher interest rate
path.
In the context of the impacts of the global financial
crisis, the Board discussed the tightening lending conditions of
commercial banks. Shifts towards greater caution could be seen
in particular for consumer credit and on the mortgage market.
Slowing credit growth might therefore be expected. In addition,
it was said that the interbank market had seen a reduction in
activity and an autonomous rise in interest rates. The Board
agreed that these restrictive factors from the financial sector
were also relevant to the monetary policy settings.
On average, the Board inclined towards the view that the
risks of the baseline scenario were broadly on the upside with
regard to inflation, although some members assessed the risks as
being balanced.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 3.75 percent.
Six members voted in favour of this decision: Governor Tuma,
Vice-Governor Singer, Chief Executive Director Holman, Chief
Executive Director Rezabek, Chief Executive Director Tomsik and
Chief Executive Director Zamrazilova. One member voted for
increasing rates by 0.25 percentage point: Vice-Governor Hampl.
(Reporting by Mirka Krufova in Prague)
