May 14 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's May 6
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 third
situation report containing the new macroeconomic forecast. In
first quarter of 2010, headline inflation had remained low and
had been below the lower boundary of the tolerance band around
the inflation target. Monetary-policy relevant inflation, i.e.
inflation adjusted for the first-round effects of changes to
indirect taxes, had turned slightly negative in first quarter.
The year-on-year contraction in real GDP had moderated further
in fourth quarter of 2009, while in quarter-on-quarter terms
economic activity had continued to rise. Employment had kept
declining and unemployment was increasing. Average nominal wage
growth had gone up owing to some extraordinary factors. Import
prices had been anti-inflationary as a result of the past
exchange rate appreciation and low inflation abroad. The
inflation pressures from the domestic economy were of little
significance.
The new May forecast predicted that headline inflation would
gradually rise this year. Owing to tax changes already
implemented, it would increase slightly above the inflation
target of 2 percent at the end of the year. In 2011, inflation
would be just below the target. Monetary-policy relevant
inflation would approach the target from below. Economic
activity would rise, but higher growth this year would be
prevented by a temporary cooling of domestic consumption and
external demand. According the forecast, the nominal exchange
rate would appreciate slightly. Consistent with the forecast was
a modest decline in market interest rates initially, followed by
stability and a gradual rise in rates as from 2011.
In the discussion that followed the presentation of the
situation report, the prevailing view was that the overall
macroeconomic environment was anti-inflationary and that the
appropriate response would be to lower rates. The Board agreed
that monetary policy decision-making was encumbered with greater
uncertainty owing to the debt problems in certain countries. It
was also said that this uncertainty was increasing the inflation
risks on both sides and that greater uncertainty could also be
an argument for stable rates.
A key assumption for growth of domestic economic activity is
the external demand outlook. The prevailing view in the
discussion was that there were anti-inflationary risks of lower
economic growth abroad owing to the fiscal situation in certain
indebted euro area countries. It was said that this might
jeopardise fulfilment of the inflation target at the forecast
horizon. It was also said that the emerging economic recovery
abroad might be hindered by lower bank lending activity, because
the planned regulatory measures were increasing uncertainty in
the financial sector, which had not yet fully recovered from the
consequences of the financial and economic crisis.
In the context of the external outlook it was said that the
forecasted rise in market interest rates abroad was getting more
distant. Compared to the previous forecast the outlook for
market interest rates abroad was substantially lower and their
expected growth was slower. Lower rates were one of the main
arguments for a lower outlook for domestic market rates.
In the discussion of the risks of the inflation forecast it
was mentioned that adjusted inflation excluding fuels had been
very low in 2010 Q1. Monetary-policy relevant inflation would
therefore approach the inflation target from below more slowly
at the forecast horizon. The currently weaker exchange rate was
identified as an upside risk to inflation by some of the board
members. A rapid weakening of the exchange rate could be a risk
to inflation, and a reduction of monetary policy rates might
further contribute to that risk. However, the prevailing view
was that the current depreciation was only transitory and that
fulfilment of the inflation target at the forecast horizon was
not at risk. The risk of higher inflation due to higher oil
prices - fostered by a stronger dollar - was also mentioned in
the discussion. However, it was also said that lower external
demand in the euro area would suppress growth in oil prices via
lower demand for energy-producing commodities and also that the
risk of pass-through of higher prices of oil and other
commodities to domestic inflation was not significant.
It was said that the still large difference between market
interest rates and monetary policy rates should also be a reason
for lowering rates. The forecast was predicting a gradual
decrease in the risk premium. Concern was expressed that the
risk premium might start increasing again owing to the fiscal
situation in certain euro area countries. A higher risk premium
might constrain the financial sector's lending activity and thus
reduce the expected growth in external demand.
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 0.75 percent, effective 7 May 2010. At the same time it
decided to lower the Lombard rate by the same amount, to 1.75
percent. The discount rate was left unchanged at 0.25 percent.
Four members voted in favour of this decision: Governor Tuma,
Vice-Governor Hampl, Vice-Governor Singer and Chief Executive
Director Tomsik. Two members voted for leaving interest rates
unchanged: Chief Executive Director Holman and Chief Executive
Director Rezabek.
(Reporting by Mirka Krufova)
