Nov 13 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's November 5
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 seventh
situation report containing the new macroeconomic forecast.
Inflation had continued falling in 2009 Q3, fluctuating well
below the lower boundary of the inflation-target tolerance band.
Despite a modest quarter-on-quarter recovery in economic
activity in 2009 Q2, real GDP had shrunk further in year-on-year
comparison and had probably been close to bottoming out.
Employment had continued falling rapidly, unemployment had risen
and nominal wage growth had stabilised at a slightly positive
level. The initial pressures arising from the domestic economy
were still assessed as being anti-inflationary, but had weakened
as a consequence of the observed evolution of nominal wages and
household consumption. Import prices had also started to have an
anti-inflationary effect.
According to the November forecast, inflation would be very
low in the coming few months. Headline inflation would start
rising gradually in 2010 and would be just above the 2 percent
inflation target at the year-end. Monetary-policy relevant
inflation would be below headline inflation owing to growth in
indirect taxes. The full-year decline in GDP was estimated at
4.4 percent in the new forecast for 2009. Positive year-on-year
growth in GDP was forecasted for 2010, although this growth was
expected to slow gradually in the course of the year owing to
slackening demand for Czech exports, rising unemployment and
restrictive domestic fiscal policy. Economic growth was expected
to reach 1.4 percent in 2010 and to speed up slightly to 2.2
percent in 2011. The exchange rate of the koruna would be
broadly stable over the forecast horizon. Consistent with the
forecast was a decline in market interest rates this year
followed by a gradual rise in 2010. The risks to the baseline
scenario of the forecast were viewed as modestly inflationary,
main because of the depreciation of the exchange rate at the
time the forecast was prepared.
In the discussion that followed the presentation of the
situation report, some of the board members stated that the
decision-making on monetary policy interest rates was going on
in an environment of unusually high uncertainty. The prevailing
view was that monetary policy rates had fallen to a sufficiently
low level to allow the economy to cope with the fall in
aggregate demand. Leaving monetary policy rates unchanged should
be enough to enable monetary-policy relevant inflation to return
into the lower half of the tolerance band around the inflation
target at the forecast horizon.
In support of maintaining the current level of monetary
policy rates, it was repeatedly argued that it was risky to make
monetary policy changes in an environment of major uncertainty,
which is heading in both directions. Doubts were repeatedly
expressed about whether a slight reduction in interest rates now
and a subsequent increase several quarters later could have any
value added in a situation where the very low inflation was
linked primarily with insufficient external demand. The current
exchange rate of the koruna, which was weaker than assumed by
the forecast, was identified as an upside risk to inflation, as
was the possibility of a further movement of the exchange rate
in the depreciation direction due to the uncertainty regarding
economic activity and public finances in the domestic economy
going forward. It was also said that excessively low interest
rates might create a risk to financial stability in the future.
In this context, attention was drawn to the surprising upswing
in supply prices of property in the domestic economy. Against
this, it was argued that property transfer prices had dropped
quite sharply.
The conclusions of a sensitivity scenario quantifying the
impacts of a possible slowdown in potential output growth were
given as an argument for leaving interest rates unchanged.
Another aim of this scenario had been to identify the impacts of
a W-shaped recovery in economic activity. Annual inflation was
higher than forecasted at the horizon of this scenario, despite
lower GDP and nominal wage growth. The results showed that a
downward shock to long-run equilibrium paths would have
fundamental monetary policy implications, since it would create
a need to maintain interest rates at higher nominal levels.
Some of the board members, by contrast, identified the
balance of risks as being broadly anti-inflationary, pointing to
the fact that monetary-policy relevant inflation would be below
the point target almost over the entire forecast horizon, even
after the decrease in market rates consistent with the November
forecast. Insufficiently fast convergence of short-term market
interest rates to the monetary policy rate level was identified
as a downside risk to inflation. However, the opinion was
repeatedly expressed that the CNB monetary policy transmission
mechanism was sufficiently functional, especially as regards the
exchange rate channel. Against this, it was said that the
effectiveness of the interest rate channel might be weakened at
a very low interest rate level. The Board therefore again
discussed other monetary policy options for reducing the credit
risk premium.
The conclusions of a nominal wage sensitivity scenario
quantifying the impacts of potential lower nominal wage growth
at the forecast horizon were identified as an argument for a
further easing of the interest rate conditions. In support of
the conclusions of this scenario, it was repeatedly said that
many non-financial corporations would have to cut costs through
zero or negative wage growth in 2010 because of the need to keep
their margins positive.
The Board then assessed the signs of recovery in the
international and domestic economy. The fairly strong
consumption persistence of Czech households, which was slowing
the decline in aggregate demand, was identified as a factor
supporting moderate optimism. Attention was also drawn to the
surprising recovery in prices of some assets abroad. Another
factor suggesting a recovery of the global economy was quite
high capacity utilisation in the area of commodities, whose
prices might turn into a major inflationary factor again.
Against this, the opinion was expressed that the domestic
economic recovery assumed by the forecast was pretty uncertain,
as even the quite dynamic economic growth in Asia and Latin
America was unable to create the necessary demand stimulus for
European economies. Another argument against the current wave of
optimism was the relatively tight financial conditions facing
domestic and foreign non-financial corporations, despite falling
nominal interest rates on loans, as a result of the falling
prices of their output. Also mentioned as a factor hindering
renewed economic growth was the potential effect of fiscal
restrictions in the domestic economy and in countries scaling
down their anti-recession fiscal measures in the future.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 1.25 percent.
Four members voted in favour of this decision: Vice-Governor
Hampl, Chief Executive Director Holman, Chief Executive Director
Rezabek and Chief Executive Director Zamrazilova. Three members
voted for lowering rates by 0.25 percentage point: Governor
Tuma, Vice-Governor Singer and Chief Executive Director Tomsik.
(Reporting by Mirka Krufova)
