Nov 14 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's November 6
monetary policy meeting, released on Friday.
Present at the meeting: Zdenek Tuma (Governor), Mojmir Hampl
(Vice-Governor), Miroslav Singer (Vice-Governor), Pavel Rezabek
(Chief Executive Director), Vladimir Tomsik (Chief Executive
Director).
The meeting opened with a presentation of the seventh
situation report containing the new macroeconomic forecast.
Headline inflation had remained well above the tolerance band of
the inflation target in 2008 Q3. However, it had started falling
quite quickly and was 0.3 percentage point below the previous
forecast. The domestic economy was continuing to decline from
the peak of the business cycle. The inflationary domestic cost
pressures, especially in the wage area, were steadily easing and
were being outweighed by the anti-inflationary effect of import
prices resulting from the past exchange rate appreciation. The
initial inflation pressures were assessed being on the downside.
According to the new forecast, inflation would fall rapidly
to the 3 percent inflation target at the start of next year
thanks to the unwinding of the price shocks that occurred in
late 2007 and early 2008, the anti-inflationary effect of the
appreciation of the koruna, and a decline in domestic price
pressures due to slowing economic activity and subdued wage
growth. In late 2009 and early 2010, inflation would then be at
the 2 percent inflation target valid from 2010. The forecast
expected a significant downswing in economic growth. This year
the economy would still show a relatively high rate of growth,
but next year GDP growth would fall below 3 percent as a result
of the lagged effects of the exchange rate appreciation and
slowing external demand. In 2010 there would be just a slight
increase in domestic GDP growth as a result of a gradual
recovery in external demand. Consistent with the forecast was a
decline in interest rates followed by a modest rise in late
2009/early 2010. The new situation report assessed the risks of
the baseline forecast scenario as being on the downside. The
risk of a deeper and longer economic decline abroad had been
captured in an alternative forecast scenario. Consistent with
this alternative scenario were only slightly lower rates than in
the baseline scenario, with virtually identical paths for
headline and monetary-policy relevant inflation but with
considerably lower economic growth.
After the presentation of the situation report, the Board
discussed the new forecast and the risks associated with it. The
board members agreed that the overall balance of risks to
inflation was clearly on the downside and that the new
information received since the previous monetary policy meeting
and since the completion of the new forecast was tending towards
a more significant reduction of interest rates. In particular,
the outlook for the euro area was deteriorating, interest rates
were falling around the world, and prices of commodities,
energy-producing materials and food were decreasing sharply. The
exchange rate, which was continuing to show quite a sizeable
year-on-year appreciation, also remained an anti-inflationary
factor. The only potential inflationary factors identified in
the discussion of the forecast risks were a possible decline in
the rate of growth of potential output and persisting relatively
high growth in nominal unit wage costs.
The Board stated that the domestic economy was currently
exposed to an unusual combination of anti-inflationary shocks of
a cost, exchange rate and demand nature. This situation might
last for some time, as the focus was shifting towards a demand
shock. The downswing in economic activity abroad was gradually
transmitting to the domestic economy as a result of the latter's
strong export orientation. It was said in the discussion that
the last time the Czech economy had faced such a clear
combination of risks had been back in 1998, but unlike in 1998
the current decline in demand and the significantly worse
functioning of credit markets were global phenomena. Given these
facts, doubts were also expressed whether the modest economic
recovery predicted for 2010 by the new forecast would actually
occur so soon.
The risks associated with the potential transmission of the
credit crunch abroad to the domestic economy were also
discussed. The funding of investment projects and the financing
of the operational needs of non-financial corporations were both
identified as growing risks. A sharp rise in interest rates on
loans for operational financing and constraints on the
availability of such loans would lead to a deterioration in the
financial situation of corporations.
The opinion was expressed in the discussion that a sharper
reduction in monetary policy rates was not necessarily the
optimal response, as it would not necessarily influence
effectively the situation in the interbank market and might also
send out the wrong signal regarding the soundness of the Czech
financial sector and the prospects for the domestic economy.
Attention was also drawn to the fact that after the wave of
problems in emerging market economies the koruna had been the
only currency in this category to return to its original values.
This could be interpreted not only as meaning that the Czech
economy was still regarded by foreign financial investors as a
safe haven, but also as a sign that the domestic real economy
would be affected by the external problems to a relatively
lesser extent. In this context, the opinion was also expressed
that the relative stability of the financial sector could mean a
faster return to normal lending conditions in the Czech Republic
than in surrounding economies. Against this, the opinion was
expressed if the risk of a deeper and longer economic decline
abroad, as expressed in the alternative forecast scenario, were
to materialise, interest rates would have to be lowered more
substantially to keep inflation near the inflation target and
reduce the fall in domestic economic growth.
The Board discussed the current financial market situation
in depth. It was said that the existence of quite a large
difference between the two-week repo rate and the three-month
PRIBOR, caused by a high credit premium on the interbank market,
constituted a disturbance of the monetary policy transmission
mechanism. In this context, the Board discussed a proposal to
reduce the spread between the repo rate and the Lombard rate to
0.5 percentage point in order to make the marginal lending
facility more attractive as a way of solving banks' potential
liquidity needs. In support of this proposal, it was said that
reducing the spread between interest rates for refinancing
through this facility might be seen as a positive signal.
However, the prevailing view was that in a situation where a
liquidity-providing facility was already in place, Lombard
operations were being used by banks only to a very minor extent
and only for technical fine-tuning in the maintenance of
required reserves. The proposed change would thus have a
negligible effect.
At the close of the meeting the Board decided by a majority
vote to lower the CNB two-week repo rate by 0.75 percentage
point to 2.75 percent, effective 7 November 2008. Four members
voted in favour of this decision: Governor Tuma, Vice-Governor
Singer, Chief Executive Director Rezabek and Chief Executive
Director Tomsik. Vice-Governor Hampl voted for lowering the repo
rate by 0.50 percentage point.
The Board also decided by a majority vote to leave the
spread between the repo rate and the Lombard rate unchanged at 1
percentage point. Four members voted in favour of this decision:
Governor Tuma, Vice-Governor Singer, Vice-Governor Hampl and
Chief Executive Director Tomsik. Chief Executive Director
Rezabek voted for reducing the spread between the repo rate and
the Lombard rate to 0.50 percentage point. The Board thus
decided by a majority vote to lower the discount rate and
Lombard rate by 0.75 percentage point to 1.75 percent and 3.75
percent respectively.
(Reporting by Mirka Krufova in Prague)
