TEXT-Minutes from Czech c.bank March 29 board meeting

...meeting, released on Friday.

Present at the meeting: Zdenek Tuma (Governor), Ludek Niedermayer (Vice-Governor), Miroslav Singer (Vice-Governor), Mojmir Hampl (Chief Executive Director), Pavel Rezabek (Chief Executive Director), Vladimir Tomsik (Chief Executive Director).

The March meeting of the Bank Board opened with a presentation of the situation report, which focused above all on summarising the January forecast and assessing its risks. The risks of the January forecast were assessed as balanced overall. Recent inflation figures, which had been lower than forecasted, were identified as a moderate downside risk. A role had been played by the new definition of the consumer basket and lower-than-expected inflation in a number of segments. Only food prices had risen faster than forecasted. Economic growth had been in line with the forecast. Private consumption had grown faster, whereas investment had risen more slowly and the contribution of net exports to economic growth had been lower. The external environment was assessed as favourable. Higher expectations regarding economic growth and interest rates in the euro area were presented as a moderate upside risk. The Board had been informed that future fiscal developments were a major uncertainty of the upcoming April forecast.

After the presentation, the Board went on to discuss the newly available information and the risks of the January forecast. The Board agreed that the forecast risks were balanced and there were no strong arguments for either a rise or a cut in interest rates. In this regard, the March situation report led to a view of economic developments which was very similar to that ensuing from the February report. The Board then turned to a discussion of upside and downside risks to inflation.

The rising share of household consumption in GDP was mentioned as a moderate upside risk. The Board agreed that growth driven by consumption could affect inflation in a different way than growth driven by net exports and investment. Opinions were expressed that a more optimistic outlook for euro area growth and expectations of further ECB interest rate increases - together with their implications for domestic exchange rate developments - were moderate upside risks. However, it was also said several times that growth in the euro area could be in line with its potential (non-inflationary) growth and that a number of other factors, e.g. the lower-than-expected oil prices, were an argument against viewing the external environment as an upside risk. It was said that the acceleration of growth in some cost indices could also be assessed as a moderate upside risk. The opinion was also expressed that domestic inflation was more volatile than foreign inflation and therefore rapid responses of monetary policy to both upward and downward deviations of inflation from the forecast were to be avoided.

According to the Board, moderate downside risks included above all the observed incomplete pass-through of cost shocks into inflation. It was said repeatedly that deregulation of rents would not have to pass through into inflation to the extent assumed in the January forecast. Opinions were also expressed that increases in indirect taxes would not have to affect consumer prices to the full extent. In this context, the board members drew attention to the experience of other countries, for example Germany, as well as the past experience of the Czech Republic with incomplete pass-through of cost shocks into inflation. It was also said that in some cases past pick-ups in cost indices had also failed to pass through into domestic inflation to the full extent. During the discussion of downside risks it was also said that the moderate decline in inflation expectations for 2010 could already reflect the change in the target announced at the beginning of the month. The new target could help anchor inflation expectations at a lower level.

The Board also discussed signals for inflation ensuing from the labour market. It was said that the decline in unemployment and some indications from the corporate sector suggested that the labour market would not be able to accommodate further economic growth easily. Workforce shortages could therefore increase pressures on inflation. In this context, however, opinions were also expressed that aggregate data had not suggested such a situation so far and wage pressures were not particularly visible in data on wages. It was also said that wage developments appropriate to the economic situation were important for further non-inflationary growth.

The Board also turned its attention to the effect of the planned public finance reform on the economy. A consensus was reached that its effect could become one of the major uncertainties of the April forecast.

At the close of the meeting, the Board decided unanimously to leave the two-week repo rate unchanged at 2.50 percent.

(Reporting by Mirka Krufova in Prague)

Keywords: CZECH ECONOMY/CBANK