TEXT-Minutes from Czech c.bank Sept 27 board meeting

Oct 6 (Reuters) - Following is the full text of the minutes from the Czech central bank (CNB) governing board's September 27 monetary policy meeting, released on Friday.

Present at the meeting: Zdenek Tuma (Governor), Ludek Niedermayer (Vice-Governor), Miroslav Singer (Vice-Governor), Michaela Erbenova (Chief Executive Director), Jan Frait (Chief Executive Director), Robert Holman (Chief Executive Director), Pavel Rezabek (Chief Executive Director).

The Board discussed the September situation report, which assessed the new information on economic developments and the risks associated with the fulfilment of the July macroeconomic forecast. The annual inflation of 3.1 percent in August had been 0.2 percentage point higher than predicted by the current forecast. This was primarily a result of rising food prices, which according to the forecast should have fallen. In addition, fuel prices and adjusted inflation excluding fuels had risen rather faster than forecasted. Regulated prices had deviated slightly towards lower-than-forecasted inflation.

The annual real GDP growth of 6.2 percent in 2006 Q2 had been 1 percentage point lower than predicted by the forecast. As to the structure of the economic growth, the change in inventories in particular had been higher than forecasted. Household consumption had also been slightly higher, while government consumption and gross fixed capital formation had lagged behind the assumptions of the forecast. Exports and imports of goods and services had been slightly below the forecast assumptions in 2006 Q2, while the opposite was true for wage growth. Industrial producer prices had risen faster in August than assumed by the forecast. Agricultural producer prices had recorded the opposite trend. New figures on the external environment suggested a broadly neutral effect as compared to the July forecast, although the individual indicators were showing some deviations from the forecast in both directions.

After the presentation of the situation report, the Board discussed the risks to the fulfilment of the July forecast, which had been consistent with a moderate rise in interest rates in 2006 Q3. The board members assessed the magnitude of the forecast's upside risks to inflation. These risks include the higher domestic inflation in August, the higher outlook for economic growth, inflation and interest rates in the euro area, and finally domestic fiscal developments, especially in the longer run. Conversely, the current fall in global oil prices was discussed as the forecast's main downside risk to inflation. The majority of the board members assessed the risks to the fulfilment of the July forecast as being slightly on the upside. In this context, the opinion was expressed that given continuing relatively rapid growth in potential output, there should be a weakening of potential inflation pressures along with a cyclical slowdown in demand growth.

In the discussion that followed, the Board turned its attention to fiscal development and the associated problems. It was emphasised that the long-term outlook for public finances was deteriorating in particular. Some of the board members mentioned the relatively rapid wage growth in the first half of the year. They were inclined to regard this as only a very slight risk, as the current wage growth might be a delayed reaction to the cyclical growth in economic activity.

The Board moved on to discuss the exchange rate. In this context it was said that in contrast to the previous situation report the exchange rate was no longer an unequivocal downside risk to inflation and that the risks associated with the future evolution of the exchange rate were now more evenly distributed in both directions.

Following its assessment of the risks of the forecast, the Board turned to the issue of the appropriate monetary policy response. As a gradual rise in interest rates is consistent with the July forecast, the prevailing view was that interest rates should be raised at the Board's monetary policy meeting today. The main argument made in favour of this view was that the economy had in the past been in a different phase of the cycle, i.e. below the non-accelerating inflation level of output, with interest rates depressed below their long-run equilibrium level. The observed evolution of the economy was meanwhile in line with this forecast. Now, however, the forecast was predicting a different phase of the business cycle, during which the economy would fluctuate around its equilibrium values for an extended period, and this needed to be appropriately reflected in interest rates.

However, the view was also expressed that the absence of fundamental inflationary pressures allowed the interest rate increase to be postponed and reconsidered at the Board's next monetary policy meeting in October, when the new macroeconomic forecast would be available. In support of leaving interest rates unchanged it was also said that the ongoing decline in global oil prices might have a downward effect on inflation expectations.

After discussing the situation report, the Board decided by a majority vote to raise the two-week repo rate by 0.25 percentage point to 2.5 percent with effect from 29 September 2006. At the same time it decided to increase the discount rate and Lombard rate by the same amount, to 1.5 percent and 3.5 percent respectively. Five board members voted in favour of this decision, and two members voted for leaving rates unchanged.

(Reporting by Mirka Krufova in Prague) ((prague.newsroom@reuters.com; Reuters Messaging: mirka.krufova.reuters.com@reuters.net; +420 224 190 477))

Keywords: ECONOMY CZECH CBANK TEXT