TEXT-Minutes from Czech c.bank Dec 20 board meeting

...on Friday.

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

The Board was presented with the December situation report. The presentation focused on summarising the newly available economic data and reassessing the risks of the October forecast. The downside risks to inflation associated with the October forecast had increased compared to November. The current November inflation figures were lower relative to the October forecast. Food prices had recorded the main deviation. The estimated impacts of changes to regulated prices had also moderated. The October forecast for Q3 GDP had materialised in terms of both growth and structure. The past GDP figures had meanwhile been revised downwards, which was described as a potential downside risk to inflation. Wage growth had slowed and no inflation pressures were emerging in the labour market. Current developments in the international environment were broadly neutral in relation to the risks of the October forecast. The monetary conditions had tightened somewhat.

After the presentation of the December situation report, the Board assessed the change in the distribution of the risks of the October forecast. The Board agreed that the downside risks of the forecast were even higher in December than they had been in November. At the same time, it was said that the realignment of the risks needed to be related to the October forecast. However, it was said that the forecast also contained upside risks to inflation.

It was said that the Czech economy was in a phase of economic growth which was higher than that in the euro area, and was simultaneously recording comparable or even lower inflation. The Board discussed the causes of this. The opinion was expressed that converging economies such as the Czech Republic and Poland may to some extent be resilient to inflation pressures. In this context it was stated repeatedly that increasing competition, the growing influence of the international environment, appropriate wage growth and appreciation of the exchange rate were playing a role in absorbing inflation shocks. The view was expressed that the further enlargement of the European Union might bolster some of these tendencies, for instance in the area of food prices. It was also said that pressure for lower consumer price inflation was apparent throughout Europe and hence was not typical of Central Europe alone.

The Board further considered the risks of the October forecast. The Board stated that the stronger-than-forecasted exchange rate was a considerable downside risk to inflation. Another downside risk was the lower-than-expected inflation in past months. The discussion of the upside risks focused on the ongoing strong economic growth, which now involved virtually all components of GDP. The opinion was expressed that the corresponding good corporate results might be an inflationary factor, as they might lead to higher investment demand and, secondarily, to higher consumer demand as well. In this context, however, it was said that the good corporate results might also have an anti-inflationary effect, because they might provide an incentive for foreign investors to invest more in the Czech Republic, which would generate appreciation pressures and simultaneously increase labour capitalisation, thereby boosting labour productivity. It was said that the money supply and consumer credit were growing relatively fast and that this might generate demand pressures. However, the Board was not united in its evaluation of the money growth as a potential upside risk to inflation. In response it was said that the correlation between money growth and inflation was fairly weak in the Czech Republic. It was said that rent deregulation might act as an inflationary impulse, as suggested by the experience in the mid-1990s. Another inflationary impulse mentioned was the expected rise in electricity prices in 2007.

The Board also discussed some factors affecting the exchange rate. It was said that information on the balance of payments is important for forming an opinion on future economic developments. For example, changes in the structure of foreign investment and other capital flows can signal a change in the significance of the interest rate differential. It was also said that a lengthening hedging transaction horizon can affect the exchange rate. Comment was made on the effective exchange rate of the koruna, which had been more stable than the exchange rate of the koruna against the euro. It was said that the greater stability had been due to faster appreciation of the currencies of some of the Czech Republic's trading partners, which might affect the relative competitiveness of the Czech economy.

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) ((prague.newsroom@reuters.com; Reuters Messaging: mirka.krufova.reuters.com@reuters.net; +420 224 190 477))

Keywords: CZECH ECONOMY/CBANK

[Reuters/Finance.cz]