July 3 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's June 25
monetary policy meeting, released on Friday.
Present at the meeting: Zdenek Tuma (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 fourth
situation report assessing the newly available information and
its impact on the fulfilment of the risks to the inflation
forecast from the third situation report. The situation report
assessed the overall balance of risks as being inflation
neutral. Annual inflation in May had been just 0.1 percentage
point higher than the forecast. This deviation had been due to a
slight rise in adjusted inflation excluding fuels and to growth
in fuel prices, with lower growth in food prices acting in the
opposite direction. In response to the sharp economic downswing
abroad, domestic GDP had fallen in 2009 Q1 by 0.9 percentage
point more than forecasted. The situation report identified an
inflationary risk in the GDP structure in the form of falling
investment and higher-than-expected growth in household
consumption. By contrast, the external outlook was
anti-inflationary.
After the presentation of the situation report, the Board
discussed the new information and the risks to the May forecast.
The Board agreed that the risks to the inflation forecast were
balanced. A deeper-than-forecasted fall in domestic and external
economic activity and food prices represented a downside risk to
inflation. The main upside risks were the structure of domestic
economic activity, higher oil prices and higher adjusted
inflation excluding fuels.
Great uncertainty was associated with the outlook for
external economic activity, which remained unfavourable. The
Board agreed that the potential easing of the negative trends
and faster rebound in external growth being signalled by some
business cycle indicators was highly uncertain. Concern was
expressed that the external and domestic recession would
continue. As an argument for leaving monetary policy rates
unchanged it was said that the exchange rate of the koruna was
significantly weaker year on year. This represented a sufficient
stimulus for the domestic economy to overcome the current
recession as compared to fixed exchange rate economies.
The Board went on to discuss the inflation risks associated
with domestic economic activity going forward. The lower
economic growth could be expected to have an anti-inflationary
effect in the longer run owing to cost adjustment in the
economy. The unexpectedly high growth in household consumption
was a direct inflationary factor in the GDP structure. However,
the evolution of household consumption was subject to
uncertainty, as more detailed figures on the structure of
households' disposable income had still to be published.
In the debate about inflation and its components, it was
said that inflation was developing in line with the forecast.
The monetary policy priority was to hit the inflation target at
the forecast horizon, and that was not currently in any danger.
It was also said that no major inflation pressures were apparent
in the near future. It was said in the discussion that the
lower-than-forecasted growth in food prices posed no significant
downside risk to inflation, because food prices were low and the
transmission of agricultural producer prices to food prices was
not immediate. It was said that monetary policy should not react
to short-term fluctuations in food and oil prices. In the
discussion of the components of inflation it was said repeatedly
that the slight upswing in adjusted inflation excluding fuels
might have been due to the weaker exchange rate at the start of
this year. Higher core inflation was also being recorded in the
euro area. This might pose an inflationary risk to the domestic
economy owing to its close links with the euro area economy.
The Board discussed the transmission from monetary policy
rates to market rates. It was said that market interest rates
were not converging towards the CNB's monetary policy rates. It
was also said that the persisting high risk premium in the
interbank market confirmed that the interest rate transmission
channel was currently not very effective. A rate reduction could
lead to depreciation of the exchange rate and a return to higher
exchange rate volatility. It was also said in the discussion
that the persisting high risk premium was tightening the
monetary conditions and was therefore an argument for lowering
rates. It was said repeatedly that even if short-term market
interest rates were to fall in response to a CNB rate cut, the
impact of the lower rates on long-term client rates was
ambiguous. In terms of the effects on the economy, the level of
long-term rates was more relevant than that of short-term rates.
In the discussion of the effectiveness of interest rate
transmission, it was said that other central banks, for instance
those in the USA and the euro area, had sharply lowered interest
rates partly because of problems with financial stability in
their economies. Short-term market rates were low as a result of
monetary policy actions, but long-term rates had remained stable
or had even risen somewhat. Financial stability was not an issue
for the Czech economy, hence there was no need to bring interest
rates down to zero. It was said repeatedly that low interest
rates might pose a risk to financial stability in the future. It
was said in the discussion that the money supply indicators were
suggesting a potential risk to inflation in the longer run. The
opinion was also expressed that given low interest rates, demand
for loans might rise significantly once the recession subsides,
causing inflation to go up.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 1.50 percent.
Four members voted in favour of this decision: Governor Tuma,
Chief Executive Director Holman, Chief Executive Director Tomsik
and Chief Executive Director Zamrazilova. Chief Executive
Director Rezabek voted for lowering rates by 0.25 percentage
point.
(Reporting by Mirka Krufova in Prague)
