Feb 15 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's February 7
monetary policy meeting, released 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 given a presentation of the first situation
report in 2008, containing in particular the new macroeconomic
forecast. The new forecast responded among other things to
changes in the external environment, where the financial market
turbulence was starting to adversely affect the economic growth
of the major global economies. The economic activity outlook for
the euro area countries had been lowered. The monetary
authorities' expected response had moved the Euribor interest
rate outlook downwards. The fall in the Euribor had meanwhile
been dampened by the ECB's fears of relatively high price index
growth, the outlook for which had been revised upwards since the
previous forecast. This high growth had been linked among other
things with high prices of energy and fuels and with an upward
revision of the outlook for oil prices by as much as $25 a
barrel. From the point of view of the European economy, this
rise had been only partially moderated by the depreciation of
the USD/EUR exchange rate.
The starting conditions of the forecast assumed
comparatively strong demand-pull inflation pressures from the
real economy, stemming primarily from the positive output gap.
Real wages were again slightly anti-inflationary. The real
monetary conditions index was slightly easy in its interest rate
component and tight in its exchange rate component. During 2008,
the forecast assumed that the demand-pull inflation pressures
would fairly quickly disappear and turn anti-inflationary. This
was linked with projected lower output growth in both 2008 and
2009, chiefly reflecting lower private consumption and lower net
exports. Tighter monetary conditions would also have an
anti-inflationary effect.
The new forecast had also taken into account the
higher-than-expected rise in inflation in late 2007, which it
assessed as a one-off shock linked mainly with external
developments. The underlying factors had been higher growth in
food prices, fuel prices and regulated prices. A
higher-than-usual contribution of changes to indirect taxes
would be a factor at the short end of the forecast. The
prediction assumes that this shock would fade relatively quickly
as the demand-pull inflation pressures subside and the monetary
conditions get tighter. The inflation forecast was thus
initially above the previous forecast for most of 2008 and then
declining towards the target at the monetary policy horizon.
Consistent with the macroeconomic forecast and its
assumptions was a modest rise in nominal interest rates
initially, followed by a decline still in 2008. In 2009, nominal
interest rates were expected to be broadly flat.
Several major changes had been made to the core prediction
model used to prepare the forecast. These had affected the paths
of inflation, gross domestic product and implied interest rates.
The main model change had consisted in limiting the pass-through
of shocks across individual price categories. In addition, the
weight of future developments in the formation of expectations
and the flexibility of the monetary policy reaction had both
been increased. In connection with these changes, an alternative
forecast scenario - assuming the same model mechanisms as in the
previous model from the 10th situation report of 2007 - had been
prepared. This alternative scenario generated a higher inflation
path than the baseline scenario of the forecast. Consistent with
the alternative inflation forecast was a higher - and gradually
rising - interest rate path during 2008 as compared to the
baseline scenario, in response to this higher inflation outlook.
After the presentation of the situation report, the Board
discussed the risks and uncertainties associated with the new
forecast. The Board agreed that the uncertainties associated
with monetary policy decision-making were this time greater than
usual, while the risks were heading in both directions. These
risks were linked with developments in both the global and
domestic economies. The Board turned its attention to the high
inflation recorded towards the end of last year. There was a
consensus that the rise in prices had been caused by one-off
shocks beyond the reach of monetary policy, which were gradually
abating. In this context it was also said that monetary policy
should focus on the future evolution of prices and not react to
past inflation, which had been due in part to administrative
changes introduced on January 1, 2008.
In the context of the observed high growth in prices, the
Board also emphasised the uncertainties surrounding the possible
higher pass-through of cost shocks to other price categories. It
was said that a possibility of such second-round effects could
be identified, for example, in the rise in measured inflation
expectations. Some of the board members said in this regard that
they had slight preference for the alternative scenario over the
baseline scenario. But it was also said that the baseline
scenario and the alternative scenario were predicting similar
interest rate paths for the first quarter. Relatively
significant differences between them emerge as from the second
quarter. Some of the board members emphasised their aversion to
contrary movements in interest rates in the short term as
assumed in the baseline scenario of the forecast. It was said
that raising interest rates in the short term cannot influence
inflation or inflation expectations and would merely lead to
needless volatility in the financial markets and the real
economy. Other board members expressed the opposite opinion,
stressing the need for flexible monetary policy.
Some of the board members expressed doubts about the sharp
downswing in Czech economic growth predicted in the forecast. It
was said that the related rapid change in the cyclical position
of the economy was not all that usual, nor was it currently
supported by the relatively favourable labour market data and
other related economic indicators. Against this, it was argued
that the previously mentioned slowdown in global economic
activity, which might turn out to be far more significant than
forecasted, might adversely affect the economic growth of the
Czech Republic. The argument was also made that even at a time
of rising prices and concurrently slowing economic activity, the
central bank should be responsible primarily for price
stability. It was also said that from the viewpoint of the Czech
economy the global situation could be regarded as an example of
an asymmetric shock.
Other potential impact channels on the Czech economy were
also mentioned in the discussion of the considerable uncertainty
surrounding the future course of the US economy and the Czech
Republic's main trading partner economies. The possibility of
significantly lower interest rates in the euro area was
discussed in the context of the recent dramatic interest rate
reduction in the USA. Other things being equal, such lower rates
would foster a narrowing of the interest rate differential
between the koruna and the euro and put appreciation pressures
on the koruna's exchange rate. The slowdown in global economic
activity might also lead to some easing of the demand pressures
on world prices of food and oil, which in the recent past had
risen sharply and had thus contributed to the cost shock to
Czech prices. This shock might therefore fade more quickly than
forecasted, especially as regards food prices and fuel prices.
On the other hand, it was said that the previous rise in global
prices of food and oil had been caused by adverse supply-side
factors and by increased demand from the rapidly growing Asian
economies, for which high demand could be expected to persist.
At the close of the meeting the Board decided by a majority
vote to increase the CNB two-week repo rate by 0.25 percentage
point to 3.75 percent, effective February 8, 2008. At the same
time it decided to increase the discount rate and Lombard rate
by the same amount, to 2.75 percent and 4.75 percent
respectively. Five members voted in favour of this decision:
Governor Tuma, Vice-Governor Niedermayer, Vice-Governor Singer,
Chief Executive Director Hampl and Chief Executive Director
Tomsik. Two members voted for leaving interest rates unchanged:
Chief Executive Director Holman and Chief Executive Director
Rezabek.
(Reporting by Mirka Krufova in Prague)
