Aug 14 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's August 6
monetary policy meeting, released on Friday.
Present at the meeting: Zdenek Tuma (Governor), Mojmir Hampl
(Vice-Governor), Miroslav Singer (Vice-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 fifth
situation report containing the new macroeconomic forecast. The
domestic economy was being strongly affected by the adverse
external situation. Inflation had continued falling in second
quarter of 2009, going below the lower boundary of the
inflation-target tolerance band. Economic activity had declined.
According to new figures this decline was larger by comparison
with the information available at the time the previous forecast
had been drawn up. The economic downturn was feeding through
with a lag into the labour market in the form of rising
unemployment and slowing wage growth. The anti-inflationary
effect of the economic decline was being partly offset by a
weakening exchange rate.
According to the new forecast, inflation would continue
falling in third quarter of 2009. Thereafter, it would converge
slowly from low positive values towards the inflation target,
which it would reach at the end of 2010. The economic decline
had bottomed out in second quarter of 2009, according to the new
forecast. In third quarter, the Czech economy would start to
show positive quarter-on-quarter growth rates. The full-year
decline was currently estimated at almost 4 percent, which was
more than the previous forecast had indicated. The new forecast
was predicting a return to modest growth in 2010. The exchange
rate of the koruna would be modestly appreciating over the
forecast horizon. Consistent with the forecast was a decline in
market interest rates this year followed by a gradual rise from
first half of 2010 onwards.
After the presentation of the situation report, the Board
began its discussion. It was said repeatedly that a reduction in
rates was consistent with the new forecast. The Board agreed
that by comparison with the previous forecast the risks were
smaller and could be viewed as being broadly anti-inflationary.
The opinions were also expressed that the risks were more
symmetrically distributed compared to the previous meeting and
that the external forecast risks could now be found on both the
upside and the downside.
The Board discussed the risks of the forecast. The main
downside risks to inflation included unused production capacity,
the deteriorating labour market situation, the possibility of a
slower-than-expected decrease in the credit premium, and also
the recent appreciation of the exchange rate. The upside risks
considered included the lagged effect of the previous
depreciation of the exchange rate, rising unit wage costs, and
the possibility of a correction in food and commodity prices,
which can be highly volatile.
In this context, the Board discussed some issues related to
monetary policy transmission. It was considered whether it was
realistic to assume that the depreciation of the currency would
be reflected in domestic prices with a longer lag or whether it
was more likely that the weak exchange rate had merely moderated
the fall in tradables prices. It was said repeatedly that an
important assumption of the forecast was that of gradual
convergence of short-term market rates towards monetary policy
rates. It was said that this assumption might be limited by an
only slowly falling risk premium. On the other hand, the effect
of fiscal policy on long-term rates was already observable. It
was also said that a reduction in monetary policy rates was
desirable notwithstanding the hampered monetary policy
transmission.
The Board went on to examine the growth outlook for the
Czech economy. The growth sources that would lead to renewed GDP
growth were discussed. The Board agreed that there were numerous
uncertainties surrounding the growth forecast and that a key
factor would be the speed and intensity of the external
recovery. It was said that in the logic of the new forecast the
recovery should be driven over the forecast horizon by
investment, a hypothesis which would be confirmed only if a more
robust recovery were to occur abroad. It was said several times
that the forecasted recovery was very modest. Consequently, the
domestic economy would reach its 2008 level only gradually,
hence no major demand-pull inflation pressures could be expected
over the forecast horizon. The role of consumption was
identified as another important factor of the recovery. It was
said repeatedly that the new data on higher-than-expected
consumption growth pointed to a stabilising role of consumption
and suggested that households were compensating for falling
wages by means of transfers and savings. However, the opinions
were also expressed that the rising unemployment and the lagged
impacts of the fall in GDP on the labour market might negatively
affect consumption in the quarters ahead.
Given the large influence of external developments on the
new forecast, the Board also discussed the global situation. It
was said several times that the external forecasts predicting a
relatively rapid rebound might be overly optimistic. The factors
mentioned as possibly leading to a less optimistic outlook
included the existence of spare production capacity, for which
new uses would need to be found, the potential impacts of fiscal
restrictions in countries ending their expansionary response to
the crisis, and the potential restrictive impacts of the
termination of use of unconventional monetary policy instruments
by some central banks. In this context, it was discussed whether
the exit from quantitative easing might have a bearing on prices
of oil and other commodities. It was said that these prices
might fall and that this possibility presented a downside risk
to inflation with regard to the forecast. On the other hand, the
opinion was expressed that the external recovery might also come
sooner than predicted in the new forecast. In this context, it
was also said that given the causes of the current crisis, which
had included excessively easy monetary policy on the part of
some foreign central banks, the monetary policy approach might
change in the future, leading in the longer run to higher
foreign rates.
At the close of the meeting the Board decided unanimously to
lower the CNB two-week repo rate by 0.25 percentage point to
1.25 percent, effective 7 August 2009. At the same time it
decided to lower the discount rate and Lombard rate by the same
amount, to 0.25 percent and 2.25 percent respectively. Governor
Tuma, Vice-Governor Hampl, Vice-Governor Singer, Chief Executive
Director Holman, Chief Executive Director Rezabek, Chief
Executive Director Tomsik and Chief Executive Director
Zamrazilova voted in favour of this decision.
(Reporting by Mirka Krufova)
