Nov 12 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's November 4
monetary policy meeting, released on Friday.
Present at the meeting: Miroslav Singer (Governor), Mojmir
Hampl (Vice-Governor), Vladimir Tomsik (Vice-Governor), Robert
Holman (Chief Executive Director), Pavel Rezabek (Chief
Executive Director), Eva Zamrazilova (Chief Executive Director).
The meeting opened with a presentation of the seventh
situation report containing the new macroeconomic forecast. The
Czech economy had recorded a marked upturn in annual growth in
second quarter of 2010, and a further, albeit more modest,
pick-up in annual GDP growth was expected in third quarter. A
recovery had also started to appear on the labour market, where
the annual decline in employment had moderated and the
unemployment rate had decreased in second and third quarter. The
initial inflation pressures stemming from the domestic economy
were assessed as being slight. The import cost pressures in the
consumer goods sector were weakly anti-inflationary as a result
of the recent appreciation of the exchange rate, and only
commodity prices were acting in the inflationary direction.
According to the November forecast, headline domestic
inflation would, like at present, be close to the inflation
target over the entire forecast horizon. Monetary-policy
relevant inflation, i.e. inflation adjusted for the first-round
effects of changes to indirect taxes, would keep rising over the
forecast horizon and would converge to the inflation target in
first half of 2011. Economic growth would be 2.3 percent this
year, according to the new forecast. In 2011, GDP growth would
slow to 1.2 percent, owing to fiscal consolidation, slowing
external demand growth and the unwinding of the effect of
replenishment of inventories. A renewed, more robust recovery
would occur only in 2012, when GDP growth was expected to rise
to 2.5 percent. The nominal exchange rate was appreciating
gradually over the forecast horizon. Consistent with the
forecast was stability of market interest rates close to their
current levels initially, followed by a gradual rise in rates at
the longer end of the forecast. Compared to the previous
forecast, the forecast for headline inflation was slightly lower
for 2010 and the interest rate path was lower at the longer end
of the forecast. The risks of the forecast were viewed as
balanced.
The prevailing view in the discussion that followed the
presentation of the situation report was that the current
inflation pressures were negligible, inflation expectations were
well anchored and the risks of the inflation forecast were
balanced. The majority of the board members agreed that in this
situation the appropriate monetary policy reaction was to leave
monetary policy rates at their existing level. Potentially
higher growth in world commodity prices and domestic
agricultural producer prices was identified as a weak upside
risk to inflation. Conversely, greater-than-expected
anti-inflationary effects of fiscal consolidation around the
world were identified as a weak downside risk.
The Board went on to discuss the risks that need to be
considered in relation to the stable outlook. It was said
repeatedly that uncertainty had increased sharply in several
areas in recent weeks. The main source of increased uncertainty
was the external situation, specifically the macroeconomic
decisions of central banks and governments, the hard-to-quantify
effects of changes in financial sector regulation, the absence
of pro-growth impulses and the effects of necessary fiscal
consolidation.
The next part of the discussion was focused on the
implications of the significantly increased uncertainty for
monetary policy decision-making. The prevailing view was that
given the absence of inflation pressures, the optimal monetary
policy reaction in an environment of such high uncertainty was
to leave interest rates at their existing level, since stable
interest rates would remain a factor not forming an additional
source of uncertainty for market participants. The opinion was
also expressed in the discussion that the general macroeconomic
uncertainty relating to the external environment and to
exogenous factors and their effects on the Czech economy was
such that at the present time it was impossible to rule out
virtually any domestic monetary policy actions over the forecast
horizon as regards direction and quantity.
The Board discussed the economic growth outlook in depth.
There was agreement that by comparison with the September
forecast there was greater uncertainty regarding the evolution
of domestic GDP, at least in the sense of a wider fan around the
centre of the forecast. Doubts were repeatedly expressed about
whether the GDP growth forecast of 1.2 percent for 2011 was not
too pessimistic. In support of this opinion it was said that
fiscal consolidation would positively affect the expectations of
investors and consumers, which would gradually feed through to
an increase in economic activity. It was also said that
household consumption might develop better than forecasted and
that retail sales at the end of this year would be an important
indicator of its future trend and of a potential renewal of
inflation pressures. It was also said that the rising share of
the transaction component of the money supply could be regarded
as a possible signal of private sector expectations of a more
pronounced recovery. The opinion was also expressed that in
light of the positive economic developments in the Czech
economy's trading partner nations, such as Germany, Slovakia and
Poland, much stronger external demand and a continued robust
recovery in domestic economic activity could be expected in
2011. This would be reflected in increased domestic demand, as a
result of which stronger inflation pressures than predicted by
the new forecast would start to emerge.
The Board also assessed monetary developments abroad and
their potential effects on the domestic economy. It was said
repeatedly that the new round of quantitative easing could delay
interest rate hikes in the euro area. This was creating a risk
of renewed pressures for excessive appreciation of the koruna,
which might occur in reaction to the emergence of expectations
of faster growth in domestic monetary policy rates relative to
the external economy. Investor optimism relating to continuing
fiscal consolidation and an improving balance of trade in goods
and services linked with a halt in imports relating to
investment in photovoltaic power generation this year were
identified as other potential sources of renewed appreciation
pressure. In a discussion of developments in the domestic and
external financial sectors it was said that from the domestic
perspective the current environment presented no risk to future
financial stability, as evidenced by weak growth in loans and in
the money supply.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 0.75 percent.
Five members voted in favour of this decision: Governor Singer,
Vice-Governor Hampl, Vice-Governor Tomsik, Chief Executive
Director Holman and Chief Executive Director Rezabek. Chief
Executive Director Zamrazilova voted for increasing rates by
0.25 percentage point.
(Reporting by Mirka Krufova)
