April 4 (Reuters) - Following is the full text of the
minutes from the Czech central bank (CNB) governing board's
March 26 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 second
situation report, which focused on assessing the newly available
information and the risks associated with the fulfilment of the
forecast from the first situation report. The newly available
information suggested that the risks to inflation in relation to
the February forecast were on both the upside and the downside,
but had moved towards the downside overall.
Most of the newly available data on the domestic economy
were assessed as representing upside risks to inflation.
Inflation in both January and February (annual consumer price
inflation of 7.5 percent) had been higher than expected by the
February forecast. Monetary-policy relevant inflation and
adjusted inflation excluding fuels had also been higher than
expected. Domestic economic growth had been higher than
forecasted, and the revision of the GDP figures also suggested
higher-than-forecasted growth. By contrast, the
lower-than-expected wage growth at the end of 2007 could be
termed a downside risk in relation to the forecast.
The external environment and also the current settings of
the monetary conditions were included among the downside risks.
Although some commodity prices had risen, they were not being
passed through to domestic prices, partly because the rise was
being offset by the weakening dollar. The financial crisis in
some segments of the international credit market could lead to a
downswing in European economic growth. This was giving rise to a
lower market outlook for interest rates in the euro area. The
strong appreciation of the koruna was acting more restrictively
than the forecast had predicted.
After the presentation of the situation report, the Board
began its discussion. The Board agreed that monetary policy
decision-making was difficult, because both upside and downside
risks to inflation in relation to the February forecast could be
identified. The upside risks included the possibility of the
current higher-than-expected inflation feeding through into
inflation expectations and subsequently into inflation. The
downside risks included an expected slowdown in external demand
and appreciation of the koruna exchange rate.
The Board agreed that headline inflation, and in particular
adjusted inflation excluding fuels, which was higher than the
February forecast value (at a time, moreover, of a strong koruna
exchange rate), indicated the existence of demand-pull inflation
pressures in the domestic economy. Several opinions were
expressed during the assessment of the intensity of these
pressures. It was said that the economic growth, which had been
higher than forecasted, suggested stronger upside risks to
inflation than the original presentation had indicated. It was
also said that monetary aggregate growth might also be
signalling some upside risks. But it was also mentioned that a
significant role in inflation was being played by cost factors
and food prices, which might be being affected by speculative
demand for agricultural commodities. It was said repeatedly that
a more detailed analysis of the causes of the deviation of
adjusted inflation excluding fuels from the forecast might
reduce the uncertainty at the next monetary policy meeting.
It was said during the discussion that the key factor for
monetary policy decision-making was the inflation forecast for
the monetary policy horizon, not the current inflation figure,
and that the inflation risks at the monetary policy horizon were
currently negligible. In this connection, it was said that given
the strong exchange rate of the koruna, inflation might return
to the target fairly quickly. It was said several times that the
current inflation figure represented an upside risk if it were
to feed back into inflation via inflation expectations and the
labour market. For this reason, the information provided by
labour market analyses was of key importance. This information
was currently sending out mixed signals. Wage growth had slowed
at the end of 2007 and had picked up pace again at the beginning
of 2008. The Board discussed whether this pick-up was
compensation for the 2007 slowdown - and was therefore a one-off
effect - or whether it was a more permanent trend, which would
be a signal of demand-pull inflation pressures. It was said that
only the new wage figures would clarify which alternative was
more likely.
The Board agreed that the external economy was a source of
even greater uncertainty than the domestic economy. It was
repeatedly noted that the crisis in the US financial markets and
the slowdown of the US economy could have an anti-inflationary
effect. It was said repeatedly that the European Central Bank
was currently directing its monetary policy at lowering
inflation and that the euro area countries were currently
relatively resilient to the impacts of the economic slowdown.
The Board considered whether the factors that were increasing
the resilience of the European economies to swings in the US
economic cycle by comparison with the past were permanent and
would act over the entire domestic monetary policy horizon. It
was said that the growth in the proportion of trade with Eastern
Europe and the decline in the proportion of trade with the USA
might constitute such a permanent factor.
The Board then discussed whether the US financial market
crisis had affected the exchange rate of the koruna. Some of the
opinions expressed pointed to the investment nature of the
koruna purchases and to their link with the flight from the
dollar, which was being weakened by the US crisis. But it was
also said that the exchange rate was being affected by the
interest rate differential and represented a standard part of
monetary transmission. The Board agreed that the strong koruna
exchange rate was tightening domestic monetary policy as
compared to the February forecast. The opinion was expressed
that the lowering of monetary policy rates abroad might also be
contributing to this tightening.
It was said during the discussion that it was not
appropriate to play a waiting game with the response to the
upside risks to inflation and that, at a time of increased
uncertainty regarding external developments, monetary policy
should be focused on domestic inflation factors, which were
associated with less uncertainty. It was also said that last
year's series of domestic rate increases should be included
among the uncertainties associated with the evolution of the
domestic economy, as their impact on the domestic economy was
not yet fully reflected in the data. In this context, it was
said that the February forecast expected a relatively sizeable
swing in the output gap in the second quarter, from positive to
negative values, and thus also a reduction in demand-pull
pressures.
At the close of the meeting the Board decided by a majority
vote to leave the two-week repo rate unchanged at 3.75 percent.
Six members voted in favour of this decision: Governor Tuma,
Vice-Governor Singer, Chief Executive Director Holman, Chief
Executive Director Rezabek, Chief Executive Director Tomsik and
Chief Executive Director Zamrazilova. One member voted for
increasing rates by 0.25 percentage point: Vice-Governor Hampl.
(Reporting by Mirka Krufova in Prague)
