Dec 23 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's December 16
monetary policy meeting, released on Wednesday.
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 eighth
situation report assessing the new information and its effect on
the fulfilment of the risks of the November macroeconomic
forecast. The new situation report assessed the risks in
relation to the forecast overall as being moderately
inflationary. The main upside risks to inflation were the higher
inflation observed in November and the near-term outlook for
inflation, as well as a slightly weaker exchange rate. Roughly
half of the deviation of actual inflation from the forecast had
been due to higher fuel prices, linked with an increased outlook
for oil prices, while the other half had been due to higher
adjusted inflation excluding fuels. The main downside factor, by
contrast, was a change in the external outlook, in particular an
assumption of lower foreign market interest rates.
After the presentation of the eighth situation report, the
Board discussed the new information and the risks to the
fulfilment of the November forecast. Most of the board members
agreed that the new information had not convinced them of the
need to change their opinion regarding the interest rate
settings, despite the persisting high level of risk. Those board
members who were in favour of lowering interest rates emphasised
the assumption of the forecast in the seventh situation report
about the need for lower market rates. The non-reduction of
interest rates at the last monetary policy meeting had led to a
situation where market interest rates were currently higher than
forecasted and had been for some time. The advocates of
unchanged interest rates conversely pointed out that, in
addition to the arguments for leaving rates unchanged that had
been made during the discussion of the forecast in the seventh
situation report, the economy was now seeing some upside risks
to inflation. It was also mentioned that despite the higher
differential between market and reference rates in the Czech
Republic, market rates were now at a historical low, and that
when rates are so low the economy cannot function in the long
term without developing major imbalances. Against this, however,
it was said that no risks of imbalances or impacts on financial
stability were apparent so far from the available information
and analyses.
In the context of the interest rate settings, the Board
discussed the size of the market interest rate differential
between the Czech Republic and the euro area. The Board agreed
that the effective market interest rate differential was larger
in reality than suggested by the difference between repo rates.
However, the individual board members differed in their
interpretation of the monetary policy implications of this
differential. On the one hand, it was argued that a reduction of
interest rates was desirable since it would allow the interest
rate differential to decrease. On the other hand, it was
mentioned that the high market interest rate differential
reflected certain non-standard monetary policy measures of the
ECB, and that given the announced gradual abandonment of these
measures it would tend to disappear of its own accord. In
addition, it was said that the higher differential reflected the
current higher risk premium in the Czech Republic. Against this,
some of the board members expressed doubts that the ECB would be
willing to abandon these non-standard measures in the
foreseeable future.
The Board also spent quite some time discussing the labour
market, where, among other things, there had been surprisingly
rapid growth in the average wage and a faster decline in
employment in the national economy. It was mentioned that part
of the deviation of faster-than-forecasted average wage growth
was probably due to a change in the employment structure, with
low-wage and high-sickness-rate employees being laid off first.
Also mentioned was the discrepancy between average wage growth
according to the Czech Statistical Office and growth in the
nominal hourly wage according to the Ministry of Labour and
Social Affairs, which was substantially lower. Likewise, there
was a contradiction between the growth in the average wage and
the decline in the total volume of wages in the national
economy, even taking into account the year-on-year fall in total
employment. The prevailing view was thus that the labour market
data were not indicating any major upside risks to inflation
overall.
The Board then discussed GDP, which had recorded a
lower-than-forecasted year-on-year decline. This deviation had
been due mainly to higher-than-expected growth in household
consumption and also to higher growth in government consumption.
It was said that the household consumption growth was not in
line with the aforementioned decline in the volume of wages.
Real household consumption growth might have been partly
affected by the unexpected fall in the consumption deflator,
which was inconsistent with the rising consumer price index and
which might be revised retroactively. With regard to the
unexpectedly high growth in government consumption, some of the
board members mentioned their concerns about easy fiscal policy,
which, given the failure to push through the fiscal austerity
package, might lead to a further escalation of inflationary
pressures. It was also mentioned that the high public finance
deficits might keep the risk premium at a higher level. Concern
was also expressed about the decline in loans provided to
non-financial corporations and about its impacts on investment
activity.
In arguing to leave interest rates unchanged, some of the
board members mentioned their uncertainty regarding the
equilibrium paths specified in the model. In this context, the
Board mainly discussed the potential future one-off decline in
production capacity, or potential output, which in a situation
of inertial aggregate demand would lead to inflationary
pressures. Against this, however, it was said that the current
evidence tended to suggest persistence of the excess production
capacity caused by the fall in demand, which was leading more
towards anti-inflationary pressures. It was mentioned that the
temporarily lower growth in potential output was already
partially reflected in the current forecast and that
considerations about a fall in potential output only had an
effect beyond the monetary policy horizon. Against this, it was
said that the one-off decline in potential output, were it
actually to occur, was in fact relevant in the short and medium
term.
For some of the board members, the main argument for leaving
interest rates unchanged was the forecast assumption of rising
interest rates over the next two to three quarters and their
unwillingness to make such aggressive monetary policy changes in
the opposite direction. In this context, some of the board
members repeated their concerns about the limited effectiveness
of monetary policy in a situation of very low interest rates.
Against this, however, it was said that monetary policy-relevant
inflation was approaching the target from below, which did not
testify to a significantly aggressive monetary policy response.
The proposed interest rate cut was, moreover, lower than assumed
by the forecast, and besides that the reduction of the market
rate outlook in the euro area would allow domestic rates to be
raised much more slowly in 2010 than assumed by the current
forecast. The prevailing view was that even if the effectiveness
of the interest rate channel of monetary policy transmission was
lower, this channel would nonetheless remain operational and
should be used as and when necessary. The belief was also
expressed that transparent monetary policy should be
anticyclical and that the point of monetary policy was to react
to economic shocks and not to smooth interest rates. If monetary
policy were to miss the right moment for lowering rates, it
would mean slower output growth and a larger undershooting of
the inflation target.
At the close of the meeting the Board decided by a majority
vote to lower the CNB two-week repo rate by 0.25 percentage
point to 1.00%, effective 17 December 2009. At the same time it
decided to lower the Lombard rate by the same amount, to 2.00%.
The discount rate was left unchanged at 0.25%. Four members
voted in favour of this decision: Governor Tuma, Vice-Governor
Singer, Chief Executive Director Tomsik and Chief Executive
Director Zamrazilova. Three members voted for leaving interest
rates unchanged: Vice-Governor Hampl, Chief Executive Director
Holman and Chief Executive Director Rezabek.
