July 4 (Reuters) - Following is the full text of the minutes
from the Czech central bank (CNB) governing board's June 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 fourth
situation report assessing the newly available information and
the risks associated with the fulfilment of the May forecast.
The risks to inflation were assessed as being on the upside
overall, as most of the information available at the time the
situation report had been prepared had been moving in this
direction. At the same time, though, it was said that if the
exchange rate were to stay at its current strong values it might
offset these upside risks. Developments in the euro area were
acting in the inflationary direction via the expected path of
one-year Euribor rates. Rising prices of oil and - among the
domestic factors - faster-than-forecasted wage growth were also
acting in the same direction. The downside risks to inflation
were concentrated in the exchange rate and in
slower-than-expected growth of the domestic economy. Moreover,
there was considerable uncertainty about whether the current
strong appreciation was a temporary or permanent phenomenon.
After the presentation of the situation report, the Board
discussed the risks. The current situation was assessed as being
difficult as regards monetary policy decision-making, and the
Board agreed that the inflation risks remained balanced to
moderately inflationary.
The Board's discussion began with a description of two
extreme but plausible future scenarios. In the first scenario,
the central bank would leave interest rates unchanged and the
upside risks would materialise, with an exchange rate correction
occurring, wages facing upward pressure and inflation
expectations rising. This could result in problems hitting the
inflation target at the monetary policy horizon. In the second
scenario, the central bank would raise interest rates, but the
upside risks would fail to materialise and the exchange rate
would remain at a strong level or strengthen even further. This
situation could lead, via the exchange rate channel of the
transmission mechanism, to an undershooting of the inflation
target and an inappropriate reduction in economic growth at the
monetary policy horizon.
However, it was said in the ensuing discussion that the most
likely outcome would be somewhere between these two scenarios.
Opinions differed on whether the future path might lead in the
inflationary or anti-inflationary direction. Generally higher
inflation in the global economy and rising commodity prices were
mentioned as upside risks to inflation. A tightening in the form
of a rate increase would be necessary only if domestic inflation
expectations were to rise. The opinion was also expressed that
the upside effect of the external environment was not a central
theme of current monetary policy decision-making.
In the subsequent debate about inflation expectations, it
was said that a period of high inflation and of waiting for an
appreciation to materialise can lead to volatility of inflation
expectations. It was also said that the stability of inflation
expectations could be disturbed by the expected rise in
inflation in the coming months due to the additional one-off
effects of the increase in excise duty on tobacco products and
growth in natural gas prices. On the other hand, it was said
that inflation expectations are not derived by economic agents
solely from inflation and are also directly influenced by the
exchange rate. The hypothesis of rising inflation expectations
was supported by mention of the shape of the interest rate path
expected by the financial market, which differed considerably
from the implied interest rate path of the May forecast. This
argument, however, was questioned by reference to the strong
effect of current data on market expectations. In this context,
it was also mentioned that given the current exchange rate
trend, the implied interest rate path of the August forecast
might be even lower than that of the May forecast.
In the discussion of the upside risks to inflation, it was
then said that the observed evolution of wages might only be a
virtual upside factor, since adjusted for one-off effects wages
had not risen as fast in the first quarter of this year as
expected in the May forecast. It was said that the nature of the
wage trend would be made clearer by the second-quarter figures.
The inflationary assessment of the effect of expected foreign
interest rates was labelled as equally problematic. The interest
rate differential channel underlying this effect assumes
precisely the opposite exchange rate trend compared to the
current observation. The opinion was also expressed that
although the current evolution of adjusted inflation excluding
fuels might be a cause for some concern, it was emerging behind
the peak of the business cycle, which, according to the revised
GDP growth figures, had occurred back in the first quarter of
last year. The current high annual growth could therefore be
attributed to the jump in inflation in January this year, and
adjusted inflation excluding fuels was already falling in
quarter-on-quarter terms.
The Board agreed that the current evolution of the exchange
rate was a major anti-inflationary factor. It was said that the
exchange rate had recorded its highest-ever nominal year-on-year
appreciation and it was repeated several times that if this
situation were to continue it would inevitably have impacts on
inflation and economic growth. In this context, the experience
of the similar appreciation wave in 2001 and 2002 and the
subsequent response of the economy were discussed at length. It
was argued that the current situation was not qualitatively
different from that in 2001 and 2002. On the other hand, the
opinion was also expressed that the external environment was
more inflationary.
There was broad agreement that the impacts of the
appreciation on prices and real economic activity would show up
mainly at the end of this year and the beginning of the next. It
was also said that, moreover, the effects of previous interest
rate increases should also start to appear at this time. It was
said that signs of a decline in real economic activity were
already being observed, in the form of a decrease in
quarter-on-quarter GDP growth, a sharp slowdown in investment
activity, a fall in vacancies and slowing money supply growth.
Another downside factor mentioned was the expected evolution
of real economic activity abroad, as the view of future economic
growth in Germany and the EU-15 as a whole was currently being
revised.
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)
