Česká národní banka

Minutes of the Board Meeting on 30 May 2002

Present at the meeting: Zdeněk Tůma (Governor), Oldřich Dědek (Vice-Governor), Luděk Niedermayer (Vice-Governor), Michaela Erbenová (Chief Executive Director), Jan Frait (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)

The Board opened the meeting with a discussion of the May situational report. The report assessed the new information published since the inflation forecast was presented in the large April situational report.

Inflation in April developed in line with the forecast and ended close to the lower boundary of the CNB's targeted band. Fuel prices as a part of "adjusted inflation" registered higher growth than originally expected. However, the month-on-month decline in other prices offset this development, confirming the absence of any significant inflationary pressures in the economy. Producer prices also corresponded with the forecast. Import prices registered a slightly higher decline due to a strong Czech koruna.

Industrial production continued to display dynamic growth. There was, nevertheless, a slowdown in industrial sales, which was primarily connected to supplies for the domestic market. This could signal a slowdown in domestic economic activity. On the other hand, growth in retail sales pointed to steady private consumption dynamics more towards the upper half of the forecast band. On the labour market, growth in seasonally adjusted unemployment and the decline in the number of job vacancies continued. Wages in industry rose in March at a slightly slower pace than predicted by the forecast. Nominal unit wage costs in industry were, for the time being, relatively flat.

In nominal terms, the April balance of trade improved year-on-year by about CZK 10 billion. From January to April, this improvement had already reached CZK 27 billion. This indicated that the deficit for 2002 as a whole could be lower than the CNB's current prediction. Approximately 50% of this improvement was due to price effects. However, development in real terms was also favourable, especially thanks to higher export in the group of machinery and transport, which reflected the positive development on the supply side of the economy. The decline in investment imports also had some impact. This could, on the contrary, indicate a decline in domestic investment activity.

After the April reduction in the two-week repo rate, the money market registered a proportional decline in the yield curve. The cut in the repo rate prevented any sharper rises in real interest rates due to the decline in inflation and inflation expectations. From an ex ante viewpoint, real rates slightly dropped, while ex post, rates showed a slight increase only.

On the whole, the May situational report indicated that some figures published last month were headed in an upward direction compared to the April forecast, while other data were weaker than expected. Overall, though, the balance of inflation forecast risks had not changed. There was a prevalence of downward risks associated with the strong exchange rate and the potentially higher downward flexibility of tradable goods prices, which could result from longer-term persistence of the exchange rate at this level.

In the discussion following the presentation of the situational report, the Board, though, stressed that the risks of the April inflation forecast could not be perceived in the same way as during the April board meeting. The 50 basis point cut in the repo rate, at the very least, had compensated for the risk related to the spontaneous tightening of the interest rate component of real monetary conditions due to declining inflation and inflation expectations.

Even so, some of the board members argued that the CNB was still more capable of identifying the anti-inflationary risks than the inflationary ones, and hence, the balance of risks would continue in a slightly downward direction. In spite of the strong cut in interest rates, real monetary conditions were not more relaxed than before. The exchange rate remained at a strong level. Contrary to this, however, one view suggested that the risks may now be seen as balanced. Lowering interest rates corrected some of the risks. The exchange rate was stabilised, and even from a more pessimistic standpoint, the real economy data were at worst mixed in nature.

There was consensus among the board members that the trade balance figures partially reflected the previous wave of export-oriented investment and structural changes in the economy. However, it was warned that no definite conclusions could be made so far on the economy's ability to cope without interference from abrupt exchange rate appreciation. The negative impact of this strengthening was expected to surface with some delay. In this context, the decline in investment imports was also discussed. This particular development could indirectly reflect the effect of the strong exchange rate, reducing company profits and, in turn, funds for investment. A slowdown in investment activity could have a negative effect on the supply side of the economy if persistent over a longer period of time.

The Board also focused on credit growth, which at this time, mainly concerned loans to private individuals. It was mentioned that the debt financing of consumption and housing construction would start to be a significant factor not only from the standpoint of the high rate of growth, but also in terms of absolute volume. In this way, monetary policy would acquire one of the standard channels for transmitting interest rate changes to aggregate demand. Accordingly, one view expressed that the present private consumption forecast did not take the actual situation into full account.

At the close of the meeting, the Board decided unanimously to leave the CNB two-week repo rate unchanged at 3.75%.

Author of the Minutes: Tomáš Holub, Adviser to the Governor

Comments are welcome on the following email address: Tomas.Holub@cnb.cz