Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2003 > 27 February 2003

Minutes of the Bank Board Meeting on 27 February 2003

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 Racocha (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)

The Board opened the meeting with a presentation of the February situational report on economic and monetary development. According to the report, actual price development had recently been slower than predicted by the CNB's forecast. It was stated that year-on-year consumer price growth in the Czech Republic was now at an historical low. However, information on possible developments in regulated prices and indirect taxes and on the current koruna exchange rate vis-à-vis the euro indicated that future price growth would tend to increase moderately against the January forecast. The inflation effects of rising oil prices, this time 10% to 15% above previous expectations, were partially corrected by the weakening dollar. The latest information on the labour market, supply and demand, the external balance and public finance corresponded, in principle, to the forecast's assumptions. Prospects for foreign demand recovery, however, had shifted once again to a later period.

Besides assessing current developments, the situational report also focused on overall economic performance for 2002. Year-on-year M2 growth at the end of the year continued to slow down and finished December at 3.2%. The only visible increase was in household lending, which rose year-on-year by CZK 40 billion. Interest rates affected the structure of deposits. In the household sector, time deposits dropped by CZK 29 billion. In contrast, deposits in building savings rose by CZK 47 billion. Koruna sight deposits and cash (M1) increased by 18.6% for the year. Deposits in foreign currencies slightly declined.

The 2002 results confirmed the ability of the supply side of the economy to cope with adverse conditions (weak foreign demand, the strong koruna exchange rate, floods, etc.). This mainly concerned industry, with a 4.8% year-on-year rise in production growth. Household consumption dynamics slowed to 2.7% despite an increase in consumer lending. Retail sales were also clearly weakened by a drop in the number of tourists. One of the most favourable results of 2002 was the substantial decline in the trade deficit - from CZK 117 billion in 2001 to CZK 74.5 billion. Still a serious problem for the Czech economy was the public budget deficit at ca 5% of GDP (adjusted for transactions that used resources not created by the economy at that time - e.g. privatisation revenues) and the deficit's expected future trend.

In the discussion to follow, board members agreed that there was no new information of a substantial nature warranting a change in interest rates. The risks relevant for monetary decision-making were distributed symmetrically. The Board assessed the preliminary information on the state of wage negotiations in the business sector as relatively favourable.

The current negative year-on-year CPI was primarily affected by exogenous factors that monetary policy could not influence directly. In particular, this concerned import prices and administrative price measures, the most substantial of which was postponement of regulated price corrections. The momentary deviation in inflation was, therefore, a natural development and was not even reflected in the decline in inflation expectations identified by the CNB´s surveys. Nevertheless, it must be said that inflation volatility triggered by the combined effects of exogenous factors was great and did not reflect monetary conditions. The current mix of anti-inflationary shocks could be exchanged once again for factors of the opposite nature.

The Board also discussed the relationship of interest rate developments in the Czech Republic to the decision-making process of the European Central Bank. It was mentioned as a reminder that the CNB's monetary decision-making was more flexible, and therefore, anticipated in advance the ECB's measures. It may also be assumed that foreign entities had already incorporated the assumption of ECB rate cuts into interest rates at the long end of the yield curve. In this context, it was expressed that breaking through the barriers of ECB rates affected the movement of portfolio capital, increased the effectiveness of foreign exchange intervention and significantly aided in stimulating consumer lending.

At the close of the meeting, the Board decided unanimously to leave the CNB two-week repo rate unchanged at 2.5%.

Author of the Minutes: Petr Krejčí, Adviser

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