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 September situational report, assessing the new information and risks associated with the July forecast. It was stated during the presentation that the latest figures on inflation were slightly lower than the forecast predicted. The prices of food had a substantial impact on the situation. Only import prices deviated upwards from the forecast. This, however, was probably only a temporary swing, and import prices should have more of a disinflationary effect during the period of monetary transmission. The components of inflation stabilised during the past three months. The GDP growth data corresponded to the July forecast, though the figures for the specific components showed some deviations from the forecast. For example, household consumption was more dynamic than predicted, while net export was less dynamic in comparison with the forecast. The new balance of payments data were in line with the higher dynamics of household demand and the weak dynamics of demand in Germany. The Czech economy was now going through a phase of stable inflation and growth pulled by domestic demand.

Following the presentation, the Board turned to a discussion on the actual distribution of risks in relation to the July forecast. It was said repeatedly that the risks were distributed evenly in September on both sides of the forecast and that they were weaker than in August. It was mentioned that low inflation formed downward inflation expectations and that this change in expectations contributed to stabilising inflation at a lower level. One view also expressed that the extensive structural changes in the economy would increase the effectiveness of production and competitiveness in services, and in turn, to reducing any potential cost inflation pressures. It was also stated that the character of unemployment could contribute to easing inflation pressures.

The Board focused on the issue of external disequilibrium. Members agreed that the external imbalance could be caused by structural factors as well as the dynamics of domestic demand and that it was important to carry out a more detailed empirical analysis of the situation. The Board would take up this matter again in October when a more detailed analysis was available. A view was also expressed that the problem of the external imbalance - if pulled by domestic demand - should be accounted for when setting fiscal policy, because monetary policy was very limited in its means to react to this disequilibrium.

The Board analysed the possible effects that the fiscal reform underway at this time could have on monetary policy. It was stated that expectations of certain reform steps could affect the decision-making of households, which could, for example, speed up the purchase of goods before potential tax adjustments were made or set up building savings prior to the considered change in conditions. It was mentioned that the currently more lenient position toward the original aims of the reform was a medium-term inflation risk. It was repeated several times that attention should be paid in particular to the content of the reform and whether or not it supported medium-term sustainable development for public finances. The suggested reduction in the deficit alone within a period of three years was nowhere near sufficient enough to ensure sustainable macroeconomic development.

The Board then discussed the results of the analysis devoted to household credits. It was said that banks paid a sufficient amount of attention to emerging risks. It was also mentioned that the dynamics of rising household credits could be a factor that would start to affect the economic cycle from a macroeconomic standpoint, because private consumption was a substantial source of growth. It was also said that the dynamics of household credits changed the structure of financial assets and liabilities, and this could make the economy react more to interest rate changes.

At the close of the meeting, the Board decided unanimously to leave the CNB two-week repo rate unchanged at 2%.

Author of the Minutes: Kateřina Šmídková, CNB, Adviser to the Board

Comments are welcome on the following email address: Katerina.Smidkova@cnb.cz