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CNB > Monetary policy > CNB Board decisions > 2004 > 26 February 2004

Minutes of the Board Meeting on 26 February 2004

Present at the meeting: Zdeněk Tůma (Governor), Oldřich Dědek (Vice-Governor), Luděk Niedermayer (Vice-Governor), 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 assessing the new information and risks associated with the January forecast.

Consumer prices rose in January at a slightly faster pace than predicted in the January forecast. This was especially due to regulated prices and the influence indirect tax changes had on them. Adjusted inflation was also slightly higher than the forecast. Food prices, however, rose at a slower pace, and net inflation fluctuated near the forecast level. Industrial and agricultural producer prices in January were higher than the prediction for Q1 2004.

There were no real discernible quantitative shifts in the external environment against the assumptions of the January forecast. In Germany, the estimate of CPI inflation was slightly reduced. The higher forecast for oil prices on world markets was, in principle, offset by a stronger CZK exchange rate vis-à-vis the dollar. The dollar exchange rate vis-à-vis the euro substantially weakened against the forecast assumptions.

The December figures on the real economy indicated favourable developments in industrial production, construction and retail sales. M2 growth accelerated, and relatively rapid lending growth continued. According to preliminary data, the 2003 public budget deficit was substantially lower than the Ministry of Finance expected. The trade deficit for 2003 corresponded to the forecast. However, the current account for the balance of payments ended with a higher deficit, reflecting, in particular, the impact of reinvested profit in the balance of incomes. Developments on the labour market in January were in line with the forecast.

Following the presentation of the situational report, the Board turned to a discussion of the current distribution of risks associated with the January forecast. Overall, the risks were perceived to be slightly pro-inflationary in nature. Some board members considered the risks to be more or less balanced in the horizon of the most effective transmission.

Similar to the January situational report, a considerable amount of attention was devoted this time to the planned tax corrections. It was mentioned that the ambiguous situation surrounding the changes in indirect taxes increased overall uncertainty, which could unfavourably affect rising inflation expectations, and in the end, even future inflation. However, it was argued that, from the budgetary standpoint, the overall financial effect of changes was essentially clear. In the medium run, this would mean neutral operations as far as income was concerned. Fiscal development was discussed even in context with a lower-than-expected public budget deficit in 2003. It was repeatedly stated that there was a risk of using a more favourable starting position for relaxing the originally assumed speed and scope of fiscal consolidation. In the same way, some expenditure measures compensating for changes in VAT could generate an additional deficit tendency for the medium term.

The dynamics of credit formation was indicated by some board members as another possible inflation risk. On the other end of the scale, however, attention was focused on global economic development and the situation on the labour market. From the standpoint of external economic development, the Board agreed that acceleration of economic growth in the Czech Republic was strongly tied to recovery abroad. Any delay in this recovery presented a downside risk, especially if this development were combined with a decline in FDI inflow to the Czech Republic. During the discussion on the labour market, it was said that real wage development this year would be mostly moderate according to a number of indicators, and it could offset to a certain extent the accelerated dynamics from the previous year. The Board also discussed the long-term trends on the labour market leading to the premise that the structural level of unemployment in the Czech economy could rise, and as a consequence, present a serious problem for macroeconomic development.

The Board also discussed in detail the issue of the external imbalance in relation to publishing figures on the balance of payments. The current account deficit for 2003 exceeded 7% of GDP. It was stated that the deficit would be cut in half after accounting for the effect of reinvested profit, which was automatically financed in the balance of payments as FDI. It was also pointed out that, despite this fact, the overall current account deficit was still rather high and the supply side of the economy, strengthened in the past by foreign investments, should try to at least partially offset these deficit pressures with a favourable trade balance.

At the close of the meeting and following the discussion on the situational report, the Board decided unanimously to leave the CNB two-week repo rate unchanged at 2%.

Author of the Minutes: Vladimír Bezděk, Adviser

Comments are welcome on the following email address: Vladimir.Bezdek@cnb.cz