Minutes of the Bank Board Meeting on 26 October 2000
Present at the meeting: Josef Tošovský (Governor), Oldřich Dědek (Vice-Governor), Zdeněk Tůma (Vice-Governor), Miroslav Hrnčíř (Chief Executive Director), Luděk Niedermayer (Chief Executive Director), Pavel Racocha (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)
The Board opened the meeting with an assessment of current economic and monetary developments. It was expressed that the new data and analyses had not significantly changed the overall economic outlook, i.e. continued recovery in an environment of relatively low inflation. The economy had been experiencing discontinuity on the supply side. Although the external cost shock was deeper and had been lasting longer than originally expected, according to CNB assumptions, this should only be temporary in nature. Monetary policy reaction to the primary cost shock would be counterproductive. However, more attention must be focused on the events signalling the shock's secondary effects (especially wage negotiations).
Board members closely examined the relations of actual and potential output growth and how monetary policy would react to developments in this area. The Board agreed as a whole that the real GDP growth rate would be situated more in the upper band of the CNB's current forecasts (this year between 1.8% and 2.8%, and next year between 1.5% and 3.5%). Nevertheless, according to some signals on the supply side of the economy, this increase in economic growth would not generate any inflationary risks. It was expressed again that maintaining low, more stable interest rates in nominal terms had helped stimulate sustainable growth this year. Board members, nonetheless, were fully aware of the fact that the present rates had been set in a period of declining recession. The Board said that the recent strengthening of the exchange rate had caused some tightening of monetary conditions.
The Czech Republic's foreign trade results for August, together with continued growth in energy raw materials and the impact of a strong dollar, had caused a rise in this year's trade deficit estimate to CZK 130 billion. Although prices played a predominant role in the high deficit, more concrete evidence for the deficit had recently started to surface, e.g. the worsening import/export ratio expressed in real terms. The expected slowdown in growth for the European economies could also have a negative impact in this area.
A large-volume transaction on the foreign exchange market was responsible for the koruna's strengthening against the euro during the past few days. However, attention was drawn to the fact that, in the present phase of completing state share privatisation, this distinct type of divergence could occur again, and even possibly lead to new exchange rate levels. The CNB would carefully monitor and analyse any developments in this direction.
As in the last meeting, the Board once again focused its attention on public finances. It was said that the expected growth of the structural deficit, around 1 p.p./GDP annually, (i.e. the deficit adjusted for its cyclical element and the one-time income and expenses relating to transition) would not be sustainable in the long run. Therefore, the results of the Czech Government's assessment of the medium-term fiscal outlook would be especially important for the Board.
The future of public finances had been complicated by the need to deal with two problematic areas. Revision of the structure of budget expenditures was the first area of concern. This meant making expenditures sustainable in relation to income. The second area was concerned with preventing the emergence of pro-cyclical fiscal policy. This type of fiscal conduct would encourage imbalance, excessive internal demand and a rise in inflation. While discussing these issues, the Board pointed to the danger of reverting back to pre-1997 developments, where expansive fiscal policy and inert fiscal policy in relation to the imbalance significantly contributed to the subsequent monetary crisis. Theory and practice have shown that some form of government action would be the most appropriate way to minimise these risks. However, in the absence of corrective measures, it is the central bank's responsibility to employ monetary measures - though it would only be the second best response in this particular case.
Financial market developments, as illustrated on the implied interest rate curves, had indicated a clear shift in market inflation expectations. Nevertheless, inflation analyses and forecasts did not sufficiently justify such expectations. According to CNB predictions so far, net inflation at the end of 2001 would fluctuate around the mid-point of the announced inflation target (an increase of 2%-4%), though temporarily higher in the first half of the year. The structure of inflation would experience a substantial change: while its emphasis at this time was on the primary consequences of the rise in energy raw material prices, in 2001, net inflation would mainly be affected by recent developments in the area of consumer and producer prices.
After reviewing the situational report, the Board decided unanimously not to change the setting of monetary policy instruments and to leave the CNB two-week repo rate at its current level.
Author of the Minutes: Petr Krejčí, CNB, Adviser to the Governor
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