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 an assessment of the newly available economic data. January price figures had not confirmed previous concerns about January's revaluation negatively affecting inflation. Adjustment of the inflation indicators to the new consumer basket, potentially leading to higher inflation expectations, had not transmitted any inflationary impulse. Therefore, no correction of the economic outlook was needed. In the absence of these two inflationary risks, net inflation at the end of 2001 would be situated in the lower half of the target according to the latest forecasts. A survey conducted by the CNB clearly indicated a decline in inflation expectations. This decline was also implied, to a certain extent, by a drop in the long end of the yield curve, reflecting, in turn, market expectations on the central bank's future actions.
The January data on the real economy corresponded to expectations. Aggregate demand had slightly exceeded aggregate supply. This lead was reflected in the trade deficit, financed by the inflow of foreign direct investment. Economic recovery had been gradual. Sales in the sectors had been developing at different rates, which signalled the continuation of structural changes. A slower employment decline could imply gradual narrowing of the output gap. For the time being, though, wage-cost pressures were not a threat to inflation developments. Industrial producer prices rose slower in contrast to the original assumptions of their growth rate. In addition, the effects of the external cost shocks were fading away.
After assessing the new economic data, the Board analysed the possible monetary policy responses. According to the latest information, monetary policy's priority target had been secured. January figures, coupled with a slight appreciation trend in the koruna exchange rate, had increased the likelihood of net inflation being in the lower half of the inflation target at the end of the year. The slow recovery in economic growth - along with the assessment of other indicators - had suggested that lowering rates might be an appropriate monetary policy response.
In contrast to this proposal, leaving rates at their current level was also considered. A view was expressed that the growth dynamics of the economy had now exceeded potential growth according to analyses and had already caused the output gap to gradually narrow. Closing up of the output gap could interfere with the effect of monetary policy easing. The low level of real deposit rates was another argument given. Attention was given to public sector finances. The fiscal deficits were significant in the formation of a macroeconomic framework. New information suggesting an additional demand impulse was grounds for concern.
In this context, board members discussed the flexibility of the central bank's instruments. It was expressed that some of the risks given as arguments for not changing the rates were medium-range in nature and that it would be appropriate to react to them as they actually show up in the inflation forecast. The duration of monetary transmission was mentioned as a significant factor. Attention was also given to the yield curve, whose longer end had lowered recently. A change in the shape of the yield curve meant that monetary conditions would be eased. The Board discussed the impact that a change in the repo rate could have on the shape of the yield curve. The outcome depended on whether or not the repo change was anticipated by financial markets.
The Board focused a part of their discussion on the exchange rate. It was mentioned that the koruna had once again exhibited a slight appreciation tendency, which was visible in the effective nominal exchange rate and real exchange rate. With the exception of this tendency, possibly corresponding to productivity growth, the exchange rate in upcoming years would be influenced by capital inflow connected to foreign investment and the Government's privatisation projects. The external environment should also experience changes. After an interest rate decline in the USA, the effective interest rate differential increased. The Board stressed the importance of the exchange rate in influencing the domestic economy. Foreign exchange intervention is a central bank instrument that the Board is prepared to use, if the need should arise.
At the close of the meeting, the CNB Board decided to lower the CNB two-week repo rate by 0.25 percentage points to 5%. Six members voted in favour of this decision, and one member was in favour of leaving rates at their current level. The Board also agreed unanimously to lower the discount rate to 4% and the Lombard rate to 6%. The discount and Lombard rates would continue to change in proportion to the repo rate. However, the Board reserves the right to deviate from this rule in exceptional cases. In this particular arrangement, the discount and Lombard rates lose their signalling capacity in monetary policy.
Author of the Minutes: Kateřina Šmídková, CNB, Council of Advisers
Comments are welcome on the following email address:Katerina.Smidkova@cnb.cz