Minutes of the Bank Board Meeting on 26 April 2001
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 April situational report on economic and monetary development had not changed the CNB's outlook on overall monetary and macroeconomic developments. Net inflation and consumer inflation were expected to be stable this year with a slight increase in 2002. The anticipated rise in inflation, consistent with the announced inflation target, was based on the assumption of a gradually closing output gap.
Closing of the output gap should have an effect on employment. This should, in turn, generate a slight rise in wage inflation pressures (i.e. growth in nominal unit wage costs). Although nominal unit wage costs were not a serious concern from the standpoint of rising inflation, wage development would, nevertheless, cease to be an anti-inflationary factor. The report had also anticipated a gradual change in the structure of price movement. The cost effect of import price growth should die out this year. In 2002, import prices should have a stabilising effect on inflation.
Internal and external factors would affect economic growth in a contradictory fashion. As for external factors, the CNB was expecting a decline in the dynamics of foreign demand. In this respect, the report indicated that the slowdown in economic growth for the Czech Republic's main business partners could not be entirely linked to the recent deterioration of the Czech Republic's trade balance. A more detailed structural analysis of foreign trade indicated that the worsening deficit in past months had been mainly caused by structural changes in the Czech economy and dynamic investment growth. However, the anticipated slowdown in foreign demand could have a negative impact on domestic economic growth in the future. This had been reflected to a certain extent in the CNB's forecast.
The analyses of the national accounts did not indicate that the rise in stocks for the last quarter of 2000 had been caused by a decline in foreign demand. Despite stock growth, the turnover period had been reduced. This confirmed that the increase in stocks was not disproportionate.
As for internal factors, there had been more and more concrete signs of continuing or moderately accelerating economic growth. An increase in industrial and construction production, the unemployment decline and the latest information on the structure of the trade balance had all indicated a rise in investment activity. There had also been a gradual increase in real disposable household income, which should stimulate consumption. While real disposable income declined in 2000, a moderate increase was to be expected this year.
A considerable part of the April situational report focused on the disturbing developments in public finances. An analysis of budgetary performance pointed to the risk of overestimating privatisation revenues this year. In the discussion to follow, emphasis was put on the acute danger that fiscal policy would behave in a pro-cyclical manner, implying in turn, a rise in the structural deficit of public finance.
In a discussion on the inflation forecast, board members warned against the risks of higher or lower price growth than was originally stated in the forecast. It was expressed that underestimating or overestimating the inflationary risks associated with wage developments depended to a high degree on the future growth of labour productivity. The estimate of labour productivity growth, though, was also uncertain. Another view suggested that the weight of unit wage costs in the total costs of enterprises would most likely be overestimated, and that factors other than wages must be considered when assessing cost-push inflation. Despite the relatively strong real appreciation of the exchange rate, measured by unit wage costs, the competitiveness of tradable goods would not be compromised. Therefore, it could be indirectly inferred that the wage increase in the tradables sector had been offset by other cost factors.
It was expressed during the discussion that comparison of the current macroeconomic situation with the situation in the mid-1990s had revealed substantial qualitative differences. The external deficit was currently structural in nature, and a rise in the import of technologies was expected to improve the competitiveness of the economy. However, the dynamics of the deteriorating current account balance had given reason for concern.
Contrary to past meetings on the situational report, current exchange rate developments were not a topic of discussion at today's meeting.
At the close of the meeting, the Board decided unanimously (with all seven members voting) to leave the CNB two-week repo rate at its current level.
Author of the Minutes: Tibor Hlédik, CNB, Council of Advisers
Comments are welcome on the following email address: Tibor.Hledik@cnb.cz