Minutes of the Board Meeting on 25 November 2004
Present at the meeting: Z. Tůma (Governor), O. Dědek (Vice-Governor), L. Niedermayer (Vice-Governor), M. Erbenová (Chief Executive Director), J. Frait (Chief Executive Director), P. Racocha (Chief Executive Director), P. Štěpánek (Chief Executive Director)
The Board opened the meeting with a presentation of the November situational report, assessing the new information and risks associated with the October macroeconomic forecast.
Year-on-year CPI inflation reached 3.5% in October, whilst the CNB forecasted 3.2% growth. This moderate deviation was caused by an error in the forecast for food price inflation. Developments in the remaining price areas were in line with the forecast. Adjusted inflation, excluding fuel, matched the forecast exactly. Fuel prices were growing at a slower rate than the CNB had expected. Regulated prices, on the other hand, registered slightly higher growth.
The leading economic growth indicators signalled the continuation of robust recovery. The performance indicators suggested that the domestic consumption forecast had been adequately reached, nevertheless, the individual indicators of the industrial and construction sectors signalled risks of slightly lower-than-expected GDP growth in Q3 and Q4 2004. Developments on the labour market were in line with the forecast for wages as well as employment. There was uncertainty related to meeting the forecast assumption of higher wage growth in the non-corporate sector in 2005.
Following the presentation of the situational report, the Board turned to a discussion of the risks associated with achieving the October forecast in relation to inflation as well as the remaining key macroeconomic indicators. The Board agreed that there was no reason for reassessing the macroeconomic situation. The Czech economy sustained a low-inflation environment. There were no immediate risks of demand inflation pressures. However, these risks could emerge with the gradual closing of the output gap. Forecast risks were asymmetrically distributed over time. While the short-term risks associated with cost factors were rather pro-inflationary in nature, in the medium-term risks associated with demand effects were headed in an anti-inflationary direction. Some members expressed the view that the overall risks were deviating in a pro-inflationary direction.
The Board discussed the deviation in food prices from the forecasted values. Even though the predicted decline in food price dynamics occurred, from a quantitative standpoint, the forecast was not achieved. Specifically, in monthly terms, a food price decline was predicted, however in reality, these prices merely stagnated. There was consensus that the importance of the figures for one month should not be overestimated. Moreover, food prices were a volatile and difficult-to-forecast item. Nevertheless, similarly to the food prices, the forecast of a decline in agriculture producer prices was not entirely fulfilled. Some members expressed a view that the October forecast underestimated the importance of the structural change on this market in connection with the Czech Republic's EU entry. Therefore, food price development could represent a pro-inflationary risk. However, the link between the development of agriculture producer prices and food prices would not have to be so tight. The Board would continue monitoring this issue closely.
Industrial producer price development was also perceived as a pro-inflationary risk, as well as the potentially faster transmission of import price changes into final prices. This was related to oil prices, because the projection of its future prices has been adjusted upwards in comparison to the forecast assumption. This could pose inflationary risk to the forecast that was offset partially by the weaker-than-expected dollar exchange rate. Conversely, the weaker-than-expected German data posed an anti-inflationary risk. The euro appreciating vis-à-vis the dollar was also a potential risk as far as the external demand for European goods was concerned. A slowdown in Europe would have a negative effect on exports and investments.
The Board discussed monetary conditions, which were moderately tighter against the forecast, especially due to the exchange rate component. The board members agreed that there were no fundamental reasons that could lead to a significantly stronger Czech koruna vis-à-vis the euro in comparison to the forecast. In line with the approved strategic documents, the CNB was prepared to cooperate actively with the Government on eliminating any privatisation effects on the exchange rate.
At the close of the meeting, the Board decided to leave the CNB two-week repo rate unchanged at 2.50%. All seven board members present voted in favour of this decision.
Author of the minutes: Martin Cincibuch, Adviser to the Board
Comments are welcome on the following email address: Martin.Cincibuch@cnb.cz