Minutes of the Board Meeting on 22 December 2004

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 a presentation of the December situational report, assessing the new information and its implication for the risks associated with the October macroeconomic forecast. The newly available data indicated that the risks had now slightly moved in an anti-inflationary direction against to the October forecast.

November inflation at 2.9% was in line with the October forecast. Slight deviations from the forecast appeared in two price segments. Food prices rose at a faster pace than predicted in the forecast, and fuel prices rose at a slower pace than predicted. The last available inflation data were assessed as a moderate pro-inflationary risk.

Year-on-year GDP growth was lower in Q3 2004 compared to the October forecast. The revision of GDP data, which for the year 2004 changed the 2003 comparison base, played a crucial part in this deviation. Different in Q3 than predicted in the October forecast was the development in household consumption, which had grown at a slower pace than was expected, and the export of goods and services, which was higher than predicted. Leading growth indicators developed overall in line with the October forecast.

The Board followed the presentation of the situational report with a discussion. The board members agreed that the newly available data did not signal a significant accumulation of pro-inflationary nor anti-inflationary risks in connection with the October forecast. It was repeatedly said that the domestic economic environment was low-inflationary and that stable, low inflation helped anchor inflation expectations at a lower level, which at the same time helped to stabilise low inflation.

However, it was said that the anti-inflationary risks had begun to strengthen slightly. Domestic as well as foreign growth was slightly lower compared to original expectations, and therefore, no significant demand inflation pressures had surfaced in the economy. Owing to exchange rate development, a tightening of monetary conditions took place. In addition, a weaker US dollar compensated for the expected slight increase in import prices. There were opinions that even though the inflation outlook was favourable, some pro-inflationary risks did exist. The food price segment, in particular, revealed relatively dynamic price development. Oil prices in USD were still a potential inflation factor. Labour market development could also mean a pro-inflation risk.

The Board further focused on food price development. There was an opinion that faster price growth than was predicted in the October forecast could reflect the process of convergence of different price levels, which after EU entry, was accelerated by intensified exchange with abroad. It could also imply a change in the working assumption, according to which the speed of food price convergence was mainly determined by the growth rate of the domestic population's purchasing power, and therefore, this speed was rather slow.

The Board also focused on the recent GDP figures and revision of data. It was said that the Q3 2004 GDP figures were a factor that could reduce the future GDP growth data estimate and also the inflation forecast. It was also mentioned that economic growth was still pulled by investments, but consumption growth was significantly lower than expected. One view also expressed that the significant rise in corporate lending indicated continued economic recovery. It was repeatedly said that substantial attention should be given to a more detailed analysis of the effects of the revision of GDP data on forecasting future development.

The Board also discussed the development of credit aggregates. It was said that lending growth was rather dynamic, which was triggered by an improvement in the economy in terms of the economic cycle, a low interest rate environment, and stability of the banking sector. There was also an opinion that a fast lending growth rate in the domestic non-financial business sector could pose a risk, should the position of economy worsen in terms of the economic cycle.

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: Kateřina Šmídková, Adviser to the Board

Comments are welcome on the following email address: Katerina.Smidkova@cnb.cz