Minutes of the Board Meeting on 30 June 2005

Present at the meeting:

Z. Tůma (Governor), L. Niedermayer (Vice-Governor), M. Singer (Vice-Governor), J. Frait (Chief Executive Director), R. Holman (Chief Executive Director), P. Řežábek (Chief Executive Director)

The Board discussed the June situation report, which analysed the new statistical data and assessed the risks associated with the fulfilment of the April macroeconomic forecast.

In May of this year, the consumer price index had recorded a year-on-year rise of 1.3%, as compared to the 1.1% expected by the CNB. The deviation from the forecast had been due primarily to higher growth in food and fuel prices. The faster growth in fuel prices than forecasted by the CNB reflected higher world oil prices than those considered in the reference scenario of the April macroeconomic forecast. The deviation in food price inflation was due to large seasonal swings, in this case chiefly in fruit and vegetable prices. Adjusted inflation excluding fuels in May had moved in line with the forecast (rising by 0.9 year on year, compared to the expected 0.8%). Annual industrial producer price inflation in May had also been consistent with the forecast. The decline in agricultural producer prices in May had conversely been larger than expected by the CNB.

Year-on-year GDP growth had been 4.4% in 2004 Q1, slightly exceeding the CNB's forecasts. The individual items within the economic growth structure had deviated from the forecast. Real exports had been better than forecasted, whereas imports had been worse. The result was a lower-than-forecasted real net export deficit. Gross fixed capital formation and consumption of households and general government had conversely lagged behind the forecast assumptions. The highest growth in value added in Q1 had been in the services sector, whereas industry and the economy as a whole had recorded a slowdown in value added growth. There had been a further improvement in labour productivity in the same period. However, the corporate financial indicators had worsened somewhat. Employment and unemployment were in line with the CNB's expectations. Wage growth was more subdued than forecasted by the CNB.

After the presentation of the situation report, the Board assessed the risks to the fulfilment of the April forecast. The board members agreed that the monetary conditions were not diverging significantly from the forecast. The new data on the economy essentially confirmed the April macroeconomic forecast, and the current interest rate settings were consistent with the forecast.

During the assessment of the upside risks to inflation, the main emphasis was put on growth in world oil prices, whose future dynamics and implications should not be underestimated, among other things, in relation to the development of the dollar exchange rate. In the discussion of the downside risks to inflation, particular attention was drawn to the low growth outlook in the euro area countries.

The Board agreed that the individual risks generally had only a slight quantitative impact on inflation and interest rates going forward. The risks were currently broadly balanced and were not generating any major signals for a change in monetary policy rates. Within this broad consensus, the opinion was also expressed that the downside risks might prevail in the future - in addition to the pessimistic outlook for external economic growth, attention was drawn to the potential future slackening of domestic growth signalled by the leading indicators, the slowing pace of investment activity and the less positive financial results in the corporate sector. However, it would be possible to assess the seriousness of these risks only in the light of new economic figures, and no monetary policy response was necessary at present.

In its discussion of the risks, the Board then turned its attention to two sets of problems: fiscal issues and the economic growth structure. As regards fiscal developments, the Board agreed that despite the favourable state budget results for the first half of 2005 it was still necessary, with regard to the CNB's macroeconomic forecast, to view the full-year fiscal expenditure level as a risk acting in both directions. The structure of domestic economic growth was also discussed in more detail. Although the aggregate growth in real GDP in 2005 Q1 was broadly in line with the CNB's forecasts, there had been a slowdown in investment growth, with the current growth being driven chiefly by exports. To what extent the present economic growth was sustainable in these circumstances, and how the changes in the growth structure would affect the economy's potential, were therefore a matter for further analysis. In this context the sustainability of the favourable current account development was also discussed.

After discussing the situation report, the Board decided unanimously to leave the two-week repo rate unchanged at 1.75%.

Author of the minutes: Vladislav Flek, Adviser to the Board

Please send any comments to the author at: vladislav.flek@cnb.cz