Minutes of the Board Meeting on 24 November 2005
Present at the meeting: Z. Tůma (Governor), L. Niedermayer (Vice-Governor), M. Singer (Vice-Governor), M. Erbenová (Chief Executive Director), J. Frait (Chief Executive Director), R. Holman (Chief Executive Director), P. Řežábek (Chief Executive Director).
The Board discussed the November situation report, which analysed the new information and assessed the risks associated with the fulfilment of the October forecast.
Annual inflation had risen to 2.6% in October. This rise was in line with the current forecast. As regards the structure of consumer price inflation, slightly higher-than-forecasted growth in administered prices had been recorded, offset by rather lower-than-forecasted growth in food prices and fuels. Adjusted inflation excluding fuels had been consistent with the forecast. The current rise in industrial producer prices and import prices was slightly lower than forecasted. Agricultural producer prices in September had been pretty much in line with the forecast.
The new figures on the real economy indicated no major risks to the fulfilment of the forecast, which expects third-quarter GDP growth of just under 5%. Industrial and construction output had recorded faster year-on-year growth in the third quarter. The balance of trade had shown a surplus in September, albeit a rather smaller one than the forecast had expected. Data from the labour market suggested a larger-than-forecasted rise in employment in the third quarter. However, the unemployment rate was falling only moderately, in line with the forecast. The higher demand for labour was thus not generating any decrease in the number of unemployed people. Wage growth in industry and construction had remained subdued in the third quarter.
After the presentation of the situation report, the Board discussed the risks to the fulfilment of the October forecast. There was broad agreement that the risks could be viewed as balanced. Some of the board members regarded the risks of the October inflation forecast as skewed to the downside.
The slightly tighter-than-forecasted domestic monetary conditions and low growth in import prices were described as anti-inflationary factors. It was said that the exchange rate of the koruna was diverging from the assumptions of the forecast. In the opinion of some of the board members, a continuation of this trend could have a fairly strong downward effect on inflation. Several board members also mentioned oil prices, which were at rather lower levels than the October forecast had expected. On the other hand, it was said that this deviation was not all that large and that some decrease in the price of oil had been among the assumptions of the October forecast. It was also said that the strong competition in the Czech economy may prevent the high energy prices from generating inflation pressures.
In the context of the growth in the domestic energy price level, concerns were raised about the negative income effect. The consequence of this is that higher energy prices reduce households' real income and thus curb consumer demand. The argument given against this was that households are able to eliminate this downward pressure on consumption, for example by borrowing more. Aggregate consumer demand should additionally be bolstered by the higher-than-forecasted employment growth and the continuing growth in real wages. According to Labour Force Survey figures, the rising employment is being driven chiefly by manufacturing and partly also by services. Compared to previous quarters, then, the focus of employment growth may be shifting from the government sector to the more productive private sector.
The latest information concerning the impact of the increase in excise duties on cigarettes was also debated. Part of this increase will probably be absorbed by producers via a decrease in their margins. This factor would reduce the forecast for annual inflation by approximately two to three tenths of a percentage point.
The Board also discussed developments in the real economy. It was mentioned that the current relatively buoyant economic growth may also be linked with a pick-up in potential output growth. Higher potential output would of course more easily suppress the inflation effects in the economy. It was also said, however, that the rate of growth of potential output had been increased quite substantially in recent CNB forecasts and that it was difficult to find arguments for a further significant pick-up. Attention was drawn to the GDP growth volatility generated by changes in the terms of trade. The situation in some sectors of the economy was also discussed. Among other things, it was said that the observed rise in the number of unsold new apartments may pose a risk to construction output going forward. However, this risk may be offset by continuing infrastructure investment activity. Moreover, the construction sector is itself fairly optimistic about its immediate future.
The Board's discussion also touched on the differences in interest rate and inflation expectations between the financial markets and analysts. The interest rate path derived from the yield curve, i.e. from the opinion of the market, foresees relatively significant growth in the coming quarters. By contrast, according to survey findings, financial analysts expect far more modest growth in domestic rates at the one year horizon. The analysts also expect lower inflation and higher economic growth next year by comparison with the CNB forecast.
After discussing the situation report, the Board decided unanimously to leave the two-week repo rate unchanged at 2%.
Author of the minutes: Vladimír Bezděk, Adviser to the Board
Please send any comments to the author at Vladimir.Bezdek@cnb.cz