Minutes of the Bank Board Meeting on 27 April 2006
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 April situation report, which contained the new macroeconomic forecast. Compared to the January forecast there were changes in the expected effects of external factors, in particular higher world prices of oil. In addition, higher industrial producer price inflation - and subsequently higher consumer price inflation as well - was expected in Germany. The direct upward impact of these changes on domestic inflation was not too significant, but in the forecasting system the related higher outlook for Euribor rates was significantly affecting the interest rate path consistent with the forecast.
The Czech economy remained in a phase of high growth. Revisions to the 2005 GDP figures had increased this growth. Compared to the January forecast the expected economic growth was considerably higher, especially in the case of 2006. The new forecast predicted real GDP growth of 5.4%-6.9% in 2006 and 3.9%-6.9% in 2007. In the forecasting system the high real GDP growth had generated a rise in the rate of growth of the non-accelerating inflation level of output and, to a lesser extent, closure of the output gap at the turn of this year. The effect of demand on inflation was expected to be broadly neutral going forward.
The forecast was for annual consumer price inflation of 2.2%-3.6% in March 2007 and 3.2%-4.6% in September 2007. The slight decrease in the inflation forecast was due mainly to an anti-inflationary exchange rate effect and to lower-than-expected growth in food prices in the past period. As in the previous forecast, however, inflation exceeded the point inflation target from June 2007 onwards. The rise in inflation during 2007 would be a result primarily of a higher contribution from changes in indirect taxes, food prices and import prices excluding energy. However, monetary-relevant inflation (adjusted for the direct effects of tax rate changes) would stay just below the point inflation target in 2007.
Consistent with the macroeconomic forecast and its assumptions was interest rate stability initially and a gradual rise in rates thereafter.
After the presentation of the situation report, the Board discussed the uncertainties and risks associated with the forecast. The Board focused its attention on the interpretation of the higher-than-expected real GDP growth in 2005. It was said that the high growth last year was surprising, especially given that it was not translating fully into growth in inflation pressures. In this regard, the view was also expressed that any revision of last year's real GDP growth figures might change the current perceptions of the recent development of the economy.
The board members agreed that uncertainty also surrounded real GDP growth going forward. Both a further pick-up and a slowdown in economic growth were possible. However, it was also said that the fundamental view regarding the economy was qualitatively unchanged in the light of the new forecast. The economy could still be regarded as a fast growing and low-inflation one, especially with regard to monetary-relevant inflation. Based on the statistical data available, the prevailing view among the board members during the discussion was that the present economic situation could be described as favourable, with no major signs of unbalanced tendencies. Another prevailing view among the board members was that interest rates could now move in either direction. However, the key factor determining their future development would be information on the direction of the economy based on new statistical data.
The domestic risks were described by the board members as relatively insignificant overall. In this context, it was said that competition from foreign workers with low wage demands was a factor depressing wage growth. However, comments were made that the key factor underlying the subdued wage growth remained the persisting high unemployment, with its pronounced elements of structural unemployment. It was also said that although the rapid economic growth was having a positive effect on the fiscal outlook in the form of higher state budget revenues, this growth was nevertheless leaving the structural problems in public finances untackled.
The board members discussed the issue of the external risks in more detail, primarily with regard to the rise in oil prices. On the one hand, mention was made of the possibility of disturbances to the global economic equilibrium and a threat to world prosperity in the medium run. The complexity of the supply and demand effects associated with the oil price growth was also mentioned, and the view was expressed that the resultant effect of the oil price growth on inflation and interest rates would depend on the relative strength of these factors, which was currently difficult to determine in advance. The pass-through of the higher oil prices via cost pressures to oligopolistic industries with a high share of energy costs was also discussed. In this context, uncertainty regarding whether, and to what extent, the cost pressures would translate from declining profit margins into prices was expressed in the discussion. On the other hand, attention was drawn to the possibility of the global cost shocks being dampened by energy-saving technological innovations and also to the possibility that the oil price growth would be eased by the development of the exchange rate of the koruna.
During the discussion of the risks, the Board also addressed the undershooting of the inflation target in past years. In this context, the need for a symmetric reaction to inflation movements in both the lower and upper half of the tolerance band of the point inflation target was pointed out.
The board members expressed various opinions during the overall assessment of the risks. The prevailing view, however, was that the risks of the forecast were balanced.
After discussing the April situation report, the Board decided unanimously to leave the two-week repo rate unchanged at 2%.
Author of the minutes: Vladislav Flek, Adviser to the Board
Please send any comments to the author at vladislav .flek @cnb .cz