Minutes of the Bank Board Meeting on 25 May 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 was presented with the May situation report, which assessed the new information and the risks associated with the fulfilment of the April macroeconomic forecast.
Consumer prices had risen by 2.8% year on year in April in line with the current forecast. The dynamics of the individual components of inflation had also been as predicted. Rather lower growth in fuel prices had been offset by only slightly faster growth in administered prices. Adjusted inflation excluding fuels had been in line with the forecast, as had industrial producer prices, agricultural producer prices and import prices.
Newly available information concerning the supply side and foreign trade and from business surveys signalled no major risks to the fulfilment of the April GDP forecast. The forecast expected a further pick-up in annual GDP growth in 2006 Q1. This prediction was confirmed by short-term projection methods based on leading and coincident indicators. Industrial production had risen by 15.4% year on year in 2006 Q1, the highest figure since 1998. Labour market indicators were in line with the current forecast. A deviation from the forecast was observable for the nominal exchange rate, which so far in Q2 had been stronger on average than assumed in the forecast.
After the presentation of the situation report, the Board discussed the risks to the fulfilment of the April forecast. The Board agreed that the inflation risks had not moved since the April meeting. The risks to the forecast were moderate and balanced and the monetary policy rate settings were in line with expected economic developments.
The Board agreed that it viewed the exchange rate as a downside risk to inflation. It was said that the appreciation of the koruna could be explained to some extent by the accelerating GDP growth and the positive evolution of the trade balance. Uncertainty was expressed about the economy' s resilience to the relatively significant strengthening of the exchange rate. This resilience had increased over time, but no doubt had its limits.
The Board went on to discuss the equilibrium real appreciation rate. It was said that the theory derives the equilibrium real appreciation rate inter alia by means of the Balassa-Samuelson effect and that in empirical analyses of 1990s data this effect had been identified as very small for the Czech economy. Against this, it was pointed out that prices of nontradable goods were rising much faster than prices of tradable goods, which might suggest a more significant Balassa-Samuelson effect.
The Board then discussed the potential impacts of the current decline in prices of some assets on global markets. In this context, it was said that the Czech financial market could be affected by these developments. The opinion was expressed that the current decline in asset prices on some markets was not a major risk, but rather a necessary correction.
The Board went on to discuss the external environment and its effects on the Czech economy. Attention was drawn to the accelerating inflation in various parts of the world. Growth in interest rates was also expected in the euro area. A global tightening of monetary policy by key central banks could lead to depreciation pressures on the koruna if domestic rates were not raised. Some of the board members nonetheless said that they did not expect any dramatic rise in interest rates in the euro area.
Part of the discussion was devoted to the elasticity of prices in industry, which will significantly affect overall inflation going forward. Attention was drawn to structural factors leading to divergence of industrial producer price inflation in the Czech Republic from that in its major trading partner nations.
The Board's discussion also touched on public finances. Concern was expressed about the growth in state budget expenditure. It was said that unless there was a major change in the present trend, the Maastricht convergence criteria might not be met.
After discussing the situation report, the Board decided unanimously to leave the two-week repo rate unchanged at 2%.
Author of the minutes: Juraj Antal, Adviser to the Board
Please send any comments to the author at juraj .antal @cnb .cz