Minutes of the Bank Board Meeting on 31 August 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).
The Board was presented with the August situation report, which assessed the new information and the risks associated with the fulfilment of the July forecast.
The annual inflation of 2.9% in July had been 0.1 percentage point lower than predicted by the current forecast. This was a result of lower-than-forecasted growth in regulated prices, adjusted inflation excluding fuels, and fuel prices. This had outweighed the effect of faster growth in food prices, which according to the forecast should have still been falling year on year. Industrial producer prices and import prices had risen faster than forecasted, whereas annual agricultural producer price inflation had fallen sharply compared to the forecast.
Newly available information concerning the supply side and foreign trade and from business surveys signalled a continuation of the previous high GDP growth with a gradual slowing trend in the following quarters, in line with the July forecast. Preliminary estimates based on the evolution of foreign trade suggested a reduction in the year-on-year growth rate of real exports compared to the forecast. Employment and wages were developing in line with the forecast, although a slightly faster decline in registered unemployment was apparent.
After the presentation of the situation report, the Board discussed the risks to the fulfilment of the July forecast. The board members agreed that the economy was developing in line with this forecast and that the risks to it could be regarded as balanced.
The Board agreed that the projected fiscal development posed an upside risk to inflation. The opinion was expressed that owing to the size of the planned budget deficit and the legal nature of a major portion of the planned budget expenditures, the situation was more serious than in the past. It was said that the estimated fiscal impulse had risen from -1.1 percentage point in 2004 to the present 0.2 percentage point and was set to reach 0.5 percentage point in 2007. This represented a considerable fiscal expansion at a time of strong economic growth.
The Board agreed that the sole major downside risk to inflation was a possible nominal appreciation of the exchange rate. In the discussion on this issue it was said that the end of the cycle of interest rate increases in the USA might foster a strengthening of the exchange rate of the koruna. Against this, it was said that the appreciation pressure on the koruna might be eased by the persisting political uncertainty and the slightly worse-than-forecasted development of the balance of payments.
The Board then discussed the balance of payments. The opinion was expressed that a change might occur in the balance of payments trend. It was also said that the rising share of consumption in the rapid economic growth might impact on the volume of imports. In this context, the Board agreed that change in the GDP growth structure had been an integral part of the forecast, hence the modest deterioration in net exports had been expected. It was said that although expected foreign investment would increase export capacity in the future, in the short term there might be negative impacts on the trade balance under technology imports. It was also said that, in addition, the outlook for further foreign direct investment in the longer run was uncertain.
The Board went on to discuss potential developments in the external environment and their effects on the Czech economy. It was said that economic developments abroad in 2007 and 2008 would be important for domestic inflation. Attention was drawn to the relatively high economic growth in the EU countries, which should support the domestic economy. In this context, some surprise was expressed at the worse dynamics of Czech exports. Conversely, some of the board members drew attention to the slowing economic growth in the USA, which might affect demand for European exports.
The Board's discussion also touched on other future uncertainties. Some of the board members expressed concern about the impact of energy prices on domestic manufacturers' earnings and competitiveness. Considerable uncertainty was seen in the shape of the yield curves in the euro area and in the timing and extent of the impacts of the increased tax on cigarettes.
After discussing the situation report, the Board decided unanimously to leave the two-week repo rate unchanged at 2.25%.
Author of the minutes: Juraj Antal, Adviser to the Board
Please send any comments to the author at juraj .antal @cnb .cz