Minutes of the Bank Board Meeting on 30 November 2006
Present at the meeting: Z. Tůma (Governor), L. Niedermayer (Vice-Governor; left the meeting in order to take part in a teleconference of the General Council of the ECB; did not participate in the voting), 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 November situation report, which analysed the new information and assessed the risks of the October macroeconomic forecast.
The annual inflation of 1.3% in October had been 0.3 percentage point lower than forecasted. This deviation had been due in approximately equal measure to lower-than-expected growth in food prices and lower adjusted inflation excluding fuels. Regulated prices, fuel prices and the estimated impacts of changes to indirect taxes had all been broadly in line with the forecast. The recently passed act on excise duties on tobacco products would lead to the impact of changes to indirect taxes on inflation being roughly 0.3-0.4 percentage point higher in 2007 than predicted by the forecast. The next increase in excise duties would then be pushed back from 2007 to 2008. The current growth in industrial producer prices and agricultural producer prices was also lower than forecasted.
Newly available information on the real economy suggested no major risks to the economic activity forecast, which expects annual GDP growth to slow further to 5.4% in 2006 Q4. Despite slackening slightly, annual real retail sales growth had stayed high in Q3 in line with the forecast. Industrial and construction production had also maintained high growth rates in Q3. Growth in capital imports and a higher rate of growth of long-term loans indicated a slightly higher-than-forecasted pace of investment growth. By contrast, the current balance of payments figures implied a risk of a higher net export deficit. The unemployment rate was developing in line with the forecast, but employment growth was below expectations, especially in the services and construction sectors. Lower-than-expected wage growth in the economy was also fostering lower nominal unit labour costs and more sluggish household disposable income growth.
After the presentation of the situation report, the Board discussed the distribution of the risks in relation to the assumptions of the October forecast. The Board agreed that the risks were on the downside. In this context, however, it was also said that this might be due to a combination of several transitory anti-inflationary shocks. In such a situation the Board should not react hastily.
As part of its assessment of the fulfilment of the external assumptions of the forecast, the Board discussed the impacts of the lower oil prices and the recent appreciation of the euro against the dollar. It was said that whereas in the past these two factors had often had opposite effects on the koruna prices of oil, now both of them were having an anti-inflationary effect. Some of the board members assessed the risks of the potential negative impacts of the euro's appreciation against the dollar on the euro area economy.
In connection with the lower-than-expected growth in food prices in October, the long-term factors influencing inflation in this area were also discussed. This discussion covered the dependence of food prices in the consumer price index on agricultural producer prices, the consolidation of retail chains on the one hand and of food producers on the other, and the effect of the greater opportunities to export foods to EU markets. The opinion was expressed that food prices might be affected by the accession of two countries with very strong agricultural sectors to the EU in 2007.
The Board also discussed the exchange rate development. It was said that the current appreciation of the koruna may imply an additional downside risk for adjusted inflation excluding fuels over the next few months. Against that, opinions were expressed that the current appreciation of the exchange rate was not entirely supported by economic fundamentals. In particular, the current account deterioration, caused in part by a greater volume of dividends paid, might lead to depreciation of the koruna.
The board members also discussed the growth outlook abroad. In this context, it was said that, rather than the size of the revision of expectations concerning economic growth, it was the distribution of that change between the change in the growth rate of potential output and the output gap that was important for future inflation. Some of the board members voiced the hypothesis that owing to the appreciation of the euro against the dollar the recent upward revision of the growth outlook may have been more a manifestation of higher growth potential.
After discussing the situation report, the Board decided unanimously to leave the two-week repo rate unchanged at 2.50%.
Author of the minutes: Michal Hlaváček, Adviser to the Board
Please send any comments to the author at michal .hlavacek @cnb .cz