Minutes of the Bank Board Meeting on 23 June 2011

Present at the meeting: Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Kamil Janáček, Lubomír Lízal, Pavel Řežábek, Eva Zamrazilová.

The meeting opened with a presentation of the fourth situation report assessing the new information and its effect on the fulfilment of the risks of the inflation forecast contained in the third situation report. The new situation report assessed the risks in relation to the forecast for monetary-policy relevant inflation as being balanced overall and those in relation to headline inflation as being on the upside overall. With regard to the future path of interest rates, the risks were balanced. A more detailed discussion of the risks to the inflation forecast can be found in the commentary on the Graph of Risks to the Inflation Projection (GRIP).

In the discussion that followed the presentation of the situation report, the prevailing opinion was that the risks to monetary-policy relevant inflation were balanced. A majority of the board members agreed that the appropriate monetary policy response was to leave rates at the current level. The opinion was expressed that the observed deviations of the main economic indicators from the forecast represents an upside risk to inflation. It was also said that upside risks were building up at the monetary transmission horizon, which is the key factor for decision-making.

The Board agreed that some recovery of the domestic economy could be seen at the present time. The opinions on the degree of this recovery and on its implications for the inflation outlook differed. It was said several times that only the first signs of recovery were being observed and that these signs could be slightly stronger in the outturns of some indicators than had been forecasted. It was also said that the economic recovery was not significant because it was primarily a result of strong external demand and that domestic demand remained weak. Domestic economic growth based on growth in net exports did not represent an upside risk thanks to the appreciation of the koruna, which was offsetting potential demand pressures stemming from abroad. Some of the board members pointed out that the economic recovery was uneven across the individual sectors of the economy. The opinion was also expressed that the observed recovery could now be regarded as the onset of stable economic growth, which was currently manifesting itself as growth in consumption in some segments and as growth in investment demand, and that this growth represented an upside risk to inflation.

The Board went on to discuss the current labour market situation. The latest developments reflected the nature of the overall economic situation – growth in wages and unemployment was uneven and could be seen primarily in export-oriented sectors. A majority of the board members did not regard the evolution of the labour market as a risk for inflation. Moreover, the very slight growth in real wages, the growth in whole-economy labour productivity and the decline in nominal unit wage costs were not indicating any consolidation of the weak domestic demand. It was also said that the structure of employment in industry was indicating a potential increase in wage growth pressures in this sector, which would represent an upside risk to inflation.

In the discussion of the risks to the inflation forecast it was also said that the current deviation of the inflation from the forecast, which had been 0.3 percentage point in May, was a result of higher growth in food prices. Some of the board members expressed uncertainty regarding the outlook for food prices. The question remained whether the observed rise in food prices was temporary, as already experienced, for example, in the case of the jump in food prices at the end of 2007, or whether there would be further growth in food prices.

It was said repeatedly that the expected increase in VAT in January 2012 represented an upside risk to headline inflation. A majority of the board members agreed that long-term expectations were stable and anchored close to the inflation target. The VAT change thus did not pose a risk of a long-term increase in headline inflation, as confirmed by previous experience.

The Board discussed in detail the economic situation abroad, which is an important condition for growth of the domestic economy. The opinion was expressed that the significantly reduced outlook for market interest rates in the euro area was a new downside risk to inflation for the current forecast. In a discussion about the fiscal problems of Greece it was said that the potential restructuring of Greek sovereign debt would not necessarily have a strong impact on the economic situation of countries that are relevant to the Czech economy. Several comments were made about the economic outlook for Germany, the Czech Republic’s largest trading partner. Some of the board members said that economic growth in Germany would slow this year by less than expected in the forecast, and that this, in turn, would improve the outlook for the domestic economy via a greater volume of exports. However, the opinion was also expressed that the expectations of German economic agents were sceptical and that this scepticism was rising. The outlook for global commodity prices was also discussed. Some of the board members admitted the possibility of renewed growth in commodity prices, which would lead to a slowdown of the global economy and in particular of emerging economies.

At the close of the meeting the Board decided by a majority vote to leave the two-week repo rate unchanged at 0.75%. Five members voted in favour of this decision: Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Lubomír Lízal and Pavel Řežábek. Two members voted for increasing rates by 0.25 percentage point: Kamil Janáček and Eva Zamrazilová.

Author of the minutes: Michal Franta, Adviser to the Board