Minutes of the Bank Board Meeting on 4 August 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 fifth situation report containing the new macroeconomic forecast. Domestic economic growth, which had so far been driven by net exports and investment in inventories, had picked up pace in 2011 Q1, but probably started to slow in Q2. Annual consumer price inflation had increased slightly in 2011 Q2, reaching 1.8% in June. The initial inflationary pressures stemming from the domestic economy were not significant, owing to weak domestic demand. Global commodity and food prices were the main source of inflation.
According to the new forecast, headline inflation would be just above 3% in 2012 owing to a VAT increase, but would return to the target at the start of 2013. Monetary-policy relevant inflation would be close to the target of 2% over the entire forecast horizon. The forecast expected economic growth to slow slightly to 2.1% in 2011 and to grow at roughly the same rate in 2012. Economic growth would be dampened by fiscal consolidation, slackening growth in external economic activity, fading investment in inventories and by the debt problems in the euro area and elsewhere. A stronger upswing in growth would occur in 2013. The nominal exchange rate of the koruna was gradually appreciating over the forecast horizon. Consistent with the forecast was broad stability of market interest rates at the start of the forecast horizon and a gradual rise in rates starting in late 2011/early 2012. Headline inflation in 2012 was roughly 1 percentage point higher than the previous forecast owing to the incorporation of the VAT changes, but monetary policy does not react to the first-round effects of such changes. The prediction of monetary-policy relevant inflation was little changed from the previous forecast. The path of market interest rates was lower than in the previous forecast, mainly because of a lower outlook for foreign market interest rates. The second-round effects of the VAT increase were expected to be weak and the risks of the inflation forecast were regarded as balanced.
In the discussion that followed the presentation of the situation report, the prevailing opinion was that the risks of the inflation forecast were balanced and that the appropriate monetary policy response was to leave rates at the current level. However, the opinion was also expressed that the deviations of some economic indicators from the forecast represented an upside risk to inflation. It was also said that upside risks were prevailing at the monetary transmission horizon, which is the key factor for decision-making on the current rate settings, and that an increase in rates would be desirable.
In the discussion, it was said repeatedly that in the period since the previous forecast changes had occurred in the external environment which were increasing the level of uncertainty. Lower-than-expected growth abroad and an escalation of the debt problems of certain euro area countries were sources of increased uncertainty. It was said repeatedly that in connection with the debt crisis in the euro area, the outlook for foreign market interest rates, which was currently lower not only than the forecast, but also than the sensitivity scenario of lower foreign rates, was a downside risk to inflation. However, the opinions were also expressed that a weaker-than-forecasted exchange rate of the koruna against the euro represented an upside risk to inflation that might manifest itself in higher exports and higher import price inflation.
In the discussion of the risks of the inflation forecast it was also said that the pass-through of the high global commodity prices to domestic prices – especially food prices – would be more sustained by comparison with the current forecast. The opinion was expressed that higher food prices might affect inflation expectations, because the effect of food prices on inflation expectations was greater than their share in consumer spending, and that the second-round effects of the VAT changes might also have an effect on inflation expectations. However, the majority of the board members agreed that the VAT increase would not have significant second-round effects on inflation and that inflation expectations would remained anchored. In this context, it was also said that the planned VAT changes might have a greater-than-expected restrictive effect on domestic demand. It was also said that industrial producer price inflation was lower than in the previous forecast and that this signalled lower upward pressure on prices in the economy.
With regard to the risks of the inflation forecast, the Board discussed in detail the outlook for economic growth abroad, which is an important condition for growth of domestic economic activity. It was said repeatedly that the high debt level in many countries was reducing the growth potential and that lower external demand was a limiting factor for growth of the domestic economy. The opinion was expressed that growth abroad would also be constrained by new regulatory measures in the financial sector. However, it was said repeatedly that the growth abroad was territorially unbalanced and that the domestic economy’s main trading partners were recording rapid growth, which represented an upside risk to inflation.
Some of the board members expressed the view that the economic recovery was unbalanced not only abroad, but also in the domestic economy, and that it was being driven predominantly by exporters. It was said that corporate deposits were flowing abroad, possibly as a consequence of the low domestic interest rates. However, it was also said that the lower quick liquidity of corporations was more a reflection of the adverse situation in the corporate sector, as also evidenced by continued low growth in lending to corporations. The opinion was expressed that the modest real wage growth, the growth in whole-economy labour productivity and the fall in nominal unit wage costs testified to continued weak domestic demand. The Board also discussed the current situation in the mortgage and building saving schemes market. It was said that growth in loans to households for house purchase was higher, but that households were taking advantage of house purchase loan refinancing under more advantageous conditions. The Board agreed that the property market did not currently represent an additional upside risk to inflation, as confirmed by data from the construction sector.
The opinion was repeatedly expressed that the current level of monetary policy rates was low and that it was desirable to return to a neutral rate level. It was said that keeping rates low for an extended period could represent a risk from the point of view of financial stability in the future. By contrast, it was said that besides interest rates, the exchange rate – which was stronger both at the moment and at the forecast horizon – was also part of the overall monetary conditions and that interest rate stability was consistent with fulfilment of the inflation target.
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: Kamil Galuščák, Adviser to the Board