Minutes of the Bank Board Meeting on 27 September 2012
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 sixth situation report assessing the new information and its effect on the fulfilment of the inflation forecast contained in the fifth situation report. The new situation report assessed the overall risks to the forecast as being tilted towards lower monetary-policy relevant inflation amid a lower outlook for interest rates. For headline inflation, the downside risk was slightly larger owing to the fact that the VAT changes as from 2013 had not been approved so far. Headline inflation had been at 3.3% in August and was thus 0.1 percentage point lower than forecasted. The lower-than-predicted inflation had been due to food prices and adjusted inflation excluding fuels, which had turned more negative than expected. The evolution of economic activity represented a downside risk to inflation. The decline in annual real GDP had deepened to 1% in Q2, representing a decrease of 0.6 percentage point more than had been forecasted. Only net exports had contributed positively to GDP growth; the other expenditure items had contributed negatively. Lower-than-expected wage growth in the business sector in 2012 Q2 and a stronger exchange rate of the koruna were also having an anti-inflationary effect. 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 Board agreed that domestic economic activity was subdued and therefore anti-inflationary. The labour market (thanks to low wage growth), current domestic inflation and the stronger exchange rate of the koruna were also anti-inflationary in relation to the forecast. The uncertainty surrounding the possible changes to VAT rates at the start of next year, which represents another downside risk to inflation, was mentioned several times by the Board. Mention was also made of some positive signals from the domestic economy which might reduce the anti-inflationary risks to the forecast: for example, the performance of non-financial corporations and the surprising evolution of investment activity.
It emerged from the discussion that the Board could also see some upside risks to inflation, currently represented above all by higher prices of energy and agricultural commodities. In this context, it was said that these price categories are not under the direct influence of monetary policy. It was also noted that unprecedented divergence could be seen across the individual price categories due to the combination of the above inflationary factors and negative demand-side impulses.
The Board discussed in detail whether household consumption was in line with the condition of the domestic economy or whether it was lower as a result of households’ falling consumer confidence. It was said that household consumption was in line with the low level of its determinants. Real disposable income was being weakened by rising food prices, which are one of the main items of the consumer basket. In such a situation, there could be no recovery in consumption of durables. However, it was also said that households were showing low consumer sentiment, hence their consumption was below the level consistent with economic fundamentals and they were increasing their savings. In this context, it was mentioned that a rise in household savings accompanied by falling consumption represented a downside risk to inflation. It was also speculated whether, in the present situation, household consumption was moving into areas not directly covered by the statistics on households’ consumption behaviour. It was also said several times that the current household consumption situation could not be clearly assessed from the available data.
The Board also discussed the new investment activity figures for Q2. Annual growth in gross fixed capital formation was flat, whereas the forecast had predicted a decline of 9.4%. Given the surprising evolution of investment, most of the board members agreed that this figure was highly likely to be revised, because quarterly investment data are often subject to revisions. The opinion was expressed that any downward revision would represent a downside risk to inflation. On the other hand, however, it was said that any confirmation of the investment stagnation would imply an upside risk in relation to the forecast. The possible relationship between the surprising rise in investment activity and the observed substantial decrease in dividend payments to non-residents in Q2 was also discussed. If this relationship applied, it would indirectly support the surprising recovery of investment activity suggested by the data.
The relatively fast growth in the average wage in industry in July and its possible link with future growth in net exports was mentioned several times in the discussion of the labour market. In addition, uncertainty was expressed about the nature of wage bargaining for next year. However, the Board agreed that the domestic labour market was generally anti-inflationary, reflecting lower-than-forecasted wage growth in the business sector.
The Board discussed in detail the role of the exchange rate of the koruna as an anti-inflationary factor. It was repeatedly said that the current appreciation of the koruna was surprising. It was discussed whether the appreciation of the koruna was a result of the markets’ view of the domestic fiscal situation, which might seem better than that in neighbouring countries. It was mentioned several times that in the current situation the evolution of the exchange rate was a fundamental factor for the behaviour of economic agents in the domestic economy, and a stronger appreciation would need to be taken sufficiently into account in future monetary policy deliberations.
The Board also discussed possible further monetary policy actions which might come into consideration if a further easing of monetary policy became necessary. It did not agree on whether such actions were needed. In connection with the discussion of the koruna exchange rate, however, the option of taking actions that would directly affect the exchange rate was preferred. The Board then discussed the option of making asymmetric changes to the discount and Lombard rates, because the gap between the monetary policy rates was viewed as being too wide at the current rate level.
At the close of the meeting the Board decided by a majority vote to lower the CNB two-week repo rate by 0.25 percentage point to 0.25%, effective 1 October 2012. At the same time it decided to lower the Lombard rate to 0.75% and the discount rate to 0.10%. Five members voted in favour of this decision: Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Kamil Janáček and Lubomír Lízal. Two members voted for leaving interest rates unchanged: Pavel Řežábek and Eva Zamrazilová.
Author of the minutes: Michal Franta, Adviser to the Board