Minutes of the Bank Board Meeting on 19 December 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 eight situation report assessing the new information and its effect on the fulfilment of the inflation forecast contained in the seventh situation report. The new situation report assessed the overall risks to the forecast as being slightly on the downside. Headline inflation had gone down by 0.7 percentage point to 2.7% in November and was thus 0.3 percentage point lower than forecasted. The lower inflation had been due to lower growth in fuel prices and administered prices and a deeper decline in adjusted inflation excluding fuels. By contrast, food price inflation had been slightly higher than forecasted. The decline in annual real GDP had deepened to 1.3% in Q3, representing a decrease of 0.5 percentage point more than had been forecasted. This deviation had been due to a smaller positive contribution of net exports, while the other expenditure items of GDP had been rather less unfavourable than assumed in the forecast. In addition to the lower economic activity, slower wage growth had had an anti-inflationary effect in Q3. A weaker-than-forecasted exchange rate was partially offsetting the downside risks stemming from the domestic economy. Currently higher world prices of agricultural commodities were an upside risk to inflation. 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, a majority of the board members agreed that the data published since the previous situation report implied no major deviations from the forecast with regard to inflation pressures. The consensus was that the overall risks to the inflation forecast were only slightly on the downside and that the appropriate monetary policy response was to leave rates unchanged. It emerged from the discussion that, given the zero lower bound on interest rates, a further easing of the monetary conditions – as assumed by the forecast for 2013 – could be achieved by influencing the exchange rate of the koruna.
In a discussion of the sources of current and future inflation, it was said that domestic economic activity was subdued and anti-inflationary. It was said that demand-pull inflation pressures were not apparent at the forecast horizon either. Some of the board members pointed to risks arising from the currently higher agricultural producer prices and food prices. It was said that new data had confirmed the advance impact of the January 2012 VAT increase on food prices last year, and that, in addition to higher world prices of agricultural commodities, a lower domestic harvest was fostering higher agricultural producer prices. It was said that the low domestic harvest and higher world prices of agricultural commodities would continue to affect these price categories in 2013. It was also said, however, that the outlook for supply-side inflation pressures stemming from the currently high world commodity prices was not clear.
The Board discussed economic activity in detail. It was said that new GDP figures confirmed that the economy was in recession. It was said that household consumption was less favourable than forecasted on account of a published revision of the national accounts. It was also said that the household consumption deflator had been revised downwards to approximately half the value of consumer price inflation, and that without this revision household consumption would have fallen even more significantly, representing an additional downside risk to inflation. It was also said, however, that the published revisions of the national accounts did not have a major impact on the assessment of the current cyclical position of the economy and the related inflation pressures. It was said that economic activity was mixed across sectors and that higher demand in some sectors was favourably affecting some related production activities. It was said that growth in lending to corporations was low, but that new loans to non-resident foreign controlled corporations were up.
It was said repeatedly that the anti-inflationary domestic economy was affecting the labour market. It was said that employment had seen year-on-year growth in Q3, but had declined when converted to full-time employment. Consistent with this was annual average wage growth in the corporate sector, which had fallen to a historical low of 1.3% in Q3, which was an anti-inflationary factor. It was said several times that the sizeable contraction in GDP was the cause of the still higher growth in nominal unit labour costs, which would gradually dissipate in the period ahead.
It was said in the discussion that GDP growth was lagging behind the fundamentals of the Czech economy and that the weaker growth was due to low sentiment among households and corporations stemming from uncertainty at home and abroad. Attention was drawn to the higher saving rate in the household sector. It was said that household consumption was being depressed by rising food, energy and import prices and that the end of rent regulation was also a source of uncertainty. The opinion was also expressed that households’ low expenditure on durables was due to falling prices, which were apparent in negative adjusted inflation excluding fuels, despite the currently weaker exchange rate. It was said that the low sentiment in the corporate sector was being reflected in higher deposits amid relatively favourable financial results and that the low sentiment was due to low expected demand and growth in world commodity prices. It was said repeatedly in the discussion that the level of uncertainty in the domestic economy had decreased in the area of taxation, and that consolidation measures aimed at increasing state budget revenues, which had been incorporated into the forecast, would have an anti-inflationary effect in 2013.
Some of the board members said that developments abroad, especially in certain European countries, were a source of uncertainty. It was said that no demand stimuli for the domestic economy could be expected from abroad. It was said that foreign financial markets had calmed somewhat, but expectations regarding future developments abroad were more negative. In this regard, it was said that three-month Euribor rates had fallen to a historical low of 0.2% since the previous situation report. It was said in the discussion that the low outlook for external demand and risk aversion in the European region were fostering a weaker exchange rate of the koruna. However, it was also said that the outlook for external demand and foreign interest rates was not diverging significantly from the forecast assumptions.
At the close of the meeting the Board decided unanimously to leave the two-week repo rate unchanged at 0.05%. Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Kamil Janáček, Lubomír Lízal, Pavel Řežábek and Eva Zamrazilová voted in favour of this decision.
Author of the minutes: Kamil Galuščák, Adviser to the Board