PRAGUE, July 12 (Reuters) - Following is the full text ofthe minutes from the Czech central bank (CNB) governing board'sJune 26 monetary policy meeting, released on Friday:
Present at the meeting: Governor Jiri Rusnok, vice-governorsMarek Mora and Tomas Nidetzky, board members Vojtech Benda,Oldrich Dedek, Tomas Holub and Ales Michl.
The meeting opened with a presentation of the fourthsituation report assessing the new information and its effect onthe fulfilment of the macroeconomic forecast contained in thethird situation report. During second quarter, domesticinflation had been in the upper half of the tolerance bandaround the CNB’s target, in line with the forecast. As expected,the contribution of core inflation had gradually diminished,whereas administered prices had continued to show robust growth.The slight deviations of headline inflation from the forecastduring second quarter had been due mainly to volatile foodprices and to a lesser extent to growth in fuel prices, whichhad been slightly higher than forecasted.
The new data had confirmed stable growth in domesticeconomic activity in the first quarter of 2.6%. This was in linewith the forecast, although the individual expenditurecomponents had differed slightly. Household and governmentconsumption had grown faster than forecasted and thecontribution of change in inventories had been less negative. Bycontrast, fixed investment growth had lagged behindexpectations. The contribution of net exports had been broadlyneutral in line with the forecast, although both export andimport growth had slowed unexpectedly sharply. From the sectorperspective, wholesale and retail trade and services hadcontinued to be the biggest contributors to gross value addedformation. The contribution of manufacturing remained relativelylow. Labour market indicators had confirmed persistingtightness. The slowdown in employment growth had been slowerthan expected and wage growth conversely stronger, although onlyslightly so in market sectors. With whole-economy labourproductivity growth lagging behind real wage growth, nominalunit wage costs were accelerating. A more detailed discussion ofthe risks to the current inflation forecast can be found in thecommentary on the Graph of Risks to the Inflation Projection(GRIP).
In the discussion that followed the presentation of thesituation report, a majority of the board members assessed therisks to the current inflation forecast at the monetary policyhorizon as being balanced. Following the increase in May, broadinterest rate stability until mid-2020 was consistent with thisforecast.
According to the Board, higher inflation and interest rateswere being fostered solely by domestic factors. The main suchfactors included a weaker-than-forecasted exchange rate of thekoruna, which in second quarter had stayed at the same averagelevel as in first quarter. Some of the board members also viewedthe labour market situation and the change in the GDP growthstructure away from investment towards consumption asinflationary factors. Conversely, the situation abroad, wherethe outlooks for industrial producer prices and crude oil priceshad decreased, remained an anti-inflationary factor. The Boardconsidered the extension of the period of expected stability ofthe ECB’s interest rates and the shift in the Fed’s rhetorictowards a future decrease in interest rates to be significantchanges compared with the previous meeting. The mainuncertainties of the current CNB forecast continued to berelated to the impacts of protectionist measures in globaltrade, a more pronounced and potentially more protractedslowdown in economic growth in the euro area countries and theexchange rate of the koruna going forward.
The Board stated that the forecast for the domestic economywas materialising very well overall and remained inflationary innature. However, opposite tendencies could be seen in theeconomy. On the one hand, external demand was weakening, afactor primarily affecting industrial exporters. On the otherhand, however, the output of firms satisfying domestic demandwas still rising briskly. Those firms still saw labour shortagesas the main barrier to growth. The slowdown in Germany was thuspassing through to the Czech economy to only a limited extent sofar. If, however, the slowdown in external demand were to lastlonger, its impact on the Czech economy would be stronger.
A significant part of the meeting was devoted to externaldevelopments. The board members discussed whether signals of anapproaching recession could be identified in the currentobservations. There was a consensus that although leadingindicators were worsening, this had yet to be reflectedsignificantly in the real data. It was mentioned that temporaryslowdown episodes in the euro area were fairly common from thehistorical perspective and were not a good predictor of deeperrecessions. Neither could future developments be read with anycertainty from the currently negative slopes of yield curves,which may have been partially distorted by quantitative easing.One board member nonetheless pointed out in this context thatthe forecasts had displayed a high error rate roughly a year toa year and a half before the crisis in the past.
The board members agreed that the uncertainty surroundingthe exchange rate of the koruna was still high. The exchangerate would be affected by contrary factors and the question waswhich of them would prevail. Considerable uncertainty wasassociated with the duration and intensity of global factors,interest rate differentials, market "overboughtness" and therole of the exchange rate as a built-in stabiliser. The Boardexplained the observed deviation of the koruna exchange ratefrom the forecast in second quarter largely in terms offundamentals, namely the recent economic developments abroad andthe change in the outlook for the external economy.
Another topic discussed was observed inflation and theinflation outlook. Two of the board members drew attention tothe fact that inflation was close to the upper boundary of thetolerance band, a situation they were not comfortable with.However, the Board mostly agreed that what was important was notthe current inflation figure, but the inflation outlook at themonetary policy horizon, at which inflation was returning to theCNB’s target. It was said repeatedly that it was entirelynatural for inflation to fluctuate inside the tolerance bandaround the target in a small open economy and that this wasconsistent with the CNB’s price stability mandate.
At the close of the meeting the Board decided by a majorityvote to leave the two-week repo rate unchanged at 2%. Sixmembers voted in favour of this decision: Jiri Rusnok, MarekMora, Tomas Nidetzky, Oldrich Dedek, Tomas Holub and Ales Michl.Vojtech Benda voted for increasing the rate by 0.25 percentagepoints.(Reporting by Mirka Krufova)