PRAGUE, July 12 (Reuters) - Following is the full text of the minutes from the Czech central bank (CNB) governing board's June 26 monetary policy meeting, released on Friday:
Present at the meeting: Governor Jiri Rusnok, vice-governors Marek Mora and Tomas Nidetzky, board members Vojtech Benda, Oldrich Dedek, Tomas Holub and Ales Michl.
The meeting opened with a presentation of the fourth situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the third situation report. During second quarter, domestic inflation had been in the upper half of the tolerance band around 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 forecast during second quarter had been due mainly to volatile food prices and to a lesser extent to growth in fuel prices, which had been slightly higher than forecasted.
The new data had confirmed stable growth in domestic economic activity in the first quarter of 2.6%. This was in line with the forecast, although the individual expenditure components had differed slightly. Household and government consumption had grown faster than forecasted and the contribution of change in inventories had been less negative. By contrast, fixed investment growth had lagged behind expectations. The contribution of net exports had been broadly neutral in line with the forecast, although both export and import growth had slowed unexpectedly sharply. From the sector perspective, wholesale and retail trade and services had continued to be the biggest contributors to gross value added formation. The contribution of manufacturing remained relatively low. Labour market indicators had confirmed persisting tightness. The slowdown in employment growth had been slower than expected and wage growth conversely stronger, although only slightly so in market sectors. With whole-economy labour productivity growth lagging behind real wage growth, nominal unit wage costs were accelerating. A more detailed discussion of the risks to the current 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 assessed the risks to the current inflation forecast at the monetary policy horizon as being balanced. Following the increase in May, broad interest rate stability until mid-2020 was consistent with this forecast.
According to the Board, higher inflation and interest rates were being fostered solely by domestic factors. The main such factors included a weaker-than-forecasted exchange rate of the koruna, which in second quarter had stayed at the same average level as in first quarter. Some of the board members also viewed the labour market situation and the change in the GDP growth structure away from investment towards consumption as inflationary factors. Conversely, the situation abroad, where the outlooks for industrial producer prices and crude oil prices had decreased, remained an anti-inflationary factor. The Board considered the extension of the period of expected stability of the ECB’s interest rates and the shift in the Fed’s rhetoric towards a future decrease in interest rates to be significant changes compared with the previous meeting. The main uncertainties of the current CNB forecast continued to be related to the impacts of protectionist measures in global trade, a more pronounced and potentially more protracted slowdown in economic growth in the euro area countries and the exchange rate of the koruna going forward.
The Board stated that the forecast for the domestic economy was materialising very well overall and remained inflationary in nature. However, opposite tendencies could be seen in the economy. On the one hand, external demand was weakening, a factor primarily affecting industrial exporters. On the other hand, however, the output of firms satisfying domestic demand was still rising briskly. Those firms still saw labour shortages as the main barrier to growth. The slowdown in Germany was thus passing through to the Czech economy to only a limited extent so far. If, however, the slowdown in external demand were to last longer, its impact on the Czech economy would be stronger.
A significant part of the meeting was devoted to external developments. The board members discussed whether signals of an approaching recession could be identified in the current observations. There was a consensus that although leading indicators were worsening, this had yet to be reflected significantly in the real data. It was mentioned that temporary slowdown episodes in the euro area were fairly common from the historical perspective and were not a good predictor of deeper recessions. Neither could future developments be read with any certainty 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 that the forecasts had displayed a high error rate roughly a year to a year and a half before the crisis in the past.
The board members agreed that the uncertainty surrounding the exchange rate of the koruna was still high. The exchange rate would be affected by contrary factors and the question was which of them would prevail. Considerable uncertainty was associated with the duration and intensity of global factors, interest rate differentials, market "overboughtness" and the role of the exchange rate as a built-in stabiliser. The Board explained the observed deviation of the koruna exchange rate from the forecast in second quarter largely in terms of fundamentals, namely the recent economic developments abroad and the change in the outlook for the external economy.
Another topic discussed was observed inflation and the inflation outlook. Two of the board members drew attention to the fact that inflation was close to the upper boundary of the tolerance band, a situation they were not comfortable with. However, the Board mostly agreed that what was important was not the current inflation figure, but the inflation outlook at the monetary policy horizon, at which inflation was returning to the CNB’s target. It was said repeatedly that it was entirely natural for inflation to fluctuate inside the tolerance band around the target in a small open economy and that this was consistent with the CNB’s price stability mandate.
At the close of the meeting the Board decided by a majority vote to leave the two-week repo rate unchanged at 2%. Six members voted in favour of this decision: Jiri Rusnok, Marek Mora, Tomas Nidetzky, Oldrich Dedek, Tomas Holub and Ales Michl. Vojtech Benda voted for increasing the rate by 0.25 percentage points. (Reporting by Mirka Krufova)