Full text of the Minutes
According to the March situational report, macroeconomic development was consistent with the assumptions of the January forecast.
Monthly consumer price growth in February was slightly lower than predicted owing to a correction in food prices since January. Unregulated prices in February were flat overall. Annual inflation continued to fluctuate slightly above the midpoint of the January forecast. However, this was only a small deviation from the expected development. Industrial producer prices did not signal any inflation risks and registered a slight year-on-year decline in February. Agricultural producer prices shifted above the assumptions. This departure was, nevertheless, considered to be only short-term in nature. World prices for oil and other raw materials would cause prices to rise at a faster pace. The continued appreciation of the exchange rate, though, had an anti-inflationary effect. In April, the announced cut in regulated natural gas prices would also push towards lower inflation.
GDP growth in 2001 Q4 was slightly higher than the prediction, but overall, it was still consistent with the assumption of gradually slowing growth. According to expectations, growth was encouraged by investment and household consumption. Contrary to the prediction, investment in stocks, in particular, promoted stronger growth. However, a deterioration in net export, which was somewhat stronger than predicted, had a negative effect on growth.
Monthly indicators, on the other hand, pointed to a reduction in the risk associated with domestic demand pressures. Growth in industrial production slowed in January. Industrial sales continued to decline in real terms, which signalled a rise in stocks due to low demand. Retail sales registered year-on-year growth, though, at a slower pace than in the previous period. There was a substantial decline in personal automobile sales. The seasonally adjusted unemployment rate recorded no real change. The ratio of unplaced job applicants to one job vacancy increased. Information on wage developments in the last quarter of 2001 also signalled lower inflation risks.
The exchange rate of the Czech koruna vis-a-vis the weighted average of the currencies of the Czech Republic’s main business partners appreciated in real terms by more than 8% in January. In view of the analysis of the balance of payments, there was no real justification for any further strengthening. As a result of the agreement between the CNB and the Government, privatisation incomes would not have an effect on the foreign exchange market. The share of non-privatisation direct investment declined in 2001, and the reinvestment of profit, which did not represent any real flow of money through the foreign exchange market, would play an increasingly larger role. Moreover, recovery in the USA and in other advanced market economies would support a rise in foreign interest rates, making portfolio investment abroad more attractive.
In the discussion to follow, the Board agreed that the risks of the current forecast were balanced from an overall perspective. However, in contrast to the assessment in the situational report, attention was focused more on the medium-term risks. During this time frame, the risks shifted slightly upwards.
Current information from abroad confirmed the onset of recovery. This would gradually find its way into the Czech economy thanks to higher demand in Western Europe. In addition, global recovery would affect price pressures at a quicker pace due to higher raw material prices. The published GDP figures for 2001 Q4 could be assessed positively, despite the substantial growth boost from stocks. In this respect, there were some doubts concerning the predicted slowdown in the rate of economic growth and domestic demand for the first half of 2002 due to weaker, but already recovering, foreign demand. One view was that this prediction might be too pessimistic. However, it was mentioned that certain information, to some extent, even supported the forecast’s scenario. Included in this information was the decline in import, which, along with the declining prices, could also be associated with a decline in domestic economic activity. In the medium term, though, even the present forecast assumed that the domestic economy would recover and that the output gap would close up more quickly.
Hence, the Board agreed that the Czech economy did not need any additional demand impulses at this time. In this respect, attention was turned to developments in the fiscal area. While fiscal policy helped the economy overcome weakening foreign growth last year, now fiscal policy had again become inconsistent with the economic cycle. Besides long-term unsustainability, fiscal development could again be characterised as destabilising in the medium term.
The Board paid particular attention to the exchange rate. Current data on the trade balance had so far not confirmed any substantial negative exchange rate impact on the Czech economy. Nevertheless, one view expressed that this effect had not yet managed to surface fully, because the koruna had only really begun to show substantial signs of strengthening at the end of 2001. There was also mention of microeconomic data and certain information on the production and financial performance of export firms pointing to exchange rate overvaluation. Despite the existing uncertainties connected with structural changes in the economy, current exchange rate developments were still perceived as unbalanced in nature. This was considered to be one of the main downward risks of macroeconomic development.
Board members discussed the projection of the effect of the balance of payments on the exchange rate, which was presented during the first part of the meeting. It was stressed that the agreement between the CNB and the Government had remained a key instrument in this area. Implementation of this agreement – focused on resolving the impact of the state’s foreign currency revenues – should prevent any surplus of foreign currency on the market. The Board also considered the strategies of foreign exchange intervention.
At the close of the meeting, the Board decided unanimously to leave the CNB two-week repo rate unchanged at 4.25%.
Present at the meeting: Zdeněk Tůma (Governor), Oldřich Dědek (Vice-Governor), Luděk Niedermayer (Vice-Governor), Michaela Erbenová (Chief Executive Director), Jan Frait (Chief Executive Director), Pavel Racocha (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)