Following is the full text of the Minutes
The presentation of the Monetary and Statistics Department focused primarily on assessment of the information available since the discussion of the January situational report. The published figures revealed no information that would suggest any significant change in the inflation forecast or that would change the current view on expected demand, economic growth or the current account. The risks relating to the inflation forecast were distributed evenly in both directions.
In January, there was a decline in CPI inflation to 3.7%, which corresponded to the CNB’s expectations. Although this level was 0.2 percentage points higher than the predicted value in the January situational report, this deviation did not cause any re-evaluation of the anticipated trend in CPI inflation in view of the assessment of the wider range of new information. The higher-than-anticipated price growth was mainly caused by faster price growth in the food sector as well as higher adjusted inflation. Year-on-year growth in industrial producer prices and agricultural producer prices corresponded to the forecasts. Retail and catering sales, industrial production earnings and revenues from VAT collection indicated a slowdown in economic activity in the first quarter of this year. However, the latest figures on industrial production were somewhat better than originally expected. External cost factors had been and would continue to be anti-inflationary in nature according to expectations. In December 2001, the year-on-year decline in import prices had been stronger than expected, especially as a result of a sharper drop in energy raw material prices.
Following the presentation of the February situational report, the Board turned their attention to certain thematic areas. The focus of the discussion was on the balance of risks for future inflation development. The majority of members were of the opinion that the inflation forecast presented in January was still an adequate measure of monetary policy decision-making, and there was no reason to doubt the symmetric distribution of inflation risks. The main downward risks were identified as the effects of the recent strengthening of the koruna’s nominal and real exchange rate on further price and demand developments, any further decline in raw material prices or the possibility of more profound transmission of the strengthened nominal exchange rate to tradable commodity prices. The main uncertainties in the opposite direction included the sustainability of the longer-term anti-inflationary impact of the nominal exchange rate, raw material prices, and the potential effect of eased fiscal policy on domestic demand. One view expressed that the new data indicated a downward change in the balance of future inflation risks, especially due to a somewhat stronger real koruna exchange rate and higher real interest rates in comparison to previous assumptions.
In view of the discussion on inflation risk distribution, the Board focused its attention on the outlook for world economic recovery. It was stated that the information on the growth perspectives of the world economy, for Europe in particular, continued to show inconsistencies. The uncertainty concerning the speed and dynamics of economic recovery still remained high.
Evaluating the effect of the last cut in short-term interest rates on the yield curve slope was another issue discussed. The effectiveness of the repo rate’s transmission to interest rates with longer maturities does not only depend on the central bank’s transparency in disclosing the inflation forecast, but also on financial market expectations towards economic development and the central bank’s response. One view indicated that the assessment of the effect of short-term rates on the slope of the yield curve had also been complicated by the fact that the central bank’s measures were often anticipated by the financial markets and that changes in long-term interest rates would take place before the actual change in monetary policy interest rates. It was mentioned that interest rates in the EU, especially for the longer end of the yield curve, had already begun to create an effective boundary for a further decline in corresponding domestic currency rates. While assessing interest rate settings, it was stressed that the current macroeconomic environment created a natural constraint for additional declines in the yield curve.
Attention was again focused on the assessment of exchange rate developments for the previous month. It was expressed that the foreign exchange market had stabilised to some extent and that a recovery in market liquidity had occurred. Nevertheless, the Board agreed that the CNB’s view on exchange rate development would remain unchanged and that longer-term trends on the foreign exchange market were decisive for evaluating monetary conditions. It was emphasised that the pace of real exchange rate strengthening during the last several weeks exceeded the real capabilities of the Czech economy.
Following the discussion of the February situational report, the Board decided unanimously to leave the CNB two-week repo rate at its current level.
Present at the meeting: Zdeněk Tůma (Governor), Luděk Niedermayer (Vice-Governor), Michaela Erbenová (Chief Executive Director), Jan Frait (Chief Executive Director), Pavel Štěpánek (Chief Executive Director)