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Minutes of the Board Meeting on 27 September 2001

9.10.2001 10:15

The September situational report revealed that the view on the nature of monetary and economic development in the Czech Republic had not changed. Figures for last month pointed to a certain degree of stabilisation: in particular more favourable consumer and producer prices, improved inflation expectations, and as a result, a more moderate slope to the yield curves. The 0.2% decline in month-on-month consumer prices for August partially balanced out the deviation in the opposite direction during past months and also improved the inflation outlook for the end of this year.

The Czech Statistical Office’s GDP growth estimate for Q2 corresponded to the CNB’s assumptions. However, the structure of this growth reflected the contradictory effect of domestic and foreign demand even more. Real and nominal wages generated higher household consumption dynamics, while net export’s contribution slowed economic growth more than had been originally expected. As a result, emphasis was still put on the risks of future developments, such as declining foreign demand, a possible reduction in the price (wage-cost) competitiveness of Czech production and the increasing risk of demand inflation pressure from households.

The money supply’s year-on-year growth rate had been declining at a slow pace only (to 12.8% for August), and still significantly exceeded nominal GDP growth. The interest rate cuts by the world’s central banks following the terrorist attacks in the USA increased the positive interest rate differential, which reached on average 2.5 points vis-a-vis the USD and 1.5 vis-a-vis the EUR. In the light of global uncertainty, though, this would not seriously increase the risk of debt capital inflow to the Czech Republic at this time.

The status of negotiations on the 2002 state budget and missing information about the public finance outlook as a whole interfered now with identifying the extent of the risks linked to expansive fiscal policy. Some real improvements for a number of tax revenues would far from ensure an improvement in public finances adequate to the current phase of the economic cycle.

In the discussion to follow, board members agreed that the events of the past weeks had increased the risk of a further global slowdown in economic growth. The uncertainty abroad had also increased the significance of external factors for monetary policy decision-making at the CNB. In the environment of relatively robust domestic demand growth and the anticipation of further declines in foreign demand, the duration and intensity of slowing economic growth or the possibility of a recession in advanced economies would be relevant for upcoming decision-making on interest rates. Therefore, the absence so far of signals of negative effects on the Czech economy could only be temporary.

The gravity of the effects felt by the Czech economy could be augmented even more if the vulnerability level of some features of the economy was high. In this unsettled environment, foreign investors would probably react more strongly to the unhealthy development of public finances and would assess trade deficits in a more sensitive manner. Excessive wage growth would represent an especially high risk. This development would not only lead to demand inflation pressures but could also impair the competitiveness of Czech production in a period of stagnant foreign economic growth. For this reason, the Board attached a great deal of importance to forthcoming wage negotiations and direct dialogues with trade union managers.

During the discussion on internal monetary factors, it was expressed that the new data and knowledge disclosed by the situational report were not strong enough to clearly defend or refute some of the interpretations concerning the nature of inflation in the Czech Republic, as was expressed during the discussion on the last situational report. Monetary policy decision-making, therefore, would continue to be burdened by a high degree of uncertainty. In this respect, it was stated that, aside from signals of stabilising prices (favourable oil prices, a weaker exchange rate for the dollar, a decline in the domestic producer price index), there were also signs of eased monetary policy: in particular, a strong rise in household consumption, high increases in the money supply and negative real interest rates. As for internal factors, some of the board members suggested that the current interest rate settings were not optimal. However, consensus among members showed that the risks linked to external developments predominated in the actual decision-making process.

At the close of the meeting, the Board decided unanimously to leave the CNB two-week repo rate at its current level.

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)

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