CZECH CENTRAL BANK SEPT 25 MEETING MINUTES: BOARD MEMBER HOLUB VOTED FOR BP RATE CUT
PRAGUE, Oct 4 (Reuters) -Following is the full text of the minutes from the Czech National Bank's (CNB) governing board's Sept. 25 monetary policy meeting, released on Friday:
The meeting opened with a presentation of the sixth situation report based on an assessment of the information obtained since the summer forecast was drawn up. Consistent with the forecast was a modest decline in short-term market interest rates.
The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as broadly balanced overall. Aleš Michl began by saying that inflation had been higher in recent months than both the CNB and financial market analysts had been expecting. The fight against inflation was not over, so it was necessary to further curb the excessive growth in the quantity of money in circulation and to continue to lower interest rates only moderately.
Most of the risks identified at the August meeting persisted. According to Jan Procházka, the upside risks to inflation were associated primarily with prices in the service sector and with the labour market. Eva Zamrazilová also still regarded growth in services prices, which were continuing to rise faster than goods prices, as the main upside risk. In her view, the growth in house prices and its potential pass-through to market and imputed rents was a warning signal as well. Jan Kubíček and Tomáš Holub agreed. Aleš Michl regarded the unexpected increase in the public finance deficit as an inflationary risk.
Conversely, a deterioration in global economic activity and weaker performance of the German and Czech economies was repeatedly identified as a significant downside risk to inflation. Jan Frait said that global inflation potential was weak in the medium term. Demand was being depressed in many countries by a combination of cyclical and structural factors, including high private and public debt levels, overcapacity (necessitating restructuring of industry and other sectors) and over-invested property sectors. In the euro area, these factors were leading to very weak demand for new loans. He regarded a faster decline in ECB interest rates as a likely scenario in this situation. Jan Procházka said that for no good reason there was a “bad mood” in the Czech Republic. This was being reflected in subdued growth in household consumption and the production side of the economy.
The latest domestic inflation figures were also debated. Eva Zamrazilová and Karina Kubelková noted that the short-term food price outlook had moved upwards. Headline inflation could therefore be expected to rise to close to the upper boundary of the tolerance band around the CNB’s 2% target in the next few months, which was reason to be cautious. On the other hand, the temporary increase in inflation at the end of this year would be due mainly to base effects; inflation would decrease at the start of next year and then fluctuate close to the target. Jan Kubíček added that prices of some items of the consumption basket remained volatile and core inflation was still above 2%. This led him to believe that the disinflation process would not be over until inflation (core or headline) was fluctuating moderately around the target and its structure was not being affected by falling fuel prices or unusually high services inflation.
Part of the discussion was devoted to the extent to which monetary policy should be eased. A majority of the board members argued in the debate that there were still some inflationary pressures in the economy. They were therefore inclined to be cautious in reducing interest rates, preferring a cut of 0.25 percentage point. Karina Kubelková felt such a step was appropriate given the current economic situation, market expectations and the exchange rate path (which was as assumed in the forecast). At the same time, a modest rate cut should not lead to any major increase in systemic risks in the financial stability area. Jan Procházka agreed, adding that keeping real interest rates positive should help drive up productivity to prevent the rising wage costs from passing through to prices.
There were also different opinions on how much to cut interest rates. Tomáš Holub recommended returning to a medium-term, forward-looking view of inflation. This view was directing the Board to continue to lower rates. Monetary policy-relevant inflation was slightly below the target at the monetary policy horizon. The economy was below its potential and recovering only gradually. On top of that, fiscal policy had been restrictive for the whole of this year and was visibly hindering the economic recovery, primarily via household consumption. It therefore did not make sense to keep monetary policy too tight. Tomáš Holub meanwhile assessed the risks of the summer forecast as modestly anti-inflationary overall, indicating a need to lower domestic interest rates more quickly over the rest of this year. He therefore felt it was necessary to continue easing monetary policy to a greater extent. Jan Frait also said that his own assessment of the medium-term macroeconomic outlook alone would be consistent with a 0.50 percentage point cut. However, he was taking into account the risk of investors suddenly revising their view of the long-term performance of the Czech economy, which could cause the koruna to come under depreciation pressure.
The board members also mentioned other aspects relevant to their decision. It was said that the monetary policy stance remained tight. Some of the members said that the interest rate reduction process could be paused or terminated at future meetings as rates approached their long-term neutral levels. Eva Zamrazilová stated that she considered undershooting the inflation target to be a less serious problem than overshooting it.
At its meeting, the Bank Board lowered the two-week repo rate by 0.25 percentage point to 4.25%. At the same time, it lowered the discount rate by the same amount to 3.25% and the Lombard rate to 5.25%. Six members voted in favour of this decision: Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Jan Kubíček and Jan Procházka. Tomáš Holub voted for reducing rates by 0.50 percentage point.
Reporting by Jason Hovet
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