Česká národní banka

CNB > Monetary policy > CNB Board decisions > 2008 > 17 December 2008

Minutes of the Board Meeting on 17 December 2008

Present at the meeting: Z. Tůma (Governor), M. Hampl (Vice-Governor), M. Singer (Vice-Governor), R. Holman (Chief Executive Director), V. Tomšík (Chief Executive Director), E. Zamrazilová (Chief Executive Director).

The meeting opened with a presentation of the eighth situation report, supplemented with an analysis of statistical data published after the report had been finalised. Both the situation report and the assessment of the latest data implied a clear anti-inflationary balance of risks for the forecast. The main downside risks included the economic downturn abroad, the decline in global commodity prices, the lower-than-expected current inflation, slower domestic economic growth and also the evolution of client interest rates and rates on the interbank market. The weaker exchange rate of the koruna presented an upside risk to inflation.

After the presentation of the situation report, the Board discussed the newly available information and agreed that the balance of risks to the fulfilment of the current forecast was tilted significantly towards the downside. It was said in the discussion that the new information both from the domestic economy and from abroad was signalling different-than-expected developments. The current forecast was thus a much weaker guide for decision-making than usually. The need to stabilise inflation expectations while bearing in mind the risk of sharp disinflation was among the principal arguments for a more significant rate reduction.

The Board agreed that the external environment in particular was a source of sizeable anti-inflationary shocks. It was said that an unprecedented downward revision of the outlook for economic growth abroad was occurring. The fall in external demand was described as being a result of a typical excess capacity crisis, and that this excess capacity, moreover, was concentrated in key branches for the domestic manufacturing industry. The Board agreed that the high openness of the Czech economy meant that this adverse shock would transmit to it rapidly and strongly. There was also agreement that the current rapid decline in global commodity prices and the near-term outlook for those prices constituted an additional sizeable anti-inflationary shock. The opinion was also expressed that optimum monetary policy-making should be the priority, even at the cost of more difficult communication.

The incomplete and lagged pass-through of the changes in monetary policy rates to market rates and to client interest rates was discussed, as were the monetary policy implications of this phenomenon. The opinion was repeatedly expressed that in order to steer interest rates relevant to the economy in the desired way, the imperfect transmission of monetary policy rates had to be compensated for by making larger changes to monetary policy rates. Against this, however, it was said that although the pass-through was lagged and that market and client rates contained additional credit and other premia, most of the changes in the CNB’s rates ultimately transmitted to interest rates relevant to the economy. It was also said that owing to the year-end it was unreasonable to expect any change in rates to have a major effect this year. Therefore, it might be useful, given the persisting uncertainty, to spread the monetary policy measures more over time.

Potential disturbances to financial intermediation by domestic banks were mentioned as another potential downside risk to inflation. Although domestic banks had sufficient capital, they might start to rein in their lending in response to the increased uncertainty and negative expectations linked with the world financial crisis and the downswing in the real economy.

In the context of the debate of monetary policy transmission mechanisms, attention was given to the effect of the exchange rate on the real economy and on inflation. The Board agreed that in the present situation the weaker exchange rate was having a stabilising effect on the domestic economy. The opinion was expressed that external demand was currently having a stronger effect on the domestic economy than the exchange rate. Against this, it was said that the exchange rate transmission channel was ensuring relatively rapid transmission of the monetary policy impulse to the economy.

The Board discussed the risks to the koruna exchange rate going forward. The uncertainty in this regard was generally an argument for a gradual adjustment of monetary policy rates. Regarding the effect of the interest rate differential on the exchange rate, the prevailing view was that the differential between koruna monetary policy rates and ECB rates was now playing only a very small role. In support of a greater reduction in rates, however, it was repeatedly said that a major widening of the differential in favour of the Czech currency – for example following a larger reduction in foreign rates – might foster a possible change in the exchange rate trend and a return to appreciation of the koruna. However, it was also said that the probability of a further weakening of the koruna seemed higher than the probability of a return to a stronger koruna. The opinion was also expressed, though, that the costs of the less likely appreciation would be asymmetrically high, and the Board’s next regular monetary policy meeting was not due to take place until February, whereas a sizeable fall in foreign rates could be expected in the interim. Conversely, the arguments for a more cautious approach included concerns of triggering a precipitous weakening of the exchange rate as a possible consequence of a too-large change in domestic rates.

At the close of the meeting the Board decided by a majority vote to lower the CNB two-week repo rate by 0.50 percentage point to 2.25%, effective 18 December 2008. At the same time it decided to lower the discount rate and Lombard rate by the same amount, to 1.25% and 3.25% respectively. Four members voted in favour of this decision: Governor Tůma, Chief Executive Director Holman, Chief Executive Director Tomšík and Chief Executive Director Zamrazilová. Vice-Governor Hampl voted for lowering the repo rate by 0.75 percentage point and Vice-Governor Singer for lowering the rates by 1 percentage point.

Author of the minutes: Martin Cincibuch, Adviser to the Board

Please send any comments to the author at: martin.cincibuch@cnb.cz