Česká národní banka

CNB > Monetary policy > CNB Board decisions > 2011 > 3 February 2011

Minutes of the Bank Board Meeting on 3 February 2011

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


The meeting opened with a presentation of the first situation report containing the new macroeconomic forecast. According to this forecast, the domestic economy would continue to be characterised by modest recovery and stable inflation close to the 2% target. By comparison with the previous forecast, the outlook for economic growth in the euro area had been increased, especially for the near term, and this had in turn increased the domestic growth forecast. The outlook for commodity price growth was also higher. Together with food prices, commodity prices were currently the most significant source of inflation pressures. These inflation pressures were being suppressed by exchange rate developments. The forecast was not expecting any major changes to indirect taxes. According to the forecast, domestic GDP growth would be 2.4% in 2010.

According to the February forecast, both headline inflation and monetary-policy relevant inflation would be close to the inflation target at the monetary policy horizon. Growth in administered prices would contribute to consumer price inflation. The inflation pressures caused by the growth in commodity and food prices were easing at the monetary policy horizon. Adjusted inflation would turn from negative to positive in 2011 Q3. GDP growth would temporarily slow to 1.6% in 2011 as a result of fiscal consolidation, a decline in some specific investments and investment in inventories, and slowing growth in external economic activity. Growth would pick up again in 2012. The nominal exchange rate was gradually appreciating at the forecast horizon. Consistent with the forecast was stability of market interest rates close to their current levels initially, followed by gradual rise in rates as from the end of 2011. The risks of the forecast, described in three alternative scenarios, were linked with external developments, were pointed in both directions, and were balanced overall.

After the presentation of the situation report, the Board began its discussion. The opinion was repeatedly expressed that rates should be left at the existing level because there were no demand-pull inflation pressures apparent in the domestic economy and the cost-push pressures were temporary and were being suppressed by exchange rate developments. On the other hand, it was repeatedly said that rates should be increased because the cost-pull inflation pressures could be sustained and because demand-pull inflation pressures might arise as a result of a faster household consumption recovery and a faster export recovery than assumed by the forecast.

It was said several times that the difference between these two views was due not to a fundamentally different assessment of the economic situation, but rather to a different emphasis placed on the individual risks of the forecast. The Board agreed that the risks associated with the February forecast were significant and were pointed in both directions, and that it would be necessary to assess on an ongoing basis whether any of the alternative forecast scenarios were materialising. In this context, it was repeatedly said that a premature rate increase might have larger negative impact on the economy than a delayed increase, because in the present situation the cost-push inflationary pressures were prevailing and a continuation of the debt crisis in Europe could not be ruled out. It was also said several times that an increase in rates would clearly signal the end of the crisis and that it would not have negative economic impacts, because – given the length of transmission – it would not start to act until 2012 H1, when growth would accelerate.

The Board went on to discuss the inflationary and anti-inflationary risks of the forecast in detail. It was said that a very slight rise in demand pressures generated by wage growth could be expected at the forecast horizon. This rise, moreover, would be suppressed by low import prices, so no upside risks to inflation were apparent. It was also said that the possibility of sustained, not temporary, growth in commodity and food prices was an upside risk. It was said that commodity price growth would be supported by the global liquidity overhang. In this context, it was said that the commodity price growth should, however, be observed in koruna terms and that a more appropriate forecast in the food area would be to expect an average harvest and therefore a temporary rise in food prices. The opinion was also expressed that, given the convergence phase, a slower equilibrium rate of appreciation of the koruna could be expected and that import prices would therefore not necessarily suppress the domestic demand pressures sufficiently.

In connection with the risks of the inflation forecast, the board also discussed the growth outlook. It was said that a potential faster recovery of domestic growth was one of the upside risks to inflation. However, it was also said that it was necessary to consider the possibility of an escalation of the debt crisis in the euro area, which, on the contrary, would lead to a slowdown in growth. It was also said that fiscal consolidation would foster slower growth in all segments in 2011. It was said several times that the recovery in the euro area could be faster than assumed in the forecast, and that growth in net exports could contribute more strongly to domestic growth by comparison with the forecast. The opinion was also expressed several times that household consumption could recover more quickly if the saving rate recorded no cyclical increase, as assumed by the forecast, and continued to show a downward trend. On the other hand, it was repeatedly said that households found themselves in a time of great uncertainty, as demonstrated by the high unemployment rate, and that consumption growth was therefore unlikely to accelerate. It was also said that the end-of-year sales figures might show (like in Germany) that household consumption growth was not accelerating. It was repeatedly said that the changes in the structure of M2 were indicating a preference for liquidity among households and that this liquidity was a potential source of consumption growth. In this context, however, it was said several times that a preference for liquidity could also be identified as a downside risk to inflation, because this change in the M2 structure could slow the creation of credit.

At the close of the meeting the Board decided by a majority vote to leave the two-week repo rate unchanged at 0.75%. Four members voted in favour of this decision: Governor Singer, Vice-Governor Hampl, Vice-Governor Tomšík, and Chief Executive Director Řežábek. Three members voted for increasing rates by 0.25 percentage point: Chief Executive Director Holman, Chief Executive Director Janáček and Chief Executive Director Zamrazilová.


Author of the minutes: Kateřina Šmídková, Adviser to the Board