Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2014 > 6 November 2014

Minutes of the Bank Board Meeting on 6 November 2014

Present at the meeting: Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Kamil Janáček, Lubomír Lízal, Jiří Rusnok, Pavel Řežábek.

The meeting opened with a presentation of the seventh situation report and the new macroeconomic forecast covering the horizon up to the end of 2016. The Czech economy had expanded by 2.5% year on year in 2014 Q2, with all domestic demand components having made positive contributions. By contrast, the contribution of net exports had been negative, reflecting higher imports of commodities for investment purposes. In quarter-on-quarter terms, economic activity had risen for the fifth consecutive quarter. Headline inflation had rebounded from near-zero levels in past months, reaching 0.7%, but remained below the lower boundary of the tolerance band around the Czech National Bank’s target. The low inflation had been due to a continuing decline in administered prices and subdued inflation in the euro area. The weakened exchange rate of the koruna, which was still feeding through to inflation via import prices, was acting in the opposite direction. The growth of the domestic economy, which had also given rise to an improvement on the labour market, was having an inflationary effect as well.

The new forecast was based on an assumption that market interest rates would be flat at their current very low level and the koruna exchange rate would be used as a monetary policy instrument until 2016 Q1. The return to conventional monetary policy would not imply appreciation of the exchange rate to the level recorded before the CNB started intervening, as the weaker exchange rate of the koruna was in the meantime passing through to prices and other nominal variables. The forecast expected inflation to continue rising gradually and exceed the 2% target at the start of 2016. The inflationary effect of import prices would fade at the end of this year owing to the observed fall in producer prices in the euro area amid a stable exchange rate of the koruna. By contrast, the domestic economy would increasingly contribute to price growth, mainly as a result of accelerating wage growth. Following a decline in GDP in the past two years, the Czech economy would grow by 2.5% this year according to the forecast. It would show the same growth rate in 2015 and accelerate slightly to 2.8% in 2016. Economic growth would be fostered by higher external demand, easy domestic monetary conditions and a recovery in government investment.

In the discussion that followed the presentation of the situation report, the Board assessed the risks to the new forecast as being balanced. The Board also repeated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2016. The Board stated that the downward shift in the forecast for both headline inflation and monetary-policy relevant inflation primarily reflected the subdued inflation in the euro area. Some of the board members positively assessed the change in trend recorded by inflation, which was heading towards the target, and also the fact that adjusted inflation excluding fuels, which reflects demand pressures most strongly in the price index, was now contributing positively to inflation after five years of negative contributions. However, doubts were expressed whether the future domestic inflation pressures would be able to outweigh the disinflationary tendencies from abroad. In the discussion, some of the board members pointed to the weakening of the koruna, which was fluctuating clearly above the level of the announced exchange rate commitment. A majority of the board members welcomed this exchange rate development, stating that the current market-generated weaker exchange rate level was not only helping to return inflation to the 2% target more quickly, but also fostering continued sustainable growth of the economy.

The Board spent quite some time discussing the uncertainties and risks associated with developments abroad. In particular, it discussed the sizeable downward revision of the outlook for foreign economic activity. It was said that disinflationary pressures were still apparent in both consumer and producer prices in the euro area. The Board agreed that no major inflationary impulses could be expected from abroad in the near future. Some of the board members expressed uncertainty about future developments in the euro area above and beyond the recent revision of the official outlooks. The possible effect of ECB monetary policy on the saving rate and the deferral of consumer and investment spending in Germany was discussed. Against that, mention was made of the relatively positive developments in other trading partner countries, in particular Slovakia’s relatively high economic growth outlook. Some of the board members pointed to the possible positive effect of the weaker euro on German and indirectly also Czech export performance. In the context of external developments, the Board also discussed the fall in oil prices, which would imply lower inflation pressures but could be seen as a positive supply shock.

The Board also discussed domestic economic activity by comparison with foreign economic activity. It was said that despite the downward revision of the domestic economic growth prediction, the outlook for the Czech economy had moved upwards by comparison with other EU countries. Consequently, the decline in growth abroad did not necessarily imply a fall in economic growth in the Czech Republic, which would be driven by domestic demand. With regard to the effect of domestic demand on growth, the Board also discussed the role of investment in fixed capital, which had contributed to economic growth to an increased extent in the second quarter. The inconsistency between growth in corporate investment activity and the current low credit growth was mentioned. On the other hand, however, it was said that growth in demand for credit was now starting to be visible in the data on newly extended loans and was also being flagged in the bank lending survey. Increased government sector investment was also contributing to investment growth. Some of the board members expressed concerns about whether the projected further growth in such investment might be hindered by legislative changes and related complications in the approval processes needed to implement those investments. The opinion was also expressed that investment activity was concentrated largely in sectors linked to the automotive industry, which was sensitive to external demand, and that this might pose a risk to domestic economic growth. On the other hand, however, it was said that other sectors were also in a recovery phase.
As a year had passed since the adoption of the exchange rate commitment by the Czech National Bank, the Board assessed the effect of the commitment on the economy. A majority of the board members stated that the adoption of the exchange rate commitment had served its purpose, had contributed positively to the renewal of GDP growth, and had fostered an improvement in the labour market situation and in the financial situation of the corporate sector. However, it was said that despite the shift in the exchange rate, inflation had not gone up as much as originally predicted. Against this, however, it was said that the shift in the inflation path could be explained by the surprisingly strong anti-inflationary effect of the external environment. Monetary policy had thus helped inflation to step back from the edge of deflation, the threat of which, in the light of developments abroad, had been even greater than suggested by the analyses available a year ago. It was also said that the adoption of the exchange rate commitment had fundamentally contributed to anchoring inflation expectations close to the 2% target.

At the close of the meeting the Board decided unanimously to leave the two-week repo rate unchanged at 0.05%. Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Kamil Janáček, Lubomír Lízal, Jiří Rusnok and Pavel Řežábek voted in favour of this decision. The Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene in the foreign exchange market if needed to weaken the exchange rate so as to keep the exchange rate of the koruna close to CZK 27 to the euro.

Author of the minutes: Michal Hlaváček, Adviser to the Board