Česká národní banka

Minutes of the Bank Board Meeting on 26 March 2015

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 second situation report assessing the new information and its effect on the fulfilment of the forecast contained in the first situation report. The forecast had assumed that market interest rates would be flat at their current very low level and the exchange rate would be used as a monetary policy instrument until the end of 2016, i.e. over the entire forecast horizon. The balance of risks to the forecast was anti-inflationary, due mainly to the evolution of wages and the exchange rate of the koruna against the euro. Annual headline inflation had been at 0.1% in February, slightly higher than forecasted. The near-zero inflation primarily reflected the drop in oil prices, which was a positive supply shock boosting Czech economic growth. Food prices were also falling more sharply than forecasted. By contrast, adjusted inflation excluding fuels had – in line with the forecast – increased slightly further, reflecting the fading direct effect of the weakened koruna and renewed economic growth.

As expected, annual growth of the Czech economy had slowed to 1.5% in 2014 Q4. The slight downward deviation from the forecast had been due to lower-than-expected additions to inventories. By contrast, the other GDP components had risen faster than forecasted. In line with the forecast, the monthly data from the start of this year were indicating continued growth in domestic economic activity, as solid growth in industrial production and construction output and a pick-up in retail sales had continued to be observed in January. The continuing domestic economic growth was fostering a further improvement in some labour market indicators. Employment and the share of unemployed persons were both doing better than forecasted. The number of vacancies was also increasing and had reached its highest level in six years in February. On the other hand, wage growth in the business sector had been well below the forecast in 2014 Q4. However, the total wage bill was not lagging so significantly behind the forecast and was continuing to foster growth in household consumption.

In the discussion that followed the presentation of the situation report, a majority of the board members agreed that the new information represented an anti-inflationary risk to the forecast overall. It was also said that the new figures were having contrary effects on the inflation forecast and that some indicators might be revised in the near future. There was a consensus that the appropriate response was to leave rates unchanged. The Board repeated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016 and that it was ready to move the level of the exchange rate commitment if needed. The prevailing view was that, given the anti-inflationary balance of risks to the forecast, the probability of such a step had increased compared to the Board’s previous monetary policy meeting.

It was said repeatedly that many indicators were confirming positive tendencies in the economy and that the introduction of the exchange rate commitment in November 2013 had contributed significantly to that fact. It was said that domestic demand had rebounded and was showing robust growth, as evidenced by developments in the individual components of GDP, the employment and unemployment figures, a halt in growth in the saving rate, increasing credit growth and positive core inflation. It was said that external demand was also having a positive effect, but that the economy was less dependent on external demand than in the past. It was said that domestic demand growth would gradually cause inflation to accelerate, but the environment was currently one of low inflation, as evidenced in particular by low wage growth.

It was said in the discussion that if the standard interest rate instrument were available, its use would lead to a faster return of inflation to the 2% inflation target. It was said repeatedly that for a small open economy at the zero lower bound on monetary policy rates, use of the exchange rate was the most efficient and effective monetary policy instrument, although the use of other unconventional tools could not be ruled out either. It was also said that monetary policy had unlimited options in the event of a need to ease the monetary conditions. The assumption of inflation expectations being anchored at the inflation target was also discussed. It was said that a systematic decline in inflation expectations would necessitate a monetary policy response. The concern was expressed that inflation expectations were more a reflection of past inflation than of expected growth in prices, especially in the case of households. It was said repeatedly that the introduction of the exchange rate commitment in November 2013 had led to a desirable increase in inflation expectations towards the inflation target.

The Board discussed in detail developments on the labour market and the reasons why the favourable tendencies in employment and unemployment were not yet being reflected in faster wage growth. One possible reason was that the published wage figures were backward-looking and that future wage growth might produce a positive surprise. It was also said that the number of vacancies had almost returned to the usual pre-crisis level while the number of unemployed persons remained significantly higher, possibly reflecting a growing skills gap between labour demand and supply. It was said repeatedly that the low wage growth might reflect structural changes in the employment-wage growth relationship. It was said that wage growth was low in many countries in the wake of the global financial crisis and that the contribution of wages to the fulfilment of the inflation target would be lower than in the past in the domestic economy too. It was said repeatedly in the discussion that the output gap was still negative and was not fostering faster wage growth. It was said that in the past, stronger inflation pressures had been associated with a much higher number of job vacancies and much lower unemployment. It was said that in light of the growth in employment, the anti-inflationary pressures stemming from growth in the wage bill were less strong than indicated by wage growth, but wages and future wage formation were still a major factor as regards growth in domestic demand and inflation pressures over the forecast horizon.

The Board discussed developments abroad and their effects on the domestic economy. It was said that the significant reduction in the outlook for industrial producer price inflation in the euro area was a reaction to the recent drop in oil prices and that the outlooks of foreign analysts entering the forecast were therefore more a reflection of past experience. It was said repeatedly that no further major changes in oil prices were foreseen over the forecast horizon and that the potential second-round effects stemming from lower oil prices represented a downside risk to inflation. It was said in the discussion that many European countries were facing significant anti-inflationary pressures as a result of global tendencies and that this was posing challenges for monetary policy. It was said that the increased uncertainty surrounding the overall expected benefits of the measures adopted by the European Central Bank for developments in the euro area and the Czech economy persisted. It was said repeatedly that the significantly weaker euro against the dollar and other convertible currencies would enhance the price competitiveness of euro area countries and would also have a positive effect on external inflation. It was said several times that the positive impacts of the monetary policy easing in the euro area had not yet been fully incorporated into the external outlooks. It was said that given the close links between the domestic economy and Germany, the weaker exchange rate of the euro could be expected to generate significant growth impulses in the domestic economy, which would also speed up the return of inflation to the 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: Kamil Galuščák, Executive Director, Economic Research Department