Česká národní banka

Minutes of the Bank Board Meeting on 7 May 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 third situation report and the new macroeconomic forecast covering the horizon up to the end of 2016. The Czech economy had expanded by 1.4% year on year in 2014 Q4, with most domestic demand components having made positive contributions. By contrast, the contribution of net exports had been negative. In quarter-on-quarter terms, economic activity had risen by 0.4%. Annual headline inflation had been very low in 2015 Q1, averaging 0.1%. The price level adjusted for changes to indirect taxes had fallen slightly in Q1. Both headline and monetary policy-relevant inflation thus remained well below the lower boundary of the tolerance band around the target. The very low inflation was being fostered by a year-on-year decline in fuel and food prices, reflecting a drop in global oil prices and a persisting fall in agricultural commodity prices respectively. The pass-through of the weakened exchange rate of the koruna to inflation via import prices was fading, but the easy monetary conditions were still contributing to continued growth in economic activity and a recovery in the labour market. The growing domestic economy had thus been fostering higher inflation for several quarters now.

The new forecast was based on an assumption 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 subsequent 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 domestic prices and other nominal variables. The forecast expected both headline and monetary policy-relevant inflation to be close to zero for the rest of 2015 and then rise to the 2% target in 2016. Import prices would remain anti-inflationary in the near future owing to falling producer prices in the euro area and the recent decline in energy commodity prices. This effect would gradually dissipate, however, and import prices would be slightly inflationary next year. The domestic economy would contribute to price growth over the entire forecast horizon as a result of a gradual recovery in wage growth. Following a temporary slowdown in late 2014, GDP growth would start to accelerate again this year thanks to still easy domestic monetary conditions, recovering external demand, the positive cost effect of low oil prices and rising government investment. The domestic economy would grow by 2.6% in 2015 and pick up to 3.2% in 2016, mainly on the back of a further acceleration in external demand.

In the discussion that followed the presentation of the situation report, the prevailing view was that the risks to the new forecast were anti-inflationary due to the evolution of domestic wages and the koruna-euro exchange rate. It was said several times that the situation was little changed from the previous situation report from the economic perspective. Some of the board members discussed the possibility that the economic trend was changing, although there was persisting uncertainty, associated in particular with external economic developments. It was said that it was appropriate to continue with the easy monetary policy as currently configured. Under this policy, the outlook for both headline and monetary policy-relevant inflation was heading towards the inflation target from below. There was a consensus that the appropriate response was to leave rates unchanged at technical zero. In line with the new forecast, the Board stated that the Czech National Bank would not discontinue the use of the exchange rate commitment as a monetary policy instrument before the second half of 2016.

The Board discussed wage growth and its effect on inflation in detail. A majority of the board members agreed that lower wage growth represented an anti-inflationary risk to the forecast, a risk that would be reflected in a slower return of inflation to the target. It was said that that the lower wage growth reflected structural factors affecting the labour market. Another reason for potentially slower wage growth discussed by the Board was lower inflation expectations. In this context, it was said repeatedly that although inflation expectations one year ahead had fallen, these expectations were rational and reflected the fall in oil prices. Long-term inflation expectations remained anchored near the inflation target. It was said several times in this regard that a monetary policy reaction would be necessary in the event of a systematic decline in inflation expectations affecting wage growth, for example. In a discussion of the wage growth outlook, however, it was also said that wage growth might conversely be higher in the future and that it was affected not only by inflation expectations, but also by the labour market situation. A reason mentioned several times was the observed sharp growth in demand for labour. It was also said that the outlook for stable and sustained easy monetary policy would lead – albeit perhaps in the longer run – to growth in investment, which would also increase the upward pressure on wages via demand for labour.

In a discussion of domestic inflation, it was noted that the situation was different than it had been in the past six years. Adjusted inflation excluding fuels, which reflected monetary policy developments, had been positive for a year now. This represented a positive signal that the domestic economy was generating inflation pressures. It was also said in this context that when the exchange rate commitment had been introduced in November 2013, the domestic economy had been facing a threat of a relatively long and dangerous period of deflation associated with a slump in domestic demand. Since then, the exchange rate shock had been passing through to other nominal variables. It was said that had this pass-through not happened, the currently observed inflation would be very different. If oil prices had not fallen at the turn of the year, inflation would now be inside the tolerance band around the target.

In a discussion of domestic economic developments, it was noted that the slowdown in GDP growth in late 2014 had been only temporary and that GDP growth had been accelerating again since the start of 2015, thanks among other things to a positive cost shock. A majority of the board members agreed that economic growth would continue to be robust over the forecast horizon. It was said repeatedly that domestic demand was rising and that this was visible in import growth. In this context, it was noted that any fall in domestic demand associated with sustained deflation tendencies would be grounds for monetary policy intervention.

The Board also discussed the economic situation abroad and its effect on domestic inflation. It was said that new data confirmed an economic recovery in Europe, but there might still be a sudden change for the worse. It was said that the outlook for producer prices in the euro area primarily reflected past developments and that these prices might not fall as sharply. In this context, it was also said that the expected effect of foreign inflation on domestic inflation would be negative this year.

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 Franta, Adviser to the Board