Česká národní banka

Minutes of the Bank Board Meeting on 25 June 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 fourth situation report assessing the new information and its effect on the fulfilment of the forecast contained in the third 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. In the light of new data, the risks to the forecast were assessed as being balanced, with positive information from the domestic economy acting in the inflationary direction and the Czech koruna’s exchange rate against the euro having an anti-inflationary effect. Annual headline inflation had risen to 0.7% in May, 0.4 percentage point higher than forecasted. This increase in inflation was due to all consumer basket components, especially food prices. Higher adjusted inflation excluding fuels had also contributed to the pick-up in consumer price inflation, reflecting accelerating growth of the domestic economy, an improving labour market and a weaker exchange rate of the koruna against the dollar.

According to the available data, the annual growth of the domestic economy had accelerated sharply to 4.2% in 2015 Q1, more than double the forecasted rate of growth. The main source of the deviation of GDP growth from the forecast had been a rise in inventories, which had accounted for more than one-half of the annual GDP growth. However, the other expenditure components except net exports had also recorded positive contributions to economic growth. The accelerating domestic economic growth was also fostering a continuing improvement in the labour market situation. The growth rate of total employment was increasing, the unemployment rate was falling and the number of job vacancies was rising. Average wage growth had risen to 2.2% in 2015 Q1, slightly above the current forecast.

In the discussion that followed the presentation of the situation report, a majority of the board members agreed that overall the new information represented balanced risks to the current inflation forecast at the monetary policy horizon. On the basis of the new information, inflation could be expected to be higher than the current forecast, but still well below the inflation target, in the next 12 months. It was repeatedly noted that even in the light of the newly available data, the assumption that inflation would merely be approaching the target from below at the monetary policy horizon remained in place. In this situation, the Board stated again 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. The Board also repeated its readiness to move the exchange rate commitment if there were to be a long-term increase in deflation pressures capable, among other things, of causing a slump in domestic demand or a systematic decrease in inflation expectations. However, there was a consensus that the probability of such developments had decreased since the Board’s previous monetary policy meeting.

The Board discussed the surprisingly high rate of GDP growth in more detail. It was said repeatedly that despite possible revisions, these figures indicated the onset of robust economic growth and that this growth was set to continue in the medium term. The board members also positively assessed the fact that the growth was being driven by practically all components of demand. It was also said that the forecast assumption of gradual closure of the output gap was being borne out, although the gap was still negative. It was also said that the higher GDP growth coupled with the related improvement in the labour market situation should lead to higher tax revenue and hence also to a better general government result. Some of the Board Members also stated that the renewed economic growth would probably lead to renewed real convergence of the Czech economy.

Some of the board members expressed doubts about the quantitative rate of economic recovery and about the sharp upswing in quarterly GDP growth. This growth had been driven primarily by change in inventories, which might have been affected by one-off, non-fundamental factors and may undergo a correction when the data are next revised. In this context, the Board discussed the usually high import intensity of inventories, which, however, had not been confirmed by the latest data, and the stockpiling of cigarettes associated with excise duty increases implemented in previous years, which might have affected the distribution of seasonal effects across quarters. On the other hand, the opinion was expressed that in the current phase of the business cycle, the stockpiling was linked significantly with unfinished investment projects, which was subsequently translating into growth in fixed capital formation and hence into the dynamics of economic growth. A majority of the board members thus agreed that although the GDP growth recorded in 2015 Q1 had been due in large part to one-off factors, it remained robust even after those factors were taken into account. There was thus a consensus that the Czech economy would probably continue to grow faster than forecasted in the remainder of this year.

In connection with the economic recovery, the Board also discussed the generally improving labour market situation and in particular its impacts on wage growth. The opinion was expressed that the relatively strong growth in the number of job vacancies was signalling a structural imbalance between labour supply and demand, which in the future might give rise to a shortage of labour in some parts of the market and would foster higher wage growth. Against this, however, it was said that in the current geopolitical situation any shortage of labour would be very easily satisfied by workers from abroad. It was also said that average wage growth would be suppressed by the composition effect, with growth in employment of workers with lower skills and wages. Some of the board members also expressed doubts about the consistency of some labour market data from different sources, pointing to a combination of no change in hours worked and simultaneous growth in the converted number of employees and a rising proportion of overtime work. This inconsistency was hard to explain and, coupled with data revisions, was introducing general uncertainty into the interpretation of wage growth. However, a majority of the board members agreed that despite the evident labour market recovery and despite the renewed upward pressures on wages, wage growth was currently in line with the assumptions of the forecast and did not imply major inflation pressures. It was also noted that the slightly higher-than-forecasted wage growth came after surprisingly low wage growth in several previous situation reports.

In contrast to the recovering economy and labour market and the higher-than-expected consumer price inflation, several board members drew attention to the lower-than-expected producer price inflation, which was apparent in all its components. It was said that the lower outlook for wholesale gas prices, which had yet to be reflected in regulated prices, might represent a downside risk to inflation next year. Against this, some of the board members emphasised the inflationary effect of the weakening of the koruna against the dollar, which was already starting to pass through to the majority of price categories. Some of the board members also pointed to nascent growth in long-term interest rates, with government bond yields having gone up.

The Board also discussed the uncertainties and risks associated with developments abroad. Overall, it was said that the euro area was recording a faster-than-forecasted economic recovery driven by accommodative monetary conditions. Some of the board members, however, were puzzled by the relative slowdown of the German economy, which had previously been the fastest growing economy in the euro area. Mention was also made of the rising risk of an uncontrolled bankruptcy of Greece. However, the prevailing view was that any materialisation of this risk would have relatively small and indirect impacts on the Czech economy, as its direct trade and financial links with Greece were negligible.

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