Česká národní banka

Minutes of the Bank Board Meeting on 6 August 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 fifth situation report and the new macroeconomic forecast covering the horizon up to the end of 2017. Both headline and monetary policy-relevant inflation had increased markedly in year-on-year terms in 2015 Q2, although they had still been well below the inflation target. The increase in inflation had been chiefly due to food prices, which had returned to annual growth. Adjusted inflation excluding fuels had stayed positive and stable despite fade-out of the direct effect of the weakened exchange rate of the koruna against the euro and still subdued inflation abroad. Thanks in part to one-off factors, the growth of the Czech economy had picked up significantly to 4.0% year on year in 2015 Q1, with all components of domestic demand having contributed. The contribution of net exports had been negative amid a persisting lead of import growth over export growth. The growing domestic economy was fostering higher inflation, whereas import prices were depressing inflation.

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. Consistent with the forecast was an increase in market interest rates amid modest appreciation of the koruna in 2017. The return to conventional monetary policy would not imply appreciation of the exchange rate at the monetary policy horizon to the slightly overvalued level recorded before the CNB started intervening, among other things because the weaker exchange rate of the koruna was in the meantime passing through to domestic prices and other nominal variables. The forecast expected inflation, despite an expected increase, to be below the 2% inflation target at the monetary policy horizon. The recent appreciation of the koruna towards the level of the exchange rate commitment was an unfavourable factor that was tightening the monetary conditions and hence postponing achievement of the inflation target. According to the forecast, sustainable fulfilment of the inflation target, which is a condition for a return to conventional monetary policy, would not occur until early 2017. The domestic economy would foster higher consumer prices over the entire forecast horizon via accelerating wage growth. Accelerating external demand, low oil prices, easy domestic monetary conditions and higher government investment would lead to GDP growth of 3.8% this year. Economic growth would slow to 2.8% next year, reflecting the unwinding of the effect of an extraordinary increase in inventories at the start of this year as well as a fall in oil prices. A decline in government investment and the recent appreciation of the koruna-euro exchange rate would also foster an economic slowdown. The economy would maintain the same rate of growth in 2017.

In the discussion that followed the presentation of the situation report, the board members agreed that the risks to the new forecast were broadly balanced. There was a consensus that the appropriate response was to leave rates unchanged at technical zero. The Board stated 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. It was said several times that although the need for easy monetary conditions had decreased since the previous meeting, it remained high, as evidenced by the only slow return of inflation to the inflation target from below over the monetary policy horizon. It was said repeatedly in the discussion that the easy monetary conditions had not yet passed through fully to inflation and that this, combined with potential non-fulfilment of the wage growth forecast, could be an argument for a later exit from the use of the exchange rate as a monetary policy instrument. However, it was said that the current domestic monetary policy stance guaranteed that inflation would return to the 2% inflation target.

It was said repeatedly in the discussion that the economy was on a robust and sustainable growth path. It was said that the growth was being aided by long-running easy monetary policy and would also be boosted this year by fiscal policy, a faster inflow of money from European funds (as reflected in the current account surplus), a positive supply shock due to low prices of oil and other commodities, and a recovery in demand in the euro area. Several of the board members stated that the re-emerging process of real convergence would continue at a lower pace than before the crisis and that economic growth would be lower in the next two years than this year. In this regard, it was said repeatedly that the estimates of the real equilibrium exchange rate indicated more moderate appreciation of the real exchange rate and that part of this appreciation might materialise at the forecast horizon via an inflation differential vis-à-vis the euro area. In a discussion of the structure of the growth, it was said that foreign trade could not be expected to make a larger contribution at the forecast horizon because imports were rising due to growing domestic demand, and that the foreign trade position was therefore unlikely to be more favourable than it had been when the exchange rate had started to be used as a monetary policy instrument. It was also said several times that it was good idea to wait for more data to confirm positive tendencies in the economy.

The Board discussed the implications for the inflation forecast of the new data from the real economy. It was said that the favourable data were not yet passing through to inflation or individual price categories, where prices were rising at a rate well below 2%. It was said that food prices were a surprise, as they were usually volatile. It was said that food prices might be the first signal of sustainability of producers’ renewed margins, although these margins had yet to feed through to other parts of the economy. It was said several times that inflation would not near the target until the start of 2017 and that from the perspective of hitting the inflation target, which is the monetary policy mandate, it was essential for inflation to be sustainable at the target. In this regard, several of the board members expressed concerns about the low speed at which inflation was returning to the target. It was said that the economy had come through the longest recession in history and that neither the temporarily high economic growth nor the other positive data were exerting any major pressure for rapid closure of the currently negative output gap. It was said that an absence of major inflationary pressures had been observed in the past even at higher-than-current GDP and wage growth rates.

The Board discussed labour market developments, including wage growth, which was an indicator of domestic inflation pressures and a factor fostering the return of inflation to the target. It was said that the wage growth forecast was higher than the current figures and also higher than analysts’ expectations. However, it was said that bonus payments in firms had long been relatively restrained and that this component of wages could quickly resurge. It was also said repeatedly that employment, unemployment and vacancies were indicating positive tendencies in the labour market.

The Board discussed the risks and uncertainties arising from developments abroad. It was said that given the expected decline in oil prices and their protracted pass-through, the foreign producer price outlooks for 2016 were overvalued and could represent a downside risk to inflation. However, it was said that the oil extraction and processing sector was sending out signals in both directions about future oil production and prices and that this information was already reflected in the market outlooks. It was said that new profit figures were pointing to stabilisation of the foreign financial sector, which was a condition for growth abroad. It was said that the lower global commodity prices would boost domestic economic growth, but on the other hand were a reflection of falling global growth, which would negatively affect demand for Czech exports. It was said repeatedly that the main source of uncertainty was the situation in Europe and that developments in Germany were of key importance for the domestic economy. It was said in the discussion that the domestic economy was being affected by the extraordinary monetary policy measures adopted in the euro area and that the discontinuation of these measures was also a condition for the return of domestic monetary policy to the conventional regime at the forecast horizon. It was said that the external environment and monetary policy in the euro area remained fundamental factors for the domestic economy and were having the same effect as in the past, but the monetary policy stance in the koruna zone guaranteed that inflation would return 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