Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2015 > 24 September 2015

Minutes of the Bank Board Meeting on 24 September 2015

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

The meeting opened with a presentation of the sixth situation report assessing the new information and its effect on the fulfilment of the forecast contained in the fifth 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. Annual headline inflation had stood at 0.3% in August, lower than forecasted. The deviation from the forecast had been due predominantly to a renewed decline in food prices, reflecting a drop in prices of food and agricultural commodities. Another factor had been an unexpected deepening of the fuel price decline stemming from a renewed fall in global oil prices. Adjusted inflation excluding fuels had been in line with the forecast. Adjusted inflation reflected the impacts of the depreciation of the koruna against the dollar and in particular the growth of the domestic economy, manifesting itself in nominal wage growth. The risks to the current forecast over the next few quarters were assessed as being anti-inflationary, mainly as a result of lower food and fuel prices and administered energy prices. These risks were linked with the decline in world prices of oil and other commodities. At the monetary policy horizon, these anti-inflationary risks were offset by better-than-forecasted data from the domestic economy, i.e. stronger growth in GDP and wages.

The annual growth of the Czech economy had accelerated to 4.4% in 2015 Q2, whereas the forecast had expected a slight correction to 3.4%. This deviation from the forecast had been due mainly to higher-than-expected additions to inventories. All the expenditure components of GDP had contributed to the annual growth, most of all household consumption, gross fixed capital formation and change in inventories. Gross value added growth had picked up to 3.8%, driven mainly by industry. Other sectors – in particular services – had also continued to recover significantly. The indicators available for Q3 were pointing to continued robust economic growth, as evidenced by growth in industrial production and construction output and also in retail sales. The economic growth was continuing to be reflected in improving labour market indicators. The seasonally adjusted share of unemployed persons had moved in line with the forecast, falling to 6.4% in August. The supply of vacancies had also risen. In August, the number of vacancies had been almost twice as high as in the same period a year earlier, reaching a six-year high. Average wage growth in Q2 had been 0.9% higher than forecasted both in the economy as a whole and in the business sector.

In the discussion that followed the presentation of the situation report, a majority of the board members agreed that the newly available information represented an anti-inflationary risk to the forecast at its short end, mainly because of the continuing decline in world prices of energy and agricultural commodities, but also that those risks were offset at the monetary policy horizon by better data from the domestic economy. However, the opinion was also expressed that the inflationary pressures at the forecast horizon might not be as significant as predicted by the model forecast and might not fully offset the short-term anti-inflationary risks. The Board agreed on the need to keep the monetary conditions easy. There was also a consensus that the appropriate response was to keep rates unchanged. The Board also 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.

The Board discussed domestic inflation in detail. It was noted that headline inflation had increased in Q2 from the low levels recorded in Q1, but a decline had been observed since July. It turned out that these swings in inflation had been caused exclusively by food and fuel prices. It was also said that by comparison with the consumer price index, adjusted inflation excluding fuels had been less affected by exogenous movements in global commodity prices and had been assessed several times as being consistent with the gradual recovery of the domestic economy and with GDP and wage growth.

The Board discussed the current economic growth and its implications for the inflation forecast. The current economic growth was repeatedly assessed as being robust. It was said several times that the current growth was being driven by all components of domestic demand, and the buoyant growth in loans and investment was mentioned as a sign of a growing economy. It was said that the evolution of property prices was also evidence of strong growth. The current situation of strong economic growth in a low-inflation environment was discussed. There was a consensus that one of the factors explaining this fact was the external environment, specifically the decline in commodity prices and the low inflation in the euro area and elsewhere around the world. It was also said that the speed of the return of inflation to the target was being affected by the depth of the preceding recession: the deep recessions cause greater rigidity of nominal variables and hence also a delayed return of inflation to the target. It was said repeatedly that this mechanism explained the current high domestic economic growth in an environment of low inflation.

The Board assessed the current monetary stance and its effect on the Czech economy. The current monetary conditions were assessed as being easy. It was said that the introduction of the exchange rate commitment had helped renew economic growth and stabilise inflation expectations. It was said several times that the decline in nominal market interest rates to negative levels in some segments of the financial market was fostering an additional easing of the monetary conditions.

The Board discussed whether it was necessary to further ease the monetary conditions and also discussed a possible way of doing so. The introduction of negative monetary policy rates was discussed. It was said several times that there was no need for such a step given the negative market interest rates in some financial market segments and the high credit growth. The possibility of moving the exit from the exchange rate commitment to a later date was also discussed. It was said several times that in the current situation it was appropriate to wait and see whether inflationary tendencies materialised in the domestic economy. On the other hand, it was said that the exit was unlikely to occur at the start of July 2016 and would probably happen later.

The Board also assessed developments abroad and their impacts on the outlook for domestic inflation. There was a consensus that the situation in Europe was having the biggest effect on the Czech economy. It was said that some European countries were still facing insufficient demand, as reflected, among other things, in continued low inflation. For the Czech economy, this implied continuing low-inflation or deflationary pressures from the external environment.

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: Jan Brůha, Adviser to the Board