Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2015 > 16 December 2015

Minutes of the Bank Board Meeting on 16 December 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 eighth situation report assessing the new information and its effect on the fulfilment of the forecast contained in the seventh 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 0.1% in November, 0.5 percentage point below the forecast contained in the seventh situation report. This deviation from the forecast had been due predominantly to food prices, whose annual growth had almost halted, whereas the forecast had expected it to accelerate. Fuel prices had also declined by 17.6% year on year, 2.5 percentage points more than forecasted. The year-on-year decline in fuel prices reflected the fall in oil prices, which represented a positive supply shock to the Czech economy. Adjusted inflation excluding fuels had risen to 1.3%, i.e. 0.2 percentage point higher than forecasted. The rise in adjusted inflation reflected continued growth of the domestic economy and wages, which, however, were being largely offset by a continued decline in foreign producer prices.

The annual growth rate of the Czech economy had slowed slightly to 4.5% in Q3. This was 0.3 percentage point lower than the growth assumed by the forecast contained in the seventh situation report. The deviation had been due lower-than-expected contributions of household consumption and change in inventories. Annual gross value added growth had risen further to 4.3%. This growth had been driven mainly by industry, although the other sectors of the economy had also made positive contributions. The continuing growth had also fostered an improvement in the labour market situation. Total employment had continued to rise. The seasonally adjusted unemployment rate had fallen further in Q3 to 5.0%, slightly lower than assumed by the forecast. The available data for October were indicating a further modest reduction in the seasonally adjusted unemployment rate. The average wage had gone up by 3.8% year on year in Q3 and had therefore been slightly above the forecast. Higher-than-expected annual wage growth had been recorded in the business sector.

In the discussion that followed the presentation of the situation report, the board members assessed the newly available information with regard to the risks to the current inflation forecast. The board members stated repeatedly that the newly published data represented an anti-inflationary risk at the shorter end of the forecast and that the risks to the inflation forecast at the forecast horizon were broadly balanced. There was a consensus that it was appropriate to leave monetary policy rates at technical zero and that a need to maintain significantly easy monetary conditions persisted. In this situation, the Board discussed the likely timing of the discontinuation of the exchange rate commitment. A majority of the board members agreed that the exit would probably occur around the end of 2016. All the Board’s earlier statements that it would not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016, meanwhile remained valid. The opinion was also expressed that the risks to the inflation forecast at the monetary policy horizon were slightly anti-inflationary and that the commitment was unlikely to be discontinued in 2016 and the exit was more likely to happen at the start of 2017.

In a discussion about domestic economic developments, there was a consensus that the growth of the domestic economy could be regarded as robust and sustainable. It was said repeatedly that this robust economic growth would foster continuing wage growth, which, in turn, would contribute to the generation of further domestic demand-pull inflation pressures. On the other hand, it was said that there was a risk that wage growth might be suppressed in the future by inflows of foreign workers. The low headline inflation figures were repeatedly assessed as influenced by the continuing fall in foreign producer prices and the decline in prices of food and oil, which were exogenous factors not linked with the cyclical position of the Czech economy. There was a consensus that the level of adjusted inflation excluding fuels, which was rising steadily in line with the forecast, testified to robust economic growth, and also that at 1.3%, the level of adjusted inflation excluding fuels did not suggest any overheating of the Czech economy at present.

It was said repeatedly that the drop in oil prices was a positive supply shock, whose first-round effects are normally exempted by the Board, while a monetary policy response was only necessary if negative second-round effects materialised. It was said that these second-round effects had not occurred in 2015. There was a consensus that the fall in oil prices had accelerated the growth of the Czech economy thanks to growth in real disposable income.

The Board went on to discuss the implications of the observed decline in energy and food prices for the risks to the inflation forecast. In this regard, it was said that although the drop in oil prices was contributing to the current low headline inflation figures, it did not represent a risk to the inflation forecast at the monetary policy horizon, as oil prices were unlikely to see a further decrease of similar magnitude to that seen in 2015. It was also said that retail food prices were very volatile and their current evolution did not reflect that of agricultural producer prices, implying that there was a risk of those prices going up next year. It was therefore currently premature to assess the evolution of food prices as a downside risk to inflation at the monetary policy horizon or as another positive supply shock.

The Board discussed the risks and uncertainties arising from developments in other countries. It was said that the downward revision of the economic growth outlook for China was a significant risk. In this regard, it was also said that economic growth in other emerging economies was better than assumed by past outlooks, hence the current developments in those economies did not represent an additional anti-inflationary impulse either.

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