Česká národní banka

CNB > Monetary policy > CNB Board decisions > 2017 > 2 February 2017

Minutes of the Bank Board Meeting on 2 February 2017

Present at the meeting: Jiří Rusnok, Mojmír Hampl,Vladimír Tomšík, Vojtěch Benda, Lubomír Lízal, Tomáš Nidetzký, Pavel Řežábek.

The meeting opened with a presentation of the first situation report and the new macroeconomic forecast covering the horizon up to the end of 2018. In 2016 Q4, both headline and monetary policy-relevant inflation had risen sharply and returned to the tolerance band around the CNB’s target. In December, headline inflation had hit the 2% target following four years of exceptionally low values. This had been due to a rapid recovery in food price growth and, to a lesser extent, to a rise in adjusted inflation excluding fuels. Its evolution had reflected growth in the domestic economy and wages. It had also been affected by an increase in prices linked with the launch of the first phase of electronic sales registration. The year-on-year decline in fuel prices had meanwhile dissipated. The annual rate of growth of the Czech economy had slowed to 1.9% in 2016 Q3, owing mainly to a lower contribution of net exports. The economy continued to be supported by easy domestic monetary conditions via the weakened koruna and exceptionally low interest rates.

The forecast 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 mid-2017. Consistent with the forecast was an increase in market interest rates thereafter. The appreciation of the exchange rate following the return to the conventional monetary policy regime would be dampened among other things by the fact that the weaker exchange rate of the koruna had been passing through to the price level and other nominal variables in the period since the exchange rate commitment was introduced. Nevertheless, a positive interest rate differential against the euro and the effect of the ECB’s quantitative easing would manifest themselves. Renewed – although much slower than in the pre-crisis period – real convergence of the Czech economy to the advanced euro area countries would act in the same direction. According to the forecast, the koruna would thus appreciate against the euro in the second half of 2017. However, the forecast did not take into account that the potential appreciation of the koruna may be strongly dampened by hedging of exchange rate risk by exporters before the exit from the CNB’s exchange rate commitment, as well as by the closing of koruna positions by financial investors. Both headline and monetary policy-relevant inflation would increase further into the upper half of the tolerance band around the CNB‘s target. They would then return to the 2% target from above at the monetary policy horizon. The increase in inflation would reflect rising wages and price of capital amid sustainable growth in economic activity coupled with renewed growth in industrial producer prices in the euro area. The growth of the Czech economy would reach 2.8% in 2017 and 2018 owing to renewed growth in fixed investment amid continued steady growth in household consumption. The forecast expected a pick-up in export growth from its current subdued pace.

In the discussion that followed the presentation of the situation report, the Board assessed the risks to the new inflation forecast at the monetary policy horizon as being balanced. The evolution of the exchange rate following the exit from the exchange rate commitment was repeatedly identified as the main uncertainty. It was pointed out several times that the exit would mean a return to a conventional managed float, implying that the Board was ready to dampen potential sharp exchange rate fluctuations. It was also said that the weaker exchange rate of the koruna had passed through to inflation and other nominal variables and that this would act against sharp appreciation of the koruna after the exit. Another factor acting against sharp appreciation mentioned several times was a lower rate of real appreciation than in the pre-crisis period, the level of which, moreover, was uncertain. It was said repeatedly that the koruna market was already significantly overbought and that closing of koruna positions by financial investors could cause the exchange rate to weaken after the exit. On the other hand, it was said that diversification of koruna investments into different types of assets and the different speed of closure thereof could mean that the exchange rate would not weaken. However, the prevailing view was that there were sufficient factors preventing sharp appreciation of the koruna after the exit.

In connection with the timing of the exit, the board members discussed the robustness of the current inflation trend. The prevailing view was that the unexpectedly rapid rise in inflation at the end of 2016 had been caused mainly by one-off factors and volatile items. It was mentioned repeatedly that, unlike headline inflation, adjusted inflation excluding fuels as an indicator of domestic demand-pull inflation pressures was still below the inflation target. It would therefore be premature to assess the current inflation trend as sufficiently robust, so there was no reason to change the forecast assumption that the commitment would be discontinued in mid-2017. On the other hand the opinion was expressed that the rise in inflation could be interpreted as robust and that monetary policy-relevant inflation was at its target. However, it was pointed out that in the past the Board had not responded to the first-round impacts on inflation of cost shocks from volatile items. All the board members stated repeatedly that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2017 Q2. A majority of the board members considered it likely that the commitment would be discontinued around the middle of 2017. The opinion that the public statements made by the board members should be consistent with the actual proposals presented at monetary policy meetings was also heard in the discussion.

In relation to the assessment of inflation pressures, it was said that the 3% upper boundary of the tolerance band around the inflation target was highly unlikely to be exceeded at the monetary policy horizon. Some of the board members stated that the macroeconomic risks of discontinuing the exchange rate commitment too soon were more serious than the risks of a later exit. The need for a potential return to unconventional monetary policy instruments in the event of strong unexpected anti-inflationary shocks was identified repeatedly in the discussion as a significant macroeconomic cost of exiting the exchange rate commitment too early. At the same time, it was mentioned that the macroeconomic risks associated with exiting too late should not be ignored either.

The Board discussed the interaction between monetary and macroprudential policy. It was mentioned several times that the low real interest rates in an environment of economic growth were leading to rapid credit growth. However, it was said repeatedly that macroprudential policy has tools at its disposal whose current use was suppressing the potential future risks to financial stability arising from rapid credit growth. In this regard, it was said that the current low interest rates did not represent an acute risk to financial stability for the time being.

At the close of the meeting the Board decided unanimously to leave the two-week repo rate unchanged at 0.05%. Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Lubomír Lízal, Tomáš Nidetzký 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