Česká národní banka

Minutes of the Bank Board Meeting on 30 March 2017

Present at the meeting: Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Oldřich Dědek, Marek Mora, Tomáš Nidetzký.

The meeting opened with a presentation of the second situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the first situation report. 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. In the first two months of this year, annual inflation had increased into the upper half of the tolerance band around the target and had been fluctuating above the forecast. This had been due to a stronger recovery in adjusted inflation excluding fuels, caused mainly by faster growth in prices of non-tradable goods. A growing contribution of prices in food services, driven, among other things, by the introduction of electronic sales registration, had been significant, as had faster growth in imputed rent due to rising prices of new properties, whose weight in the consumer price index had increased since the start of 2017. Growth in food prices had also been higher than forecasted.

The economic slowdown had halted in 2016 Q4 as expected. Real GDP growth had edged up to 1.9%. However, this result was slightly weaker than predicted. Steady growth in household consumption had continued to contribute significantly to growth. A sharper-than-forecasted decline in fixed investment had been recorded. By contrast, net exports had made a bigger positive contribution. Continued strong growth in labour demand had led to an upswing in employment growth and a further fall in the unemployment rate, neither of which the forecast had expected. Conversely, average wage growth in the business sector had lagged behind the forecast.

In the discussion that followed the presentation of the situation report, the Board assessed the risks to the current inflation forecast for the rest of this year as being inflationary. However, the message of the new information was mixed at the monetary policy horizon, which currently covers the second and third quarters of next year. A key question was whether the factors of the currently elevated inflation would persist at the monetary policy horizon. In this regard, the opinion was expressed that a large part of the deviation of inflation from the forecast was due to one-off factors that would fade away over one year. Against this, however, it was said that, given the favourable developments in the economy and the labour market, the inflation pressures could be more sustained and tilt the balance of risks upwards at the monetary policy horizon as well.

The Board devoted a large part of its discussion to the optimal timing of the exit from the exchange rate commitment. The board members agreed that in the interests of maintaining monetary policy predictability and credibility it was necessary to maintain the “hard” commitment, i.e. not discontinue the use of the exchange rate as a monetary policy instrument before the second quarter of this year. The possible benefits and costs of ending the commitment right at the start of the second quarter were evaluated by comparison with the option of continuing it for longer. The prevailing view was that maintaining the exchange rate commitment was no longer consistent with the macroeconomic conditions in the current situation. Moreover, continuing it could increase the risk of macrofinancial imbalances. In addition, delaying the exit by just a few months – given the current level of uncertainty – would not substantially enhance the sustainability of fulfilment of the inflation target in the future. On the other hand, it was said that the CNB had announced a continuation of the commitment until the middle of this year or beyond. This would allow it to take into account more data and analyses and generally increase the likelihood of monetary policy not having to return to the use of unconventional instruments in the foreseeable future. In a debate about the understandability of monetary policy to the public in the context of current inflation, attention was drawn to domestic economic agents’ highly asymmetric inflation perceptions, an undershooting of the target being generally preferred to an overshooting. However, the CNB was adopting a symmetric approach to fulfilling the inflation target and was exercising its independence in this regard.

The Board agreed that the main forecast uncertainty for the post-exit period was still the exchange rate, which could move in either direction in the short term. The CNB would stand ready to use its instruments to mitigate potential excessive fluctuations after the exit from the exchange rate commitment. The Board also discussed the strength of transmission of potential exchange rate fluctuations to inflation. In this context, the opinion was expressed that the transmission of a strengthening of the koruna might be more muted than the reaction of inflation to a weakening of the koruna.

As for the assessment of the domestic economic situation, a majority of the board members did not see any major risks, although GDP growth had been slightly weaker than forecasted at the end of last year. The opinion was expressed that the surprise stagnation of government consumption at the year-end could not be viewed as an anti-inflationary factor. Likewise, the currently very subdued government investment would revert to growth this year. The only persisting uncertainty was about the size of that growth. It was also repeatedly said that the economy was in a situation of full employment and was close to its potential output level. The macroeconomic situation was thus much better than when the exchange rate commitment had been introduced in 2013.

The next part of the Board’s debate was focused on the interpretation of the slower-than-forecasted average wage growth in the business sector. The prevailing view was that this should not be given too much weight, as the average wage may have been distorted downwards by rising employment among persons with below-average pay. In a situation of significant labour shortages, it was reasonable to assume that wage growth would accelerate, leading to stronger inflation pressures at the forecast horizon. Some of the board members pointed to faster-than-expected employment growth and above-average wage growth in low income groups, which would support household consumption growth. It was also said that this upward wage trend could also be observed in neighbouring Central European countries, so it was likely to be sustained. Against this, the opinion was expressed that data from the domestic economy and labour market implied a slightly anti-inflationary medium-term balance of risks to the forecast.

Mention was also made of risks stemming from developments in the euro area, where a relatively strong economic recovery – confirmed by leading indicators – was expected. The current sharp growth in industrial producer prices in the euro area was discussed. This was expected to affect domestic inflation via rising import prices. The current decline in the price of crude oil was having the opposite effect. It was also said repeatedly that ECB monetary policy remained significantly accommodative and that this could be a future factor of greater appreciation pressure on the Czech koruna and hence a downside risk to inflation.

In an assessment of the success of the exchange rate commitment, it was said repeatedly that the 2% inflation target – due to which the commitment had been introduced – had been hit and that, looking back, this decision had been proved right. Moreover, adjusted inflation excluding fuels had also been gradually rising towards 2% since the introduction of the exchange rate commitment. The easy monetary policy had contributed significantly to a recovery in economic growth, which had been averaging around 3% for four years now. Financial sector stability had also been maintained. There was a consensus that given the different evolution of the economic and financial cycles, a single instrument in the form of interest rates was not enough to achieve price and financial objectives simultaneously. The CNB had therefore introduced macroprudential measures to enhance financial stability.

At the close of the meeting the Board decided unanimously to leave interest rates unchanged. The two-week repo rate remains at 0.05%, the discount rate at 0.05% and the Lombard rate at 0.25%. Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Oldřich Dědek, Marek Mora and Tomáš Nidetzký 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: Martin Motl, Monetary Department