Česká národní banka

Minutes of the extraordinary monetary policy meeting of the Bank Board on 6 April 2017

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

The regular board meeting was devoted exceptionally to, among other things, a discussion of monetary policy issues. At the start of the meeting, the Board was informed about the latest macroeconomic indicators. Leading and coincidence indicators from the domestic economy remained favourable, especially as regards industrial production, retail sales and lending to the private sector. Relatively rapid wage growth in industry in both January and February this year could be regarded as a positive signal. This indicated that the slowdown in wage growth in the business sector in 2016 Q4 had evidently been only temporary. By contrast, the construction industry was still in decline as a result of a continued fall in infrastructure investment. The February 2017 foreign trade figures had been in line with the current CNB forecast.

The Board then resumed its discussion from the previous regular monetary policy meeting. The prevailing view was that the conditions for sustainable fulfilment of the 2% inflation target in the future had been met. It was said repeatedly that the current macroeconomic situation was fundamentally different from that in 2012–2013, when there had been a real threat of deflation linked with protracted recession of the Czech economy. Currently, by contrast, inflation had reached roughly the level that the CNB had considered optimal when the exchange rate had been introduced. The inflation forecast was pointing to sustainable fulfilment of the target at the monetary policy horizon, and inflation expectations were well anchored. Wage growth was also positive, including in the light of the latest monthly indicators. Economic sentiment as favourable as well. In this situation, continuation of the exchange rate commitment was therefore no longer necessary from the perspective of fulfilment of the CNB’s primary objective of price stability. In this regard, the opinion was expressed that the Czech economy had room for a slight tightening of monetary conditions. The apparent “overboughtness” of the koruna market would prevent the exchange rate from appreciating sharply.

The Board also again discussed the potential benefits and risks of immediately ending the exchange rate commitment by comparison with the option of continuing it. It was said several times that maintaining the exchange rate commitment for a further few weeks or months would not fundamentally affect future economic developments. It would not represent such a strong additional safeguard against any substantial anti-inflationary shocks. Such shocks could always occur, especially as regards cost shocks from the external environment, but there was no indication of them at present. Moreover, the CNB knew how to respond to them under its flexible inflation targeting regime. Against that, the opinion was expressed that a later exit from the exchange rate commitment would make the fulfilment of the inflation target more robust and monetary policy would be in a more comfortable situation even if negative shocks were to occur.

The board members agreed that the exchange rate commitment had proved effective as an extraordinary monetary policy instrument. Renewed use of the exchange rate or some other suitable unconventional instrument could not be ruled out if a risk of deflation associated with weak demand in the economy and unanchored inflation expectations were to re-emerge in the future. However, this was highly unlikely to happen in the near future.

At the end of its extraordinary meeting, the Board decided to end the CNB’s exchange rate commitment. The koruna exchange rate would thus now move according to supply and demand on the foreign exchange market. The CNB stood ready to use its instruments to mitigate potential excessive exchange rate fluctuations if needed.

Author of the minutes: Tomáš Holub, Executive Director, Monetary Department