Česká národní banka

Minutes of the Bank Board Meeting on 4 May 2017

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

The meeting opened with a presentation of the third situation report and the new macroeconomic forecast covering the horizon up to the end of 2018. Inflation had risen further in 2017 Q1, entering the upper half of the tolerance band around the CNB’s target. This increase had been driven by rising core inflation, reflecting – in addition to some one-off factors – renewed growth in foreign industrial producer prices and inflation pressures from the domestic economy. Food price inflation had also increased. Fuel price inflation had gone up as well, owing to higher oil prices in year-on-year terms. Despite having slowed last year, the Czech economy remained close to its potential output level. Its growth continued to be driven by stable growth in household consumption in conditions of rapid wage and employment growth and consumer optimism. The contribution of net exports had also been constantly positive.

Inflation would stay in the upper half of the tolerance band around the target this year and return to the target early next year. The currently peaking inflation pressures would ease as a result of a renewed anti-inflationary effect of import prices and an upswing in labour productivity growth. Growth in fuel prices would subside at the start of 2018, and core inflation and food price inflation would also slow. The growth of the Czech economy would rise to almost 3% this year and maintain this pace in 2018. It would be driven by robust growth in household consumption and a recovery in investment amid continued growth in external demand. The growth of the domestic economy would be reflected in faster wage growth. Consistent with the forecast was an increase in domestic market interest rates in 2017 Q3 and later also in 2018. The exit from the exchange rate commitment at the start of April represented a shift of monetary policy towards a neutral stance. According to the forecast, the koruna would appreciate, due among other factors to continued real convergence of the Czech economy to the euro area countries. Appreciation would additionally be fostered by a positive interest rate differential vis-à-vis the euro area and a continuing programme of asset purchases by the ECB this year. However, the exchange rate forecast did not take into account that the appreciation may also be strongly dampened in the coming quarters by market “overboughtness” of the Czech koruna.

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 slightly inflationary. The evolution of the exchange rate was repeatedly identified as the main uncertainty. The koruna had so far appreciated only slightly following the exit from the exchange rate commitment. The market remained overbought and the closing of koruna positions by financial investors could lead to increased exchange rate volatility in the future. The koruna could stay at weaker-than-forecasted levels on average. The opinion was also repeatedly expressed that the equilibrium nominal exchange rate had shifted to a weaker level during the exchange rate commitment as a result of pass-through of the weakening of the koruna to inflation and other nominal variables. In this regard, it was said that the stability of the exchange rate since the exit from the CNB’s commitment was probably due also to fundamental factors. This was indicated by Czech exports, which had slowed more sharply than external demand in recent quarters. Another argument given was the evolution of regional currencies, which had weakened spontaneously in past years despite their higher interest rate differential.

The Board devoted part of its discussion to the relationship between monetary policy and financial stability. If, for the reasons given above, the exchange rate remained weaker than forecasted, there would be greater room to tighten the monetary conditions through their interest rate component. It was said that this scenario would be more favourable from the financial stability perspective, because tightening the monetary conditions through the exchange rate component would not have the desired dampening effect on households’ demand for loans. Nevertheless, there was a consensus that the tightening of the interest rate component of the monetary conditions in the second half of this year should be gradual so as to ensure, among other things, that it did not lead to an increase in credit risk. It was also repeatedly mentioned that the exit from the exchange rate commitment represented a step towards a gradual return to the standard form of monetary policy-making through the setting of interest rates. On the other hand, it was repeatedly said that monetary policy was still not in normal mode so soon after the exit from the exchange rate commitment given the current near-zero interest rates.

The board members also discussed domestic and foreign political risks. As to domestic risks, the current government crisis and its potential negative impact on public investment through slower drawdown of EU funds were discussed. As regards the risks stemming from the external environment, the uncertainty relating to potential protectionist foreign trade measures in the USA and their impact on the world economy were mentioned several times. The elections in some European countries and their potential impacts were also discussed briefly. It was said repeatedly that the transition to the “normal” CNB monetary policy stance could also take longer because of the ECB’s continuing extremely accommodative monetary policy.

In connection with the assessment of current inflation pressures, the robustness and persistence of those pressures at the monetary policy horizon were discussed. It was said that both the current data and the forecast were indicating that inflation was sustainable with respect to future fulfilment of the target thanks in part to favourable labour market developments in the form of rising employment and upward pressure on wages. This reflected the position of the economy near its potential output level, which was leading to robust growth in consumption. Against this, mention was made of the risk of a more substantial slowdown in core inflation after the price pressures in the restaurants and hotels category subside, and the risk of a possible slowdown of new property prices within imputed rent.

The next part of the Board’s debate focused on the interpretation of the symmetry of the inflation target and its tolerance band and the optimal interest rate response. The opinion was expressed that if inflation were to stay in the upper half of the tolerance band around the target for a longer time due to more gradual appreciation of the koruna, it would not represent a fundamental problem to which it would be appropriate to react by raising interest rates significantly. The Board agreed that the current configuration of the inflation targeting regime provided sufficient flexibility to achieve price stability while simultaneously smoothing fluctuations in the business and financial cycle. In the discussion, the opinion was also expressed that the inflation target was perceived by the public as asymmetric, with any inflation below the 2% target being seen as positive and inflation above 2% being viewed by the public as an upsurge in inflation pressures eroding real incomes and savings.

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, Vojtěch Benda, Oldřich Dědek, Marek Mora and Tomáš Nidetzký voted in favour of this decision.

Author of the minutes: Martin Motl, Monetary Department