Česká národní banka

Minutes of the Bank Board Meeting on 29 June 2017

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

The meeting opened with a presentation of the fourth situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the third situation report. Annual headline inflation had been 2.4% in May. It was thus slightly below the forecast, due to slower-than-expected growth in food prices and a more marked slowdown in fuel price growth. Core inflation had continued to increase and, at 2.5%, had conversely been slightly higher than forecasted.

In line with the forecast, the growth of the Czech economy had accelerated in 2017 Q1. Nonetheless, GDP growth, which had jumped to 3% in year-on-year terms, had been higher than forecasted. This had been due mainly to a stronger-than-expected moderation of the decline in fixed investment. Household consumption and net exports had again been the main contributors to the growth of the economy, even though these two demand components had been lower than forecasted. Continued strong growth in labour demand in Q1 had led to growth in employment, which, however, had slowed to 1.6% in line with the forecast. The general unemployment rate had fallen further to 3.4% in Q1. Wage growth in market sectors had increased as expected, reaching 5.3%, i.e. 0.5 percentage point higher than forecasted.

In the discussion that followed the presentation of the situation report, the Board agreed that the balance of risks to the current forecast was tilted slightly to the inflationary side. In this context, mention was made of the faster growth in domestic economy activity and wages, which was being reflected in slightly higher-than-forecasted core inflation. The koruna exchange rate remained a persisting source of uncertainty. In the quarters ahead, it may be weaker than forecasted owing to the closing of koruna positions by financial investors in the absence of a counterparty. By contrast, current and expected oil prices were assessed as an anti-inflationary risk.

The board members also discussed the risks stemming from developments abroad. On the one hand, mention was made of the positive evolution of economic activity in the euro area, whose rate of growth had been rising in recent quarters. On the other hand, uncertainties regarding US trade policy, Brexit and the banking sector situation in some euro area countries were mentioned. Regarding inflation pressures from abroad, the minimum oil price at which production from alternative sources is profitable was discussed. The fall in the break-even price which was probably going on could depress growth in world oil prices in the event of higher demand or a fall in oil stocks. As for inflation pressures in the euro area, the surprisingly low wage growth in Germany given the record low unemployment rate there was debated. The significant uncertainty about the timing and pace of the tightening of ECB monetary policy was also mentioned.

There was a consensus at the meeting that the forecast contained in the third situation report was being fulfilled very well. Consistent with the forecast was an increase in domestic interest rates in 2017 Q3 and later also in 2018. Nevertheless, the opinion was expressed that before raising interest rates, there was a need to be sure that the inflation pressures arising from the domestic economy were robust enough to outweigh any anti-inflationary shocks stemming from abroad. In the flexible inflation targeting regime, the increase in rates could occur later than indicated by the forecast, because the costs of prematurely tightening monetary policy were still higher than the costs of a rather later response. In this regard, attention was drawn to the asymmetry in the movement of interest rates, which are constrained below by the zero lower bound but unconstrained in the direction of tightening monetary conditions.

The Board devoted part of its discussion to the relationship between monetary policy and financial stability. There was a consensus that the Board had long been a forum for careful analysing and considering aspects of monetary policy and financial stability and the interaction between them. The board members also agreed that the future increase in interest rates would help mitigate the risks associated with growth in mortgage loans, to which the CNB had already reacted primarily with macroprudential instruments. In this context, it was proposed that monetary policy considerations and the communication thereof should take more account of property market developments. With regard to this proposal, it was pointed out that interest rates were an instrument not only of monetary policy, but also of financial stability, and that property prices were already being given greater weight in inflation. Against this, it was said that macroprudential policy had specific instruments and the CNB was using them as far as it could. Monetary policy rates, meanwhile, were an instrument that should not be used primarily to correct imbalances in certain segments of the financial system, because they influenced the economy as a whole.

It was also discussed whether the observed GDP growth figures, and above all the private consumption data, were low given the labour market developments, sentiment in the economy, residential housing market developments and growth in tax receipts. On the one hand, the opinion was expressed that the statistics did not fully capture the curbing of the grey economy following the introduction of government measures such as electronic sales registration and VAT control statements. Mention was also made of the high consumption deflator, which had been recording stronger growth than the consumer price index. However, the opinion was also expressed that the GDP growth rate was close to its potential level, which had fallen after the crisis, so its values were not surprising.

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 and Marek Mora voted in favour of this decision. 

Author of the minutes: Tomáš Adam, Monetary Department