Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2017 > 27 September 2017

Minutes of the Bank Board Meeting on 27 September 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 sixth situation report assessing the new information and its effect on the fulfilment of the forecast contained in the fifth situation report. The annual headline inflation rate had been 2.5% in August, the same as in the previous month. It was only slightly below the forecast, due to slightly lower-than-expected growth in food prices. Core inflation had gone up slightly again to 2.7%, in line with the forecast.

Annual GDP growth had accelerated significantly further to 4.7% in 2017 Q2 and was distinctly above the forecast. The increase in economic activity had been fostered not only by household consumption, reflecting buoyant growth in wages and employment, but also by a marked recovery in investment activity and by foreign trade, driven by rising external demand. The biggest positive deviations from the forecast had been recorded by fixed investment and, to a lesser extent, household consumption and net exports. A shortage of available labour coupled with high labour demand had led to a further sizeable increase in job vacancies and stronger upward pressure on wages. Wage growth in both market and non-market sectors had again risen sharply in Q2, in both cases significantly exceeding the forecast. The general unemployment rate had fallen further towards 3% in Q2 in line with the forecast.

In the discussion that followed the presentation of the situation report, the Board assessed the balance of risks to the current forecast at the monetary policy horizon as tilted slightly to the inflationary side. Faster growth in domestic wages and economic activity was acting in this direction. In the quarters ahead, the exchange rate may be weaker than forecasted owing to the closing of koruna positions by financial investors in the absence of a counterparty, i.e. due to koruna market overboughtness. The koruna exchange rate remained a persisting source of uncertainty. Conversely, the lowered outlook for industrial producer prices in the euro area and lower food price growth were assessed as slight downside risks to inflation.

The board members went on to discuss the individual risks in more detail. They pointed to the fact that the very high wage growth recorded in Q2 might only have been a result of gradual catch-up following the previously surprisingly subdued wage growth. It was also said that the rapid wage growth constituted a positive contribution to financial stability, because it was increasing households’ ability to repay their loans. The high GDP growth rate was likewise debated. Attention was drawn to the possible overvaluation of this indicator due to the method used to adjust for different numbers of working days. However, it was also said that the new data were more consistent than before with the picture of broadly robust growth of the economy. Attention was also focused on the high growth in fixed investment, which had come as the biggest surprise compared with the forecast. It was said that fixed investment was a less significant inflationary factor than household consumption, because it positively affected the potential of the economy. It was pointed out, however, that household consumption had also been distinctly higher than forecasted.

A large part of the debate was devoted to the exchange rate of the koruna. It was said repeatedly that the exceptional stability of the koruna exchange rate was still due to market overboughtness. This factor, along with various regulatory measures and market constraints, was fostering a sharp reduction in standard arbitrage trades and, as a result, was also leading to temporary impairment of the exchange rate channel of monetary policy transmission. Based on the available data, gradual closure of financial investors’ koruna positions had evidently been going on recently, but the size of those positions remained significant. It was very difficult to quantify exactly, but the Board would continue to pay attention to this issue. It was also suggested that it might help if the CNB were to again start disclosing all its forecast assumptions, including the exchange rate path, in order to foster a better understanding of monetary policy actions and to eliminate the distortions in the koruna market.

Developments abroad were mostly assessed as representing a modest downside risk to inflation. The discussion focused mainly on the low inflation in the euro area despite relatively fast economic growth. In this regard, mention was made of the observed non-functioning of the Phillips curve, especially in advanced euro area countries, and the related persisting sluggish wage growth. It was said that this relation applied distinctly better in the Czech Republic. Some of the board members were in favour of waiting for the outcome of the ECB’s October meeting before deciding to raise domestic interest rates, as details of the strategy for ending the quantitative easing policy were expected to be announced at that meeting. On the other hand, it was argued that due to the distortion of the exchange rate channel, this factor might not play such a large role for domestic monetary policy.

There was a consensus that a gradual increase in domestic interest rates was consistent with the current economic situation from both the price and financial stability perspectives. From this point of view, the August interest rate increase was assessed as having been the right step towards normalising monetary policy. The equilibrium interest rate level which the CNB should converge towards through its actions was discussed in this context. This level was uncertain, but lay in the range of 2.5%–3.0% for the three-month PRIBOR. The assumed evolution of the gap between the said three-month market rate and the CNB’s two-week repo rate was also discussed, with the conclusion that the gap would probably narrow slightly further towards a long-term level of 0.1–0.2 percentage point. Further to this, the board members discussed the timing and size of the individual steps to raise interest rates towards their equilibrium level. The prevailing view was that the risk arising from delaying the rise in rates was low. There was also a prevailing view that it would be better to raise interest rates in small gradual steps.

A majority of the board members considered it appropriate to have the new forecast available before deciding to increase interest rates further. On the other hand, opinions were expressed that the new forecast would not provide any fundamentally different information than what was already available, so there were no grounds for delaying the decision. Another argument for raising rates straight away was the path of the exchange rate relative to the forecast. According to some of the board members, a tighter interest rate component of the monetary conditions should play a larger role in this situation. In this regard, it was said that even an interest rate increase would not necessarily lead to the koruna appreciating more strongly against the euro, because all that could happen on the foreign exchange market would be that one type of investor would be replaced by another.

At the close of the meeting the Board decided by a majority vote to leave interest rates unchanged. The two-week repo rate remains at 0.25%, the discount rate at 0.05% and the Lombard rate at 0.50%. Four members voted in favour of this decision: Jiří Rusnok, Vladimír Tomšík, Oldřich Dědek and Tomáš Nidetzký. Three members voted for increasing the two-week repo rate to 0.50% and the Lombard rate to 1.00%: Mojmír Hampl, Vojtěch Benda and Marek Mora.

Author of the minutes: Filip Novotný, Monetary Department