Česká národní banka

CNB > Monetary policy > CNB Board decisions > 2017 > 2 November 2017

Minutes of the Bank Board Meeting on 2 November 2017

Present at the meeting: Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Oldřich Dědek, Marek Mora, Tomáš Nidetzký. Minister of Finance Ivan Pilný was present at the meeting.

The meeting opened with a presentation of the seventh situation report and the new macroeconomic forecast covering the horizon up to the end of 2019. Inflation had gradually increased in 2017 Q3, reaching 2.7% in September. The growth in consumer prices had been mainly driven by rising core inflation and food prices. Core inflation had risen slightly, mainly as a result of a further pick-up in non-tradables prices. They had grown by 4% in September, reflecting, among other things, a further upswing in imputed rent linked with growth in prices of new apartments. Tradables price inflation had stayed below 1%. This had reflected a gradual pass-through of the stronger exchange rate, which had dampened the intensifying inflationary effect of the domestic economy. Annual GDP growth had surged to 4.7% in 2017 Q2, due mainly to renewed growth in fixed investment. Household consumption had also recorded a larger contribution to GDP growth, owing to rising growth in household income.

Domestic inflation would stay above the 2% target for most of 2018, though within the tolerance band. Growth in domestic costs would record a further short-term increase owing to labour market tightness. The domestic inflation pressures would then moderate, aided by a stabilising effect of monetary policy. However, they would continue to outweigh the anti-inflationary effect of import prices, whose decline would reflect a strengthening koruna amid a temporary weakening of foreign producer price inflation. At the same time, the one-off factors that had increased inflation at the start of this year would subside. Inflation would thus return to the 2% target from above over the monetary policy horizon. The return of inflation to the target would be fostered by further growth in domestic market interest rates in addition to appreciation of the koruna. The growth of the Czech economy would reach 4.5% this year and would slow in the following two years. The increase in domestic economic activity would be driven mainly by robust growth in household consumption in an environment of high growth in household income. Investment would continue to recover, especially in the government sector as a result of higher drawdown of EU funds. The economy would benefit from stable demand growth in the Czech Republic’s main trading partner countries.

A majority of the board members assessed the balance of risks to the current forecast at the monetary policy horizon as being slightly inflationary. A risk in this direction could stem from the path of the exchange rate. It may appreciate at a slower rate than forecasted in the next few quarters due to overboughtness of the koruna market. The strength, composition and persistence of fundamental inflation pressures from the domestic economy were also an inflationary risk to the forecast. The opinion was expressed that the risks to the inflation forecast were balanced in the event of a 0.25 percentage point increase in the two-week repo rate.

The board members discussed the domestic economy. It was said repeatedly that the higher wage growth, disposable income and consumption were generating appropriate inflation pressures. The Board also assessed inflation abroad. It was said several times that the low-inflation environment abroad represented an anti-inflationary factor for the Czech economy, but that the effect of the external environment was not sufficient to offset the domestic inflationary pressures.

There was a consensus that the appropriate response to the current inflation pressures was to increase interest rates. Some of the board members discussed the optimal size of the increase. It was said several times that if domestic inflationary pressures were higher than forecasted, it would be appropriate to increase the two-week repo rate by more than the standard step of 0.25 percentage point. On the other hand, it was repeatedly said that it was desirable to raise rates gradually and that if developments in the coming months were to confirm the materialisation of upside risks to inflation, it would be possible to use any of the next monetary policy meetings to tighten monetary policy further. It was also said that inflation expectations were anchored at the target, so there was no need to surprise the market with a larger rate hike.

It was said several times that a sharp appreciation of the koruna would represent a downside risk to inflation and a risk to the real economy and would therefore imply a postponement of further increases in interest rates. In this context, it was noted several times that a sharp one-off increase in interest rates could lead to such sharp appreciation of the koruna, due in part to the extension of the ECB’s quantitative easing programme. Given that risk, it was appropriate to raise interest rates gradually. The overboughtness of the koruna market was acting in the opposite direction. As recent developments had shown, however, the phenomenon of overboughtness did not always prevent significant appreciation.

The Board discussed renewing publication of the forecast-consistent exchange rate path, which had been suspended in November 2013. The board members agreed that the CNB would start publishing the exchange rate path again in the first Inflation Report of 2018. In this regard, it was said repeatedly that the exchange rate forecast did not constitute a commitment on the part of the Czech National Bank, so it could not be interpreted as the preferred or desirable exchange rate level from the central bank’s perspective. Like the forecasts of all other domestic variables, the forecasted exchange rate path was endogenous and conditional on the assumptions of the forecast and on the information available at the time it was prepared. It was emphasised several times that the actual exchange rate path may deviate from the forecast, among other things as a result of newly available information or factors not covered by the forecast. It was said that publication of the exchange rate path would provide the market with a complete picture of the information underlying the inflation forecasts.

The Board also devoted part of its discussion to the relationship between monetary policy rates and financial stability. It was said repeatedly that raising rates supported the financial stability objective. The opinion was expressed that a sharp increase in interest rates could be counterproductive from the financial stability perspective by putting an excessive load on indebted entities. It was therefore more appropriate to raise interest rates gradually from the financial stability point of view as well.

At the close of the meeting the Board decided unanimously to increase the two-week repo rate by 0.25% to 0.50%. The Lombard rate was increased by 50 basis points to 1.00%. The discount rate was left unchanged at 0.05%. Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Oldřich Dědek, Marek Mora and Tomáš Nidetzký voted in favour of this decision.

Author of the minutes: Jan Brůha, Monetary Department