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CNB > Monetary policy > CNB Board decisions > 2017 > 21 December 2017

Minutes of the Bank Board Meeting on 21 December 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 eighth situation report assessing the new information and its effect on the fulfilment of the forecast contained in the seventh situation report. In Q4 so far, headline inflation had remained in the upper half of the tolerance band around the CNB’s 2% target. The annual inflation rate had gone up to 2.9% in October and had fallen to 2.6% in November. In both months, the inflation forecast had materialised in terms of both the recorded figures and their structure. Core inflation and food prices were still the biggest contributors to inflation.

Annual GDP growth had accelerated further to 5% in 2017 Q3, while quarterly growth had slowed to 0.5%. The observed economic growth had been entirely in line with the CNB forecast. Only small deviations from the CNB forecast had been recorded in the structure of annual GDP growth. A higher-than-expected contribution of private investment, especially in machinery and equipment, could have a favourable effect on future productivity growth. In line with the CNB’s expectations, household consumption had continued to show dynamic growth, still reflecting the strong labour market and the resulting increased incomes of households. A shortage of available labour force coupled with high labour demand had led to a further sizeable increase in job vacancies. Wage growth had slowed in both the market and non-market sectors and had lagged behind the forecast. However, the labour market remained strongly inflationary. The general unemployment rate had dropped below 3%.

In the discussion that followed the presentation of the situation report, a majority of the board members assessed the risks to the current forecast as being balanced and insignificant. Thus, the upside risks identified at the November monetary policy meeting had not materialised so far. These risks were connected with the possibility of slower-than-forecasted exchange rate appreciation due to koruna market overboughtness and the possibility of stronger domestic inflation pressures. However, it was said repeatedly that materialisation of these risks in the future could not be ruled out. Overall, the timing of further steps in raising interest rates remains conditional on the evolution of all key macroeconomic variables, including the exchange rate of the koruna.

There was a consensus that the overall message of the economic story was unchanged since the last monetary policy meeting and that the current forecast was materialising very well. Lower-than-forecasted wage growth and a slightly stronger-than-forecasted exchange rate could be identified as anti-inflationary factors, albeit only minor ones. The external conditions were having a modest inflationary effect.

A large part of the debate was devoted to the monetary conditions this year and their impact on the real economy. The koruna had strengthened after the exit from the exchange rate commitment. Interest rates had been increased in two steps. Besides that, major cost items, most notably wages, were rising. A majority of the board members were therefore inclined to tighten monetary policy gradually, especially in a situation where the risk of delaying the process of normalising interest rates was not significant. From the macroeconomic perspective, the difference between raising monetary policy rates at the end of December and doing so possibly at the start of February was identified as negligible. It was also argued that it would be useful to have a new forecast available before making a further interest rate decision.

There was also discussion of the observed growth in investment activity, especially in the machinery and equipment item, which is traditionally dominated by private investment. Its buoyant growth was indicating a continued shift towards automation and mechanisation of production in an environment of a tight labour market and rising wages. Going forward, this could be reflected in higher productivity and competitiveness. It was said that the role of monetary policy was to stabilise expectations to enable investment to continue in the future. In the area of government investment, by contrast, the opinions were generally sceptical, partly due to slower drawdown of European funds.

Some of the board members pointed to the fact that wage growth was strong and robust despite showing lower-than-forecasted growth. Together with other labour market indicators, this indicated that the economy was at risk of overheating. The overheating of the credit and mortgage market, to which the increase in monetary policy rates was so far passing through only gradually, was likewise discussed. The interest rate component of the monetary conditions remained highly accommodative and monetary policy was expansionary overall. It was suggested that the appropriate response was to raise interest rates further. Against this, it was said that in many other countries monetary policy was even more accommodative and a rising interest rate differential could not be ignored in a small open economy, and that from the financial stability perspective it was desirable to use primarily macroprudential instruments.

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 0.50%, the discount rate at 0.05% and the Lombard rate at 1.00%. Five members voted in favour of this decision: Jiří Rusnok, Vladimír Tomšík, Oldřich Dědek, Marek Mora and Tomáš Nidetzký. Two members voted for increasing the two-week repo rate to 0.75%: Mojmír Hampl and Vojtěch Benda.

Author of the minutes: Jan Syrovátka, Monetary Department