Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2018 > 1 February 2018

Minutes of the Bank Board Meeting on 1 February 2018

Present at the meeting: Jiří Rusnok, Vladimír Tomšík, Vojtěch Benda, Marek Mora, Tomáš Nidetzký.

The meeting opened with a presentation of the first situation report and the new macroeconomic forecast covering the horizon up to the end of 2019. Inflation had peaked just below the 3% level in October 2017 and had then gradually gone down to 2.4% in December. It had thus remained in the upper half of the tolerance band around the CNB’s target. The growth in consumer prices had been due mainly to core inflation and growth in food prices in conditions of faster growth of the domestic economy and wages. The decrease in inflation at the year-end had primarily reflected the fading of one-off factors observed in the past. The Czech economy was above its potential output level amid accelerating economic growth. Household consumption remained a stable driver of GDP growth, reflecting strong wage growth and optimistic consumer expectations. Growth in economic activity was also being significantly aided by an increase in investment in the private sector. On the other hand, government investment was still subdued. Buoyant growth in import-intensive private investment coupled with less pronounced growth in exports had led to a decrease in the positive contribution of net exports.

According to the new forecast, inflation would stay above the 2% target in 2018 and then return to it at the start of next year. The overall inflation pressures remained strong, mainly reflecting accelerating wage growth amid robust growth of the domestic economy. Growth in domestic costs would record a further short-term increase owing to labour market tightness. The overall inflation pressures would meanwhile ease gradually, due mainly to a strengthening anti-inflationary effect of import prices as a result of appreciation of the koruna. Inflation would be just below the target over the monetary policy horizon, i.e. in the first half of next year. The forecasted appreciation of the koruna in the course of this year would mainly reflect a widening of the interest rate differential vis-à-vis the euro area and the impact of continued accommodative ECB monetary policy through asset purchases. This, however, would simultaneously slow the rise in domestic interest rates this year. Ongoing real convergence of the Czech economy towards the euro area countries, associated with rising labour productivity, would act in the same direction. Next year, the koruna would firm only modestly, owing to a gradual shift of ECB monetary policy towards normal. Consistent with the forecast was a rise in domestic market interest rates this year and especially next year, which, coupled with the appreciation of the koruna, would ensure that inflation returned to the target. During 2019, domestic interest rates would rise smoothly again, owing, among other things, to foreign rates turning positive again. The growth of the Czech economy would slow compared to last year, but would remain above 3% both this year and the next. GDP growth would be driven mainly by continued robust growth in household consumption and generally strong domestic investment activity amid stable growth in foreign demand. Rising labour demand coupled with an increasingly distinct shortage of available labour force would manifest itself in continued rapid wage growth.

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 balanced. The Board agreed that the situation as regards inflation, the labour market, the phase of the business cycle and other macroeconomic parameters fully justified raising interest rates. At the same time, it stated that there were two bidirectional uncertainties of the forecast. The first one was associated with the strength of current and future domestic inflation pressures. The second, general, uncertainty concerned the exchange rate path. With regard to the uncertainty relating to the strength of domestic inflation pressures, repeated mention was made of the tight labour market and its impacts on wages. Their high growth could persist for longer than indicated by the new macroeconomic forecast and hence generate higher inflation pressures in the future. The next part of the Board’s debate focused on how much the rising private investment would increase labour productivity. The latter could mitigate the growth in domestic cost pressures stemming from the tight labour market and rising wages. However, the extent and, in particular, the duration of the strongest effect of this factor was also subject to uncertainty. In connection with how strongly the current growth in private investment would affect labour productivity, the Board also discussed the structure of the private investment, i.e. whether it reflected growth in orders coupled with labour shortages requiring firms to substitute human labour with machines, or whether it was due largely to the cycle and corporate optimism. It was said repeatedly that rising labour productivity would reduce the inflation pressures stemming from the domestic economy, but it was unclear how much. In this regard, the opinion was expressed that the Czech economy’s technology gap relative to the advanced countries was not wide enough for the new investment to fundamentally raise its productivity.

The board members also mentioned the return to the CNB’s standard communication regime, i.e. the return to the publication of a numerical forecast for the koruna-euro exchange rate starting with the present forecast. In this regard, it was said repeatedly that the published exchange rate forecast – like the interest rate forecast – represented the CNB’s outlook and was subject to a high degree of uncertainty. It did not constitute any commitment by the CNB, nor could it be interpreted as the preferred or desired exchange rate level. Like the forecasts for all other variables, the exchange rate forecast was conditional on the assumptions of the forecast, including the outlooks for developments abroad. Unexpected shocks may cause the actual exchange rate to deviate in either direction from the forecast, sometimes significantly. In this context, the timing and the speed of the return of ECB monetary policy to normal was repeatedly mentioned as one of the key factors of the uncertainty. The Board also agreed that, combined with the published interest rate forecast, the resumed publication of a numerical koruna exchange rate forecast would deliver consistency and better-anchored expectations about the overall monetary conditions. This would make monetary policy decision-making more transparent and easier to understand.

The next part of the Board’s debate concerned the interest rate forecast and the specific timing of interest rate increases. In this regard, it was said that the interest rate forecast implied a rate increase in the first quarter of this year and subsequently foresaw rates being stable until the end of this year. The prevailing view was that there were no risks preventing rates from being raised at the current meeting. However, there were also voices asking whether it would be better to delay the increase until the next monetary policy meeting to ensure a smoother interest rate path. Some of the board members were wary of the potential costs of a relatively long period of rate stability this year, during which domestic monetary policy could face an unforeseeable anti-inflationary shock from abroad, for example. On the other hand, it was said repeatedly that the Czech economy was in good condition and was generating strong domestic inflationary pressures. The fulfilment of the past forecast suggested that the economy was highly resilient to any unforeseeable shocks. It was also said that the interest rate outlook was conditional on the pace of the forecasted appreciation of the koruna. If it were to strengthen more moderately, there might be room to further increase interest rates earlier than foreseen by the current forecast.

In the context of developments abroad, the risks relating to the strong euro and its potential negative effects on demand in the Czech Republic’s main euro area trading partners were mentioned several times. There was a consensus that the stronger euro would have different effects on different euro area members depending on their structure and competitiveness. In this regard, repeated mention was also made of the German economy, which historically has been more resilient to exchange rate swings than structurally weaker economies. For this reason, the risks in the form of lower external demand for Czech exports were not large. Rather, the biggest risks were associated with developments in the euro area as a whole, with potential impacts on ECB monetary policy. The opinion was repeatedly expressed that a slower return of monetary policy in the euro area to normal could, at the more distant forecast horizon, foster slower growth in domestic interest rates. On the other hand, it was said repeatedly that in a situation of buoyant growth in euro area economic activity, the strengthening euro might merely reflect a return to its average pre-crisis level. Relative to that level, the exchange rate of the euro had conversely been undervalued and deflected from its long-term equilibrium value in the recent past as a result of the debt crisis.

The Board also devoted part of its discussion to the interaction of monetary and macroprudential policy. It was mentioned repeatedly that a further interest rate increase was desirable from the financial stability perspective as well. All the CNB’s instruments (the exchange rate, interest rates and macroprudential measures) were currently acting towards cooling the heated Czech economy. In this context, the great importance of the earlier introduction of macroprudential measures was emphasised. The opinion was also expressed that interest rates were not a suitable tool for dealing with the overheated property market situation, and for this and other reasons the CNB’s macroprudential instruments should be firmly legally anchored going forward.

At the close of the meeting the Board decided unanimously to increase the two-week repo rate by 25 basis points to 0.75% with effect from 2 February 2018. The Lombard rate was increased by 50 basis points to 1.50% and the discount rate was left unchanged at 0.05%. Jiří Rusnok, Vladimír Tomšík, Vojtěch Benda, Marek Mora and Tomáš Nidetzký voted in favour of this decision.

Author of the minutes: Martin Motl, Monetary Department