Česká národní banka

Minutes of the Bank Board Meeting on 29 March 2018

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 second situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the first situation report. Headline inflation had fallen further at the start of this year. The fall had been only modest in January but more pronounced in February, when inflation had dropped slightly below the Czech National Bank’s 2% target for the first time in more than a year. In February, inflation had been markedly below the central bank’s forecast. This had been due mainly to lower-than-expected food price inflation. Core inflation had also fallen somewhat short of expectations.

GDP growth had accelerated further in 2017 Q4. Its pace had been only slightly below the forecast owing to slightly slower-than-expected growth in household consumption. Nevertheless, its dynamics remained robust due to a strong labour market and ensuing rapid growth in household income. As expected, wage growth had accelerated again in late 2017, although its pace in the private sector had been slightly lower than the CNB had predicted. Employment had continued to increase year on year, although its growth had moderated in line with the forecast. The long-running decrease in unemployment had slowed in early 2018, again in line with the forecast. A shortage of available labour force coupled with high labour demand had led to an increase in job vacancies to new historical highs. The deviations of the other demand components from the forecast had been generally insignificant and, moreover, had offset each other to a large extent. A more detailed discussion of the risks to the current inflation forecast can be found in the commentary on the Graph of Risks to the Inflation Projection (GRIP).

In the discussion that followed the presentation of the situation report, a majority of the board members assessed the risks to the inflation forecast at the monetary policy horizon as being slightly anti-inflationary. Risks in this direction stemmed mainly from inflation, which had decreased faster at the start of this year than the CNB had expected. However, more gradual appreciation of the koruna compared to the forecast could act in the opposite direction in the quarters ahead. Some of the board members viewed the risks to the forecast as balanced.

There was a consensus at the board meeting that the forecast was more or less materialising and the overall message of the economic story was thus unchanged. The individual board members nonetheless differed in how much importance they attached to the fact that the pace at which inflation was slowing had exceeded the expectations of the forecast in recent months. On the one hand, there was an opinion that this deviation was not particularly significant, as it was due mainly to the evolution of traditionally volatile food prices. In addition, there was an assumption that the current decline in core inflation was only temporary. On the other hand, however, it was said that the inflation slowdown may be due to more fundamental factors, such as productivity growth linked with increased investment or inflation expectations anchored at low levels. Nevertheless, all the board members expressed the view that nothing had changed as regards moving monetary policy towards a neutral stance. It was said that the return to normal would still take some time and should not be rushed, but the direction was clear. It was also said that monetary policy was currently configured appropriately as regards fulfilling the inflation target. The Board was nonetheless ready to react flexibly to new information on price developments. However, the opinion was also expressed that it was justified to continue – albeit with breaks – the process of returning interest rates to their equilibrium levels.

The Board turned its attention to assessing external economic developments and their effect on CNB monetary policy. A majority of the board members agreed that the euro area was currently in a rather different phase of the business cycle than the Czech economy and that the ECB’s monetary policy stance reflected this. However, the board members still had different views on whether, and to what degree, the standard link between the interest rate differential and the exchange rate of the koruna was functioning and the extent to which the exchange rate was reacting to expectations regarding future changes in interest rates.

The domestic labour market was also discussed. The board members agreed that it was still very tight. It was pointed out that the number of vacancies was continuing to rise and that firms were unable to fill vacancies despite high wage growth. This was contrasted with the situation in the euro area, where unemployment remained high and wage growth subdued. Attention was then turned to the transmission of domestic wage growth to inflation. In this regard, it was said that there were many factors that might be dampening the effect of wage pressures. In addition to those discussed above, they included, for example, the current slowdown in industrial producer price inflation and the observed appreciation of the koruna against the euro and the dollar. The next part of the Board’s debate focused on the interpretation of nontradables price inflation, which had been decreasing in recent months. It was stated that nontradables prices should be reflecting the robust growth in wages above all else. On the other hand, it was said that many imported inputs were used to produce such goods and that the appreciating koruna was making them cheaper, while competition on this market had increased sharply in recent years due to ever-expanding internet sales.

In light of the above facts, the price reaction of supply in the face of increasing demand was also discussed. The board members noted that this reaction was traditionally low in the highly conservative and price-sensitive Czech environment. Moreover, it was decreasing further as a result of the structural changes indicated above. It could be seen that supply was reacting to the growth in demand through growth in production rather than prices. This was often only happening in response to external stimuli, such as the recent introduction of electronic sales registration. It was thus noted that prices in the Czech economy did not necessarily react continuously and hence predictably to movements in demand. This generates a further uncertainty for the inflation forecast.

At the close of the meeting the Board decided unanimously to leave interest rates unchanged. The two-week repo rate remains at 0.75%, the discount rate at 0.05% and the Lombard rate at 1.50%. 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: Pavla Břízová, Monetary Department