Minutes of the Bank Board Meeting on 27 June 2018

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

The meeting opened with a presentation of the fourth situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the third situation report. Inflation had gradually increased in Q2 and had slightly exceeded the 2% target in May. The higher-than-forecasted inflation in May had been due mainly to faster growth in prices of fuels and food and, to a lesser extent, to slightly higher core inflation.

As forecasted, the growth of the Czech economy had slowed in Q1. However, the slowdown had been rather more pronounced than the central bank had expected. This had been due mainly to a stronger negative contribution of net exports and lower additions to inventories. Household consumption had also recorded slightly slower growth, but remained robust. By contrast, the contributions of fixed investment and government consumption to economic growth had been stronger than forecasted. Labour market indicators pointed to continued overheating of the labour market. Employment had continued to rise apace and had exceeded the forecast amid strong labour demand. In line with expectations, unemployment had declined only slightly. As expected, wage growth had accelerated further in Q1. Although it had fallen slightly short of the prediction in market sectors, it had exceeded the forecast in non-market sectors. 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, the board members assessed the risks to the inflation forecast at the monetary policy horizon as being inflationary. The exchange rate of the koruna, which was weaker than forecasted, was repeatedly mentioned as the most significant inflationary factor. There was a consensus that the weaker exchange rate was creating room to tighten the monetary conditions in their interest rate component, which would also support achievement of the financial stability objective.

It was said several times that the weakening of the koruna was linked with capital outflows from emerging economies into dollar assets due to growth in global uncertainty and that this phenomenon could persist in the longer term. On the other hand, it was said that swings of several per cent were common under a free float and the current weakening of the koruna in Q2 could be regarded as moderate from the perspective of historical volatility and by comparison with the movements of other currencies in the Central European region. In this context, it was pointed out that the koruna exchange rate forecast was neither a commitment, nor a preferred exchange rate level from the CNB’s point of view. The weaker-than-forecasted rate indicated room for raising interest rates and thus made it possible to take a further step towards normalising monetary policy.

The recent evolution of foreign producer prices, reflecting growth in commodity prices, was assessed as an upside risk to inflation in the short run. On the other hand, it was said several times that global uncertainties associated with the risk of escalation of trade wars and the impacts of Brexit could conversely cause the external environment to have an anti-inflation effect in the longer run. It was said several times that it was currently impossible to precisely quantify the medium-term effect of the global uncertainties on the domestic economy. In this regard, it was said that the materialisation of those uncertainties needed to be monitored closely.

It was said that consumption was rising robustly and that the domestic economy, unlike the external environment, was not a source of uncertainties. The growth in household consumption was generating stable inflation pressures. The labour market had been repeatedly assessed as overheated and generating cost-push inflation pressures due to high wage growth. It was also mentioned that labour productivity growth may not be high enough to offset those cost pressures. Nonetheless, it was also said that although the higher annual inflation observed in May represented an upside risk to inflation, its effect on future fulfilment of the inflation target should not be overestimated.

At the close of the meeting the Board decided unanimously to increase the two-week repo rate by 25 basis points to 1.00%. The Lombard rate was increased by 50 basis points to 2.00% and the discount rate was left unchanged at 0.05%. Jiří Rusnok, 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