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 sixth situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the fifth situation report. Headline inflation had been fluctuating in the upper half of the tolerance band around the CNB’s 2% target so far in Q3. It had declined temporarily in July and had risen again to 2.5% in August. Observed inflation had meanwhile been slightly lower than forecasted due to a downswing in food price inflation, which, however, had been largely offset by an unexpected pick-up in core inflation. The other components of inflation had been broadly in line with the forecast.
In 2018 Q2, GDP growth had slowed further in year-on-year terms to 2.4% and had been only marginally lower than forecasted by the CNB. It had again been driven primarily by a continued sharp rise in fixed investment and robust growth in household consumption, which had lagged only slightly behind the CNB’s expectations. The contribution of government consumption had also been positive, though rather lower than predicted. The contribution of additions to inventories had been negative, which the forecast had not foreseen, but it had been largely offset by a less negative contribution of net exports. Amid strong demand for labour, employment had continued to go up significantly while unemployment had dropped only slightly as expected. Wage growth had fallen slightly short of the forecast in market sectors but had exceeded it significantly in non-market sectors. Overall, the labour market was still creating strong inflationary pressures in line with the forecast. 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 large majority of the board members assessed the balance of risks to the forecast at the monetary policy horizon as being balanced and the individual risks as being insignificant. One member viewed the balance of risks as modestly inflationary given the path of core inflation, the high wage growth and the above-potential domestic economy. The board members agreed that the economic story of the current forecast was materialising well and that any deviations were insignificant. None of the uncertainties identified at the August meeting had manifested themselves so far. Those uncertainties had been linked primarily with global factors which had caused emerging market currencies, including the koruna, to weaken recently. The koruna’s exchange rate against the euro was close to the predicted level on average. Growth in protectionist measures in global trade remained a source of uncertainty going forward. In light of recent events, the still unclear form of Brexit could be added to this uncertainty.
The prevailing view among the board members was that given the environment of solid economic growth, rapid wage growth, a weaker koruna and inflation in the upper half of the tolerance band, it was appropriate to tighten monetary policy further via interest rates. It was noted several times that an interest rate increase of 50 basis points was consistent with the current forecast, while at the August meeting rates had been raised by 25 basis points. The board members gave preference to a policy of smaller gradual steps. It was mentioned that increasing interest rates was consistent with the financial stability perspective. One member agreed with steering interest rates towards their equilibrium level but preferred to raise them more slowly. He justified this cautious approach primarily with reference to the external uncertainties and reduced competitiveness in the event of faster growth in rates than in surrounding countries. Against this, the opinion was expressed that the current economic situation was creating room for faster convergence of interest rates to their neutral level and that even a 50 basis point rate hike at the present meeting would not be a macroeconomic mistake. Such a step, however, might be seen as a sign of panic.
Part of the debate was devoted to the timing and frequency of further rate increases. It was said repeatedly that the CNB would steer a gradual course towards the long-run equilibrium interest rate, although this would be conditional on the paths of all key macroeconomic variables, including the exchange rate of the koruna. If the next forecasts materialised and information from the external environment allowed further steps to be taken, the Board would continue to normalise monetary policy. However, this did not represent any commitment for the next meeting. According to some of the members, the process of normalising interest rates was simultaneously a means for the CNB to be prepared for any future recession. The normalisation of interest rates is creating space for monetary policy to be able to respond actively to any adverse developments associated above all with the uncertainties currently identified abroad. On the other hand, it was said that the koruna might start to strengthen relatively quickly after the financial market situation had calmed, so some caution was appropriate as regards the next steps to be taken.
Part of the discussion was devoted to the overheating of the domestic economy. It was said repeatedly that the economy was above its potential output level, there were major labour shortages and wages were rising briskly as a result. The labour market tightness was in turn creating inflation pressures. Meanwhile, neither the real sector nor households were experiencing worse access to credit, and some real interest rates were still negative. In these conditions, a rate increase was the appropriate response.
At the close of the meeting the Board decided to increase the two-week repo rate by 25 basis points to 1.50%. The Lombard rate was increased by 25 basis points to 2.50% and the discount rate also by 25 basis points to 0.50%. Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Marek Mora and Tomáš Nidetzký voted in favour of this decision. Oldřich Dědek voted for leaving interest rates unchanged.
Author of the minutes: Jan Syrovátka, Monetary Department