Present at the meeting: Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Vojtěch Benda, Oldřich Dědek, Tomáš Holub, Aleš Michl.
The meeting opened with a presentation of the eighth situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the seventh situation report. Domestic inflation had declined over the last three months, reaching the 2% target in November. It had been lower than forecasted, mainly as a result of a one-off shock to food price growth. Growth in administered prices and fuel prices had also been somewhat lower than forecasted, whereas core inflation had gone up and had been slightly above the forecast.
The rate of growth of the Czech economy had stayed at 2.4% in Q3, whereas the forecast had expected a slight acceleration. The deviation of economic growth from the forecast had been due to a lower contribution of net exports. Household consumption had also been slightly lower than predicted. Faster growth in total investment and government consumption had acted in the opposite direction. Monthly indicators suggested continued solid economic growth at the close of this year. The labour market was creating strong inflationary pressures in line with the forecast. Labour shortages coupled with still high labour demand had led to a further increase in job vacancies. Growth in total wages had remained high in Q3, slightly exceeding the forecast. Wage growth had been slightly lower than forecasted in market sectors, but significantly above 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, a majority of the board members assessed the risks to the inflation forecast at the monetary policy horizon as being broadly balanced. The inflationary effect of the exchange rate, which was weaker than forecasted, was being offset by lower observed inflation and by the current decline in oil prices. It was said that the neutral balance of risks represented a shift compared with the previous situation report, where the risks had been assessed as being slightly inflationary. The appropriate response under inflation targeting was therefore to set rates at a level consistent with the most recent forecast, i.e. to leave them at their existing level in the current situation. By contrast, one board member assessed the risks to inflation as inflationary, noting that the deviation of inflation from the forecast had been due to volatile items, whereas core inflation – an indicator of demand-pull inflation pressures – had been above the forecast, reflecting the tight labour market and rapid wage growth. It was said several times that the time had come when making monetary policy decisions would be more difficult than in 2018.
The board members assessed the domestic economic situation. It was said several times that the output gap was positive and that this was creating room to normalise interest rates further. It was said that an increase in monetary policy rates of 25 basis points would return the real repo rate to non-negative figures. On the other hand, some of the board members said that any decision to raise interest rates further would need to take account of the external environment, where interest rates remained low. Several board members also mentioned that although the output gap was undoubtedly positive, there were signs of it gradually closing, and that this diminished the need for a further rapid rise in interest rates.
The future exchange rate path was repeatedly assessed as an important factor for setting interest rates in 2019. A majority of the board members agreed that the weaker-than-forecasted exchange rate was due, in addition to year-end technical factors, to negative sentiment associated with global risks such as the manner of exit of the United Kingdom from the EU and protectionist tendencies in global trade. It was said repeatedly that if the koruna turned out to be weaker than currently forecasted next year, there would be room to raise interest rates more quickly. Given the uncertainty about the exchange rate going forward and the potential materialisation of the said global risks, it was said several times that the optimal strategy at present was to wait for clarification of the risks during the preparation of the new forecast. However, one board member pointed out that the weakened exchange rate could be a reflection of its desired stabilising effect, helping the economy adapt to potential less favourable external developments. In such case, a weakening of the exchange rate should not automatically be interpreted as guidance for increasing domestic interest rates.
The board members also assessed the monetary policy rate settings from the perspective of the financial stability objective. It was said repeatedly that the settings of macroprudential instruments such as housing loan limits and capital buffers were currently sufficient, so there was no need to put such an emphasis on raising interest rates as a support instrument for achieving financial stability. In this regard, it was also said that the recent interest rate increases combined with the recently adopted macroprudential measures were consistent with the position of the economy in the business and financial cycle.
At the close of the meeting the Board decided by a majority vote to leave the two-week repo rate unchanged at 1.75%. Five members voted in favour of this decision: Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Oldřich Dědek and Tomáš Holub. Two members voted for increasing the rate by 0.25%: Vojtěch Benda and Aleš Michl.
Author of the minutes: Jan Brůha, Monetary Department