Minutes of the Bank Board Meeting on 28 March 2019

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 second situation report assessing the new information and its effect on the fulfilment of the macroeconomic forecast contained in the first situation report. Domestic inflation had got into the upper half of the tolerance band around the 2% target in Q1. Its rise had been stronger than forecasted. In particular, core inflation had been higher than forecasted. Year-on-year growth in food prices and administered prices had also been more rapid.

The growth of the Czech economy had risen slightly in 2018 Q4, whereas the forecast had expected it to slow slightly. The deviation had been due mainly to stronger-than-expected growth in goods and services exports. Government consumption had also grown faster. By contrast, household consumption had been lower than expected, its growth having slowed markedly at the year-end. Employment had kept rising; in line with the forecast, the decline in the unemployment rate had almost come to a halt. Labour shortages coupled with still high labour demand had led to a further increase in job vacancies. Conversely, total wage growth had slowed in Q4 and was below the forecast, especially in non-market sectors, but also in 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 current inflation forecast at the monetary policy horizon as being broadly balanced. Consistent with this forecast was broad interest rate stability. According to a majority of the board members, faster dissipation of domestic inflation pressures, as indicated by slower growth in wages and household consumption at the end of last year, was an anti-inflationary risk to the current forecast. A potential stronger cyclical slowdown in the global economy was acting in the same direction. Conversely, the possibility of slower-than-forecasted exchange rate appreciation in the quarters ahead was an inflationary risk. The possibility of a disorderly Brexit and growth in protectionist measures in global trade remained uncertainties. Some of the board members viewed the risks to the forecast as being on the inflationary side, as they put greater emphasis on the risk of a weaker-than-forecasted koruna.

Part of the meeting was devoted to the exchange rate. The board members agreed that the uncertainty surrounding the exchange rate of the koruna was still high. Several arguments were made for why the exchange rate might strengthen more gradually than expected by the forecast in the coming quarters. One of these arguments was persisting adverse global sentiment, manifesting in limited investor interest in risky assets, among them Central European currencies. Investment positions in the Czech koruna, which had been enormous since the time of the exchange rate commitment, were thus no longer rising in the present conditions, despite the positive interest differential against the euro. The opinion was also expressed that the growth model of the Czech economy was gradually changing. Domestic consumption was now contributing more significantly to economic growth than in the past, at the expense of net exports. This was having consequences in the form of lower demand for the Czech currency from the real economy. A higher rate of natural exchange rate hedging of Czech exporters was having the same effect. Besides that, the opinion was repeatedly expressed that the exchange rate had also been functioning increasingly as a stabiliser of the small open economy in recent months, absorbing the anti-inflationary impacts of the slowing external demand. This function of the exchange rate could play a greater role in the quarters ahead if the global economic outlook were to worsen substantially. More than previously, it thus applied that inferences could not be drawn about interest rates going forward solely on the basis of the materialisation of the exchange rate forecast.

In a debate assessing domestic economic developments, there was a consensus that there was still room to raise interest rates further. The domestic inflation pressures, stemming from still buoyant wage growth and continued economic growth, remained strong, although they might fade rather more quickly than the current forecast indicated. Unemployment was at a record low and labour shortages were still fostering labour market tightness. Given the distance of the monetary policy horizon, the effect of the higher observed inflation on the Board’s decisions should not be overestimated, but the potential persistence of inflation needed to be taken into account. In this regard, it was noted that the deviation from the forecast was due mainly to an upswing in core inflation. On the other hand, it was said that if the signs of growth in the saving rate were to be confirmed, the need to raise interest rates would become less pressing. In this context, mention was also made of the observed mortgage downturn, which had been fostered by advance buying connected with the introduction of macroprudential measures by the CNB, sentiment linked with the growth in interest rates and persisting property shortages on the supply side.

The Board also discussed the observed cooling of international trade, which was fuelling concerns of a potential stronger global growth slowdown. In this regard, emphasis was placed on the outlook for the European economy and, within it, the situation of the Czech Republic’s main trading partner Germany. On the one hand, there were voices saying that the slowdown of the German economy might still be only a temporary matter. On the other hand, it was said that a longer period of lower growth in external demand could not be ruled out either. In this connection, mention was also made of the recent change in the rhetoric of the major global central banks, which, in the context of the uncertainties associated with the economic outlook, were tending to show patience as regards further monetary policy actions. The board members also discussed the risk of a disorderly Brexit. The probability of this was hard to quantify, but the potential economic consequences of a chaotic departure of the UK from the EU would be substantial. Against this, it was said that if the negotiations were to produce an orderly solution, a recovery in external demand could be expected in the second half of this year.

In the context of the domestic and foreign risks discussed above, the prevailing opinion among the board members was that the central bank should be forward-looking and prudent. As the domestic economy was not in urgent need of an interest rate increase in the present situation and the external uncertainties were high, the prevailing view was that there was no need to rush with raising interest rates.

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 percentage points: Vojtěch Benda and Aleš Michl.

Author of the minutes: Pavla Růžičková, Monetary Department