Minutes of the Bank Board Meeting on 18 December 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 eighth situation report assessing the fulfilment of the macroeconomic forecast contained in the seventh situation report in the light of the newly available information. Domestic inflation had been close to the upper boundary of the tolerance band around the target during Q4 and had risen slightly above the forecast and the tolerance band boundary in November. The deviation from the forecast had been due mainly to faster-than-expected growth in food prices. Core inflation and fuel prices had also been slightly above the forecast. The growth of the Czech economy had slowed slightly in Q3 and had conversely been just below the forecast. The slower-than-expected GDP growth had been due to somewhat more moderate growth in household consumption and a lower contribution of net exports. Industrial production had declined year on year in Q3 and had been broadly flat in October. Retail sales had continued to rise swiftly in October, signalling solid household consumption growth for the end of this year. Total employment growth had been subdued, in line with the forecast. As expected, the unemployment rate had stayed close to its historical low. The number of job vacancies had meanwhile remained high. Wage growth had slowed slightly in Q3, lagging somewhat behind the forecast owing to lower-than-expected wage growth in market sectors. So far in Q4, the koruna-euro exchange rate had appreciated slightly and had been marginally stronger than forecasted on average. 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).

A majority of the board members assessed the risks as being tilted towards lower-than-forecasted interest rates in the coming quarters. The uncertainties regarding the situation abroad had decreased slightly, but on the other hand more marked transmission of the previous external demand slowdown to the domestic economy was being observed.

The board members discussed the recent evolution of inflation, which had exceeded the upper boundary of the tolerance band. It was said several times that this had been due to volatile items, most notably sharp growth in food prices. Core inflation remained slightly above 2%, while inflation expectations were still anchored. It was said that the exceeding of the upper boundary of the tolerance band was a past battle that monetary policy should no longer be fighting. In this context, it was said that it was more important to focus on achieving the inflation target at the monetary policy horizon. One board member emphasised that the CNB targets 2% inflation, not a 1%–3% band, and also that if monetary policy did not respond by tightening, there was a risk of the economy losing the mechanism that would return inflation to the target. In this regard, it was also said that inflation had also risen in some tradable goods categories, indicating substantial domestic demand pressures.

The Board went on to assess the domestic economy. According to a majority of its members, numerous indicators – among them household consumption, employment, the average wage and the total volume of wages and salaries – were rising rather more slowly than forecasted. This represented an anti-inflationary risk. Against this, the discrepancy between the buoyant growth in retail sales and the sluggish growth in household consumption was noted. According to the Monetary Department, this discrepancy may be linked with technical aspects of the adjustment of household consumption in the national accounts for the number of working days.

It was said repeatedly that the risk of significantly adverse scenarios for the global economy – such as a disorderly Brexit or an escalation of protectionist measures in international trade – was falling. According to some of the board members, foreign leading indicators were suggesting that the euro area cycle was now close to its trough and the likelihood of a further slowdown was low. On the other hand, it was said it was too early for an optimistic assessment of the cyclical position abroad and there was a need to wait and see until the foreign leading indicators and sentiment indicators manifested in the real economy there. On top of that, it was said that the positive effect of the cyclical recovery abroad on the Czech economy might be lagged.

It was emphasised several times that the external environment was also affecting the Czech economy through structural factors such as the transition to electromobility and energy policy in Germany. These factors posed a risk to the growth of the Czech economy, in which the manufacture and export of automobiles and auto parts plays an important role. The opinion was expressed that certain recent domestic policy actions, such as the increase in the minimum wage and the abolition of the initial period of unpaid sick leave, were generating additional costs for firms. In this context, it was said repeatedly that an interest rate increase would represent an additional cost for investment financing in industry and could foster a deeper economic slowdown.

The Board discussed the recent appreciation of the koruna. It was said several times that this appreciation was probably linked with the decrease in uncertainties in the global economy. In this regard, one board member felt that the koruna’s appreciation trend might be renewed. It was said that the stronger-than-forecasted exchange rate could help return inflation to the target. Against this, it was argued that the appreciation had been weak and hence had not so far caused monetary conditions to move to the desired level.

There was also a discussion of the implications of the interest rate settings for financial stability. It was said that the reaction of mortgage interest rates to a change in the repo rate would be very limited and that macroprudential policy instruments had proved effective in achieving financial stability objectives. There was therefore no need to raise monetary policy interest rates for this reason.

It was pointed out that as regards the conflict between achieving the price stability objective and supporting the real economy, the central bank should focus primarily on its price stability mandate. It was said several times that an interest rate increase could pose too great a risk to the real economy at present, so it was better to leave rates unchanged at the current meeting. However, this did not preclude an increase at a future board meeting if the evolution of the domestic economy turned out to be positive. According to one board member, rates could move in either direction.

At the close of the meeting the Board decided by a majority vote to leave the two-week repo rate unchanged at 2.00%. Five members voted in favour of this decision: Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Oldřich Dědek, and Aleš Michl. Two members voted for increasing the rate by 0.25 percentage points: Vojtěch Benda and Tomáš Holub.

Author of the minutes: Jan Brůha, Monetary Department