Minutes of the Bank Board Meeting on 6 August 2020
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 fifth situation report and the new macroeconomic forecast. According to the forecast, headline inflation would stay above the upper boundary of the tolerance band for the rest of this year. Over the monetary policy horizon, i.e. in the second half of next year, inflation would return close to the 2% target. Consistent with the forecast was stability of domestic market interest rates until mid-2021, followed by a gradual rise in rates.
A majority of the board members assessed the risks to the forecast as being significant but not tilted in either direction overall. There was a consensus that there was no need to change monetary policy. Marek Mora said he saw the risks to the inflation forecast as mildly anti-inflationary, since negative demand-side effects could lead to a faster decline in inflation over the monetary policy horizon. Tomáš Holub also said he regarded the overall risks to the forecast as being tilted slightly towards a need to ease monetary policy further, as there was still a possibility of a second wave of the pandemic, which would mean a further negative shock to economic activity. At present, however, it was not necessary to lower monetary policy interest rates any further, because there was no danger of inflation expectations falling.
The board members discussed the inflation forecast, which was higher over the next few quarters than in the previous situation report. According to Oldřich Dědek, this rather changed the original view of rapidly emerging disinflationary demand pressures. A majority of the board members agreed that the continued buoyant growth in prices probably reflected efforts by firms to make up the loss of revenue they suffered during the administrative shutdown of the economy and related growth in their costs. The board members also concurred that this factor was temporary. In this context, Vojtěch Benda said the current high inflation still reflected the pre-pandemic overheating of the economy to some extent. Over the monetary policy horizon, the board members expected the decline in demand to prevail and inflation to return close to the 2% target from above.
A majority of the board members assessed the current trend in the exchange rate, which had recently firmed, as an anti-inflationary factor. According to Jiří Rusnok and Marek Mora, however, the effect of the exchange rate should not be overestimated, because the pass-through of the exchange rate to other macroeconomic variables could be limited at present by comparison with the period before the exchange rate commitment. However, Tomáš Holub pointed out that the recent upswing in tradables prices within core inflation probably partly reflected the previous weakening of the koruna, and its current strengthening could act comparatively quickly in the opposite direction.
In the debate about domestic economic activity, Jiří Rusnok said different sectors in the economy would very likely show different rates of growth. This increased the overall macroeconomic uncertainty, but monetary policy could not react to structurally uneven developments. Aleš Michl stated that short-term indicators such as electricity consumption were indicating that the decline in economic activity had bottomed out back in April. The analogous foreign indicators were suggesting that other countries had also now troughed. Oldřich Dědek also mentioned that new data were indicating a smaller-than-expected contraction, despite the unprecedented decline in economic activity.
The board members then discussed fiscal policy. A majority of the members said expansionary fiscal policy was currently contributing to the stabilisation of the Czech economy and hence helping to suppress the anti-inflationary tendencies stemming from the decline in demand and overall economic activity. Jiří Rusnok and Tomáš Holub mentioned that the fiscal impulse in 2021 and 2022 could be higher than expected by the forecast and that this represented an inflationary risk to the forecast. Jiří Rusnok, Marek Mora and Tomáš Nidetzký said fiscal policy and the stabilising budgetary measures were softening the impacts of the crisis on the labour market for the time being. A more substantial cooling on the labour market, and hence anti-inflationary demand pressures, could be expected after these measures faded out.
The Bank Board also assessed the situation outside the Czech Republic. Marek Mora and Tomáš Nidetzký mentioned the persisting risks to global economic growth, such as a disorderly Brexit and protectionist tendencies manifesting themselves in trade tensions between the USA and China. On the other hand, expansionary fiscal policy in Germany was helping to stabilise the European economy and, through trade links, the Czech economy as well. In the debate about developments abroad, Vojtěch Benda said the risk of sustained low productivity growth in the global economy was non-negligible. Sustained low productivity growth would represent a cost-push inflationary factor that would be reflected in growth in domestic prices.
At the close of the meeting the Board decided unanimously to leave interest rates unchanged. The two-week repo rate remains at 0.25%, the discount rate at 0.05% and the Lombard rate at 1%.
Author of the minutes: Jan Brůha, Monetary Department