Minutes of the Bank Board Meeting on 23 September 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 sixth situation report assessing the fulfilment of the macroeconomic forecast contained in the fifth situation report in the light of the newly available information. According to the current 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.
The board members agreed that the risks to the current forecast were substantial and that the current epidemiological situation was increasing the uncertainty regarding future economic developments. It was said repeatedly that the current forecast was materialising fairly well in the context of the current high uncertainty. In normal times, the deviations from the forecasts for individual variables such as GDP, investment, core inflation and wage growth in the market sector would be regarded as relatively sizeable, but at present they could be considered insignificant. The Board agreed that leaving interest rates unchanged was the appropriate monetary policy decision in the current situation.
A large part of the debate concerned risks and uncertainties. Jiří Rusnok said that the persisting external uncertainties (deglobalisation, trade wars, Brexit and the shift towards green energy), which had escalated further with the ongoing pandemic, had now been joined by domestic uncertainties. The prevailing view among the board members was that the current deterioration of the epidemiological situation in the Czech Republic, and any related government and corporate measures and voluntary restrictions on the part of households, could foster lower domestic economic activity by comparison with the current forecast. It was said repeatedly that the quarantine measures, however, would not necessarily have clearly anti-inflationary impacts, especially if the exchange rate of the koruna were to weaken significantly as it had during the first wave this spring (Oldřich Dědek, Tomáš Holub).
According to a majority of the board members, the additional budget measures currently being considered by the Czech government, potentially combined with drawdown of European funds, were a persisting factor that could partially offset the economic impacts of the worse epidemiological situation. According to Aleš Michl, fiscal expansion was the most appropriate complement to monetary policy, so he supported the government proposals to cut taxes next year. However, he also emphasised that the economy could not be assisted indefinitely by the various programmes (Antivirus, the loan moratorium and so on).
The next part of the debate was devoted to the structure of the supply and demand factors underlying domestic inflation. Marek Mora pointed out that the Czech Republic differed greatly from the large majority of European Union member states with its still high observed inflation. According to Mr Mora, this was only partially explained by the possible efforts of firms to make up for the profits they had lost during the spring shutdown of the economy. According to Vojtěch Benda, supply chain disruptions could be one of the reasons. Tomáš Nidetzký pointed out that temporarily elevated inflation was an advantage for the economy from the perspective of flexible inflation targeting, because it would allow it to absorb part of the shock associated with the coronavirus crisis. According to Mr Nidetzký, temporary deviations from the target on either side connected with this extraordinary shock could be tolerated without the inflation target becoming unanchored and without monetary policy losing credibility. The other board members agreed that lingering high demand and labour market overheating from the pre-pandemic period were also playing a large role. Most of them felt that this phenomenon was temporary and inflation would ultimately slow due to the generally subdued demand environment and cooling labour market.
The Board discussed the present and future monetary policy settings. According to Jiří Rusnok, it was evident that the monetary conditions were sufficiently accommodative at present. The outlook – despite being uncertain – did not currently necessitate any further action in the form of a change to interest rates either. Tomáš Nidetzký said that the good condition and liquidity position of the Czech financial sector was not currently putting pressure on monetary policy, nor was there any spillover of the negative economic impacts to the financial sector and especially the banking sector. Nonetheless, according to Tomáš Holub and Marek Mora, the latest coronavirus developments were increasing the likelihood of further monetary policy easing and the need to use unconventional instruments in the future. Mr Mora therefore regarded the risks to the forecast as anti-inflationary and in particular did not view a rising interest rate path at its long end as likely. Oldřich Dědek said that the elevated inflation, which would stay above the tolerance band around the target at least until the end of this year, was a strong argument against lowering interest rates. In addition, with the onset of the second wave of the pandemic the exchange rate of the koruna had weakened and thus eased the monetary conditions.
The exchange rate, which had weakened in recent weeks, was therefore also discussed in more detail. Tomáš Holub said that the rate was currently again playing the role of a welcome automatic stabiliser, with its weakening reflecting a possible deterioration of the macroeconomic outlook connected with the epidemiological situation. According to Mr Holub, the current weakening could support the Czech economy more than in the spring, when it had been of little help to exporters because some markets had been closed. At that time, the weaker koruna had also made imports of vital medical equipment more expensive. According to Vojtěch Benda, the exchange rate was currently reacting very strongly to sentiment. A further weakening would not bring about the desired additional easing of the monetary conditions, but rather would keep inflation elevated and have a negative impact on households’ purchasing power. Some other board members agreed with this (Jiří Rusnok, Oldřich Dědek, Tomáš Nidetzký). Jiří Rusnok said that the exchange rate could become a built-in destabiliser if it were to start deviating too dramatically from its equilibrium level, although this was not the case at present.
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 Syrovátka, Monetary Department