Minutes of the Bank Board Meeting on 4 February 2021

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 first situation report and the new macroeconomic forecast. According to the forecast, headline inflation would fall further close to the 2% target in the first quarter of this year and fluctuate around the target for the rest of the year. Inflation would be slightly above the inflation target next year, owing mainly to an increase in some excise duties. Consistent with the forecast was stability of market interest rates initially, followed by a gradual rise in rates from roughly the middle of this year onwards.

The Bank Board assessed the uncertainties and risks of the new forecast as being substantial and tilted to a longer-lasting pandemic than assumed by the baseline scenario of the forecast. The board members agreed that a worse course of the pandemic, longer lockdowns at home and abroad and an ensuing deterioration in the financial situation and sentiment of businesses and households were the main risk to the forecast. This could lead to a lengthier cyclical downturn of the Czech economy and hence to a need to keep monetary conditions accommodative for longer than assumed in the baseline scenario of the forecast.

From this perspective, the Board discussed the longer-lasting pandemic-induced downturn scenario, although a majority of the board members found it quite pessimistic. Jiří Rusnok said that even if the longer-lasting downturn scenario began to materialise, it was not likely to have such strong anti-inflationary consequences. He regarded inflation expectations as robust and well anchored to the 2% inflation target. Oldřich Dědek mentioned the previous experience of a surprisingly strong recovery of the Czech economy after the epidemiological measures were relaxed at the end of the first wave of the pandemic.

The Board praised the resilience of domestic industry during the second wave of the pandemic. The relatively high share of industry in domestic added value represented a comparative advantage of the Czech Republic in the current situation. Referring to recent information on the problems experienced by specific producers with supplies of some components, Tomáš Nidetzký saw a risk that the longer the pandemic went on, the greater the likelihood of such problems arising in supplier-buyer relations and global production chains.

Household consumption was discussed in depth. Tomáš Nidetzký and Tomáš Holub emphasised the uncertainty associated with what proportion of households’ unrealised consumption during the pandemic had been merely deferred and what proportion had been lost for good. Tomáš Holub also stressed the uncertainty regarding how strongly and over what time scale the abolition of the super-gross wage this year would affect household consumption. Given the recent unfavourable labour market data, he would expect slower fundamental wage growth this year than foreseen by the forecast.

The board members then debated inflation. Oldřich Dědek said that the decline in inflation was due in large measure to components of inflation that were not under the control of monetary policy, such as food prices and administered prices. Tomáš Holub noted that unlike many other countries, the Czech Republic had the advantage that the individual components of domestic inflation had recently been moving in opposite directions and that this would continue into the future, according to the forecast. In his view, the biggest anti-inflationary demand-side impacts of the pandemic were nevertheless still to come and would be reflected in a decline in core inflation, although this was likely to be partially offset by a renewed upswing in food prices, administered prices and fuel prices. The recent appreciation of the koruna would also foster a fall in inflation. Marek Mora and Tomáš Nidetzký mentioned that there was persisting uncertainty associated with the structure of the demand and supply shocks in the economy.

The uncertainties and risks implied by developments abroad were then discussed. Tomáš Holub said that some global uncertainties, specifically the manner of the UK’s exit from the EU and the uncertainty regarding the post-election situation in the United States, had decreased. According to Marek Mora, however, the USA’s trade relations with the EU and China had not improved significantly so far. Trade between the UK and the EU was likewise faltering despite the Brexit deal. Jiří Rusnok added that although some uncertainties were clearing, new ones were emerging and old problems persisted. He expressed concerns about the persisting structural problems in Europe and the future course of international relations. In his view, there was also uncertainty stemming from the upcoming elections in the Czech Republic and Germany. In this context, Marek Mora expressed concern about the pandemic crisis spilling over to long-term problems in the euro area financial sector.

There was a consensus that the current monetary policy stance was consistent with the current needs of the Czech economy. The Board said that the risk of deflation and the related likelihood of using unconventional monetary policy instruments had decreased and that the next monetary policy action would most likely be an interest rate hike. Jiří Rusnok said that the baseline scenario of the new forecast was logical and in line with majority market expectations that herd immunity would gradually be achieved either naturally or through vaccination. On the other hand, it was repeatedly said that there was a need to be cautious in tightening monetary policy. Vojtěch Benda and Tomáš Holub said that the recent appreciation of the koruna and rise in long-term interest rates had already generated part of the monetary tightening assumed by the forecast. In this context, Tomáš Nidetzký and Oldřich Dědek expressed concern about whether this observed tightening was premature, caused to some extent by the publication of the November macroeconomic forecast. Marek Mora said that the timing of the start of monetary policy normalisation – in a period of continued extreme uncertainty in many areas – was an important question. Vojtěch Benda and Tomáš Holub said that there was a real chance of commencing the normalisation of interest rates this year, but they also expressed concern about making the mistake of tightening monetary policy too soon. Aleš Michl said that interest rates should only go up after the pandemic had been brought under control. He still saw risks in both directions – a risk of deflation and a risk of bubbles in asset markets.

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 Filáček, Monetary Department