Minutes of the Bank Board Meeting on 24 March 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 second situation report assessing the fulfilment of the macroeconomic forecast contained in the first situation report in the light of the newly available information. According to the current forecast, headline inflation would fall 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 board members agreed that the uncertainties and risks of the current forecast in the context of the ongoing pandemic were still very substantial. A slower fading out of the unfavourable epidemic situation and a related slower return of the domestic and European economies to normal remained the most substantial risk. This could lead to a need to keep the monetary conditions accommodative for rather longer than in the forecast. It was said that in a situation of unprecedented uncertainty affecting both economic life itself and the way it is captured by the statistical data, the current forecast was materialising in a broadly satisfactory way. There was a consensus 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. According to a majority of the board members, the new data from both the domestic and foreign economy was modestly inflationary overall. In particular, wage growth in market sectors had been higher than forecasted at the close of last year. According to Tomáš Nidetzký, labour market developments had passed through strongly to inflation in the past and could contribute to inflationary pressures in the future as well. The wage situation was still being greatly affected by government support programmes, the scale of which, according to Oldřich Dědek could give rise to fiscal sustainability concerns given the long-term weaknesses in Czech public finances. The inflationary factors mentioned also included the crude oil price and its outlook for this year, and foreign inflation.

Standing in contrast to the modestly inflationary data was a worse pandemic situation than assumed by the current forecast. According to the majority view of the Board, a clear step could be seen towards the longer-lasting pandemic-induced downturn scenario prepared as part of the previous situation report. This warranted more cautious monetary policy normalisation spread over a longer period of time. In addition to the persisting pandemic risks, Marek Mora saw a risk of governments being insufficiently able to manage the complex logistics involved in vaccinating the population. Jiří Rusnok and Tomáš Holub agreed.

The next part of the debate was devoted to the structure of the supply and demand factors underlying domestic inflation. Jiří Rusnok said that the current crisis was much more of a supply-side nature. Demand remained relatively strong, as evidenced, for example, by income indicators. Besides pandemic restrictions, however, the supply side of the economy was being affected by pre-pandemic structural changes (the transition to green energy) and specific current supply chain problems (shortages of some components for industrial production).

The Board discussed the future monetary policy settings. According to Tomáš Holub, the high uncertainty and worse pandemic situation meant that monetary policy normalisation could start rather later and more slowly than in the forecast. The other board members agreed, preferring not to tie communications on increasing interest rates to a specific moment in time but to make rate normalisation conditional on clear signals that the pandemic was receding (Oldřich Dědek, Vojtěch Benda, Marek Mora, Tomáš Nidetzký). The risk of tightening monetary policy too soon was viewed by the board members being larger than any risk of delay. Moreover, the overall monetary conditions had already been partially tightened through an increase in interest rates with longer maturity. According to Aleš Michl, interest rates should not be changed until Covid had been brought under control.

The growth in long-term interest rates observed in recent months was discussed in more depth. This growth had been caused by a combination of global factors, including a shift to optimism about tackling the pandemic, massive fiscal support, the highly accommodative monetary policy of most central banks in developed countries, and markets’ concerns about future inflation. Oldřich Dědek and Tomáš Holub said that the CNB’s communications connected with the publication of the previous two forecasts had also had some effect. According to Vojtěch Benda, long-term rates roughly at, or slightly below, the inflation target level are easy rather than tight.

It was mentioned that the domestic financial sector was maintaining a high level of financial resilience. Tomáš Nidetzký said that banks’ robust capitalisation meant not only that the gradual drop in loan portfolio quality could be comfortably absorbed, but also that no constraints on the present and future financing of the Czech economy were being created.

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