Minutes of the Bank Board Meeting on 5 August 2021

Present at the meeting: Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Vojtěch Benda, Oldřich Dědek, Tomáš Holub, Aleš Michl. Minister of Finance Alena Schillerová was present at the meeting.

The meeting opened with a presentation of the fifth situation report and the new macroeconomic forecast. Inflation would rise well above the upper boundary of the tolerance band around the 2% target in the quarters ahead. Next year, inflation would return towards the 2% target, aided by a tightening of monetary conditions. Consistent with the forecast was a rise in market interest rates from the middle of this year onwards. This was in response to increased price pressures from the foreign and domestic economies and to the risk of undesirable deviation of inflation expectations from the CNB’s 2% target.

The Bank Board assessed the uncertainties and risks of the new forecast as being slightly anti-inflationary overall. Greater or lengthier overloading of global supply chains, which could result in even stronger growth in producer prices, was an inflationary risk to the forecast. Conversely, possible faster-than-forecasted appreciation of the koruna due to larger capital inflows could pose a slight anti-inflationary risk. The uncertainty associated with the evolution of domestic economic activity was acting in the same direction. The prevailing view was that the appropriate monetary policy response was to increase the two-week repo rate by 25 basis points and that interest rates, which had been very low up to now, would probably continue to be raised gradually from the second half of this year onwards.

In their contributions, Jiří Rusnok and Vojtěch Benda noted that the CNB’s statutory mandate is to maintain price and financial stability. Jiří Rusnok emphasised that long-term economic prosperity cannot be achieved without fulfilling the price stability objective. Vojtěch Benda said that the risk of inflation expectations becoming unanchored from the target was cautionary and required a timely monetary policy response. This was also indicated by the simulation in the situation report. According to Marek Mora, Tomáš Nidetzký and Tomáš Holub, too, the clear movement of inflation above the target required a monetary policy response. However, the uncertainty surrounding domestic economic developments was an argument for raising rates in more gradual steps than implied by the forecast for the near future.

Vojtěch Benda said that the economy had moved appreciably in the inflationary direction since the last meeting. According to Tomáš Nidetzký and Tomáš Holub, the labour market was also generating robust inflation pressures. However, Tomáš Holub said that the GDP flash estimate for the second quarter represented an anti-inflationary risk. Tomáš Holub and Marek Mora mentioned the future need for fiscal consolidation as another anti-inflationary risk stemming from the domestic economy in the longer run.

According to Marek Mora, the growing immunity of the population, linked primarily with rising vaccination coverage, and the progress made in treating COVID-19 were reducing the probability of broad shutdowns. Jiří Rusnok said that large-scale shutdowns in the domestic economy were also highly unlikely for legal reasons. If shutdowns did occur, Marek Mora and Vojtěch Benda felt that their economic impact would be insignificant, as firms had learned to adapt to the anti-epidemic measures. According to Tomáš Holub, there were still pandemic risks, but their materialisation could have stagflation effects, which, from the perspective of the price stability mandate, was not an argument against raising interest rates. Conversely, Oldřich Dědek said that the majority of foreign forecasters regarded the return of anti-Covid measures as the biggest risk, as such measures would prevent strong economic growth or cause it to be only short-lived. He therefore considered it premature to start the process of normalising interest rates, as it would result in higher corporate and government financing costs, which he did not regard as desirable in light of the current uncertain environment. Aleš Michl repeated his long-held view that the repo rate should not change until COVID-19 has been brought under control. 

The Board discussed the foreign cost pressures and assessed their persistence. Jiří Rusnok felt that these cost pressures would persist due in part to the EU’s environmental protection policy. Vojtěch Benda said that the cost pressures could be sustained due to the very accommodative monetary policies of certain major foreign central banks feeding through to commodity prices and core foreign producer prices. Marek Mora and Tomáš Nidetzký conversely saw an anti-inflationary risk in the possibility of the cost pressures fading more quickly. In this context, Oldřich Dědek said that foreign cost factors are generally beyond the control of monetary policy, so attempting to suppress them could be macroeconomically too costly. Against this, Jiří Rusnok noted that timely monetary policy intervention is macroeconomically significantly less costly than fighting inflation in a situation of unanchored inflation expectations.

According to Marek Mora, the possible faster-than-forecasted appreciation of the koruna could pose a modest anti-inflationary risk. Tomáš Holub said that he saw this risk only in the near term, whereas in the longer term the normalisation of Federal Reserve monetary policy could have the opposite effect. In this context, Vojtěch Benda noted that even a pronounced appreciation of the koruna would not be sufficient to offset the inflation pressures arising from growth in foreign prices.

Part of the Board’s discussion was focused on financial stability. A majority of the members agreed that the normalisation of interest rates would contribute to the fulfilment of the financial stability objective as well, mainly via a cooling of the housing market. Against this, Oldřich Dědek said that tightening monetary policy would have a negligible effect on the overheated mortgage market. Interest rates would have go up a great deal more for them to have a tangible cooling effect on that market. Aleš Michl reminded the Board of his rejected proposal to tighten the LTV ratio in a situation of significantly overvalued house prices. 

At the close of the meeting the Board decided to increase the two-week repo rate by 25 basis points to 0.75%. At the same time, it increased the Lombard rate by 50 basis points to 1.75% and kept the discount rate unchanged at 0.05%. Four members voted in favour of this decision: Jiří Rusnok, Marek Mora, Tomáš Nidetzký and Tomáš Holub. Vojtěch Benda voted for increasing the two-week repo rate by 50 basis points. Two members, Oldřich Dědek and Aleš Michl, voted for leaving interest rates unchanged.

Author of the minutes: Jan Brůha, Monetary Department