Minutes of the Bank Board Meeting on 22 December 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 eighth situation report assessing the fulfilment of the macroeconomic forecast contained in the seventh situation report in the light of the newly available information. Consistent with the autumn forecast was a sharp rise in market interest rates at the end of 2021 and the start of 2022 in response to the exceptionally strong price pressures from the foreign and domestic economies. According to the current forecast, inflation would rise significantly at the close of 2021 and approach 7% during the first few months of 2022, with all its components contributing to the increase. It would gradually fall in the rest of 2022, due, among other things, to a strengthening exchange rate and a prior significant increase in interest rates. The inflation rate would return close to the Czech National Bank’s 2% target over the monetary policy horizon, i.e. in late 2022 and early 2023.
Most of the board members assessed the newly available data and information as being markedly inflationary and hence requiring a faster increase in interest rates compared with the autumn forecast. A majority of the board members agreed that the risks included the threat of weaker anchoring of inflation expectations in an environment of a long-running marked overshooting of the 2% inflation target, possible faster and longer-lasting growth in industrial producer prices abroad, and a potential weakening of the response of the exchange rate of the koruna to growth in domestic interest rates.
The Board discussed the factors influencing inflation in detail. There was a consensus that global cost pressures were a significant source of the domestic price growth. In addition to high prices of commodities and energy, these pressures reflected persisting problems in global production chains. However, a majority of the board members, namely Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Vojtěch Benda and Tomáš Holub, also regarded the contribution of the strong domestic demand, bolstered by a long-overheated labour market, as significant. Monetary policy had to respond to these domestic inflation pressures, the significance of which, moreover, was increasing over time. Conversely, according to Oldřich Dědek and Aleš Michl the movement in inflation originated in strong cost pressures from the external environment, which monetary policy could do little to counter. Against this, Jiří Rusnok argued that although the CNB’s monetary policy would not directly affect the external cost pressures, it couldn’t not react to them either, given their potential to affect domestic inflation.
The Board also discussed inflation in the international context. Oldřich Dědek emphasised that the Czech Republic was not visibly out of line with the rest of the EU in terms of HICP inflation, so there did not seem to be anything specific in domestic inflation requiring a firm monetary policy response. On the other hand, Tomáš Holub, Tomáš Nidetzký and Marek Mora noted that inflation in the Czech Republic and the euro area was only superficially similar, as VAT changes were having opposite effects, currently reducing inflation in the domestic economy and increasing it in the euro area due to Germany. Moreover, unlike in the Czech Republic, consumer price inflation in the euro area now largely reflected the rise in prices of energy, i.e. gas and electricity. Czech core inflation meanwhile ranked among the highest in the EU, confirming the argument of strong domestic demand pressures stemming from the specific situation on the domestic labour market, to which monetary policy should react. Regarding this argument, Oldřich Dědek observed that core inflation was largely under the influence of strong cost shocks.
The Board also discussed the anchoring of inflation expectations. According to a majority of the board members, there was a significant risk of them becoming unanchored from the inflation target in the present situation. This required a firm monetary policy response. By contrast, Oldřich Dědek said he had no worries about the anchoring of inflation expectations, seeing that the inflation rate expected by analysts three years ahead was only just above the 2% target. He added that he saw no signs of a wage-inflation spiral in wage bargaining.
In a debate about economic activity, Oldřich Dědek pointed out that GDP growth was being driven primarily by household consumption, while investment growth had been substantially lower than forecasted. At the start of 2022, however, households would be facing high energy prices, with a highly negative impact on consumption. Tomáš Holub agreed but nonetheless did not expect the drop in consumption to be sufficient to reduce inflation. He felt that monetary policy could not rely on inflation to slow as a result of voluntarily reduced household consumption.
The Board also discussed the exchange rate of the koruna. Oldřich Dědek linked its recent trend to the marked deterioration in the Czech Republic’s current account balance, which was being covered by a large inflow of short-term capital. He felt this made the Czech economy more vulnerable. By contrast, Marek Mora said that global factors – including the shift away from risky assets on financial markets – were more significant. It was said several times in the debate that the koruna might be strengthening on the back of the opening of new investment positions at the start of the year in a situation of a highly positive interest rate differential. Tomáš Holub noted that the Fed’s shift towards tightening might conversely be fostering a weaker exchange rate. According to Vojtěch Benda, if the koruna did not strengthen as much as forecasted against the euro, it would imply a need for a more substantial tightening of monetary policy in the interest rate component.
In the debate of the upside risks to inflation, repeated mention was also made of producer price inflation in the domestic economy and especially abroad. According to Tomáš Nidetzký, the inflation pressures in the production sector remained strong, presaging a further rise in consumer price inflation. Jiří Rusnok agreed, stating that these pressures would be longer-lasting because of the high energy prices. According to Marek Mora, the Omicron variant was another upside risk, as it had the potential to prolong the supply-chain problems and hence also the effect of increased cost pressures on inflation.
The Board also discussed certain downside risks to inflation. Among them, Tomáš Holub mentioned the current decline in the price of crude oil on global markets and, in the longer run, the effect of the Fed’s tightening, which would dampen demand, and the future consolidation of public budgets. Marek Mora said that the anti-inflationary risks also included the possibility of the supply-chain problems dissipating faster than previously expected, despite the threat stemming from the spread of the Omicron variant. In spite of these minor downside risks, a majority of the board members agreed that the overall balance of risks to the CNB’s current forecast was markedly inflationary.
At the close of the meeting the Board decided to increase the two-week repo rate by 100 basis points to 3.75%. At the same time, it increased the discount rate to 2.75% and the Lombard rate to 4.75%. Five members voted in favour of this decision: Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Vojtěch Benda and Tomáš Holub. Two members, Oldřich Dědek and Aleš Michl, voted for leaving interest rates unchanged.
Author of the minutes: Jan Šolc, Monetary Department