Minutes of the Bank Board Meeting on 3 February 2022
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. Consistent with the forecast was a substantial rise in market interest rates at the start of this year. The Czech National Bank was thus continuing to respond to the combination of strong price pressures from the domestic and foreign economies, which were gradually passing through to domestic inflation. Headline inflation would rise significantly further at the start of this year and exceed 9%. With the aid of monetary policy, however, it would start to drop rapidly in the second half of the year and decrease close to the Czech National Bank’s 2% target over the monetary policy horizon, i.e. in the first half of next year. An expected decline in inflation pressures in 2023, in an environment of once again firmly anchored inflation expectations, would allow interest rates to decline gradually towards their long-run neutral level starting in the second half of this year.
The Bank Board assessed the uncertainties and risks of the new forecast at the monetary policy horizon as being significant and moderately inflationary overall. The prevailing opinion was that the appropriate response was to increase interest rates by 0.75 percentage point. The Board agreed that future monetary policy steps would depend on incoming new information and future forecasts.
A majority of the board members agreed that in an environment of high price growth, the possibility of weaker anchoring of inflation expectations to the CNB’s 2% target remained an inflationary risk. In this context, Marek Mora said that the previous interest rate increases and the CNB’s communications had reduced the severity of this risk. Oldřich Dědek felt that a sharp increase in interest rates could not be based on unreliably measurable inflation expectations.
Slower appreciation of the koruna as a result of a sharp tightening of monetary policy abroad or an escalation of the situation in Ukraine was identified as another upside risk to inflation. Tomáš Holub pointed out that the global inflationary environment could result in other central banks tightening monetary policy faster than the market was currently expecting. Marek Mora mentioned the two-edged effect of tightening abroad on the Czech economy – on the one hand it would lead to a reduction in the interest rate differential, depreciation pressure on the koruna and potentially higher domestic inflation, but it would simultaneously result in a reduction in global demand and hence lower price pressures from abroad. Oldřich Dědek felt the global risks were a counterbalancing force against the wide open interest rate differential, without which force the koruna would strengthen excessively.
A majority of the Board viewed the possibility of more modest growth in household consumption in response to the surge in energy prices as a risk in the opposite, anti-inflationary direction. For this reason, a majority of the board members felt that the household consumption projection for this year was over-optimistic. Jiří Rusnok, Marek Mora, Vojtěch Benda and Tomáš Holub pointed out that the savings created during the shutdowns had been formed mainly by high-income households, whereas the increase in energy prices was hitting low-income households hardest. It was therefore not certain that continued spending of savings would offset the decline in households’ purchasing power resulting from the general growth in the price level.
Consolidation of Czech public finances was discussed as another anti-inflationary risk of the new macroeconomic outlook. Vojtěch Benda and Tomáš Holub saw a risk of fiscal policy being more restrictive than assumed by the forecast already this year. In a situation of a provisional budget, however, no firm conclusions could be drawn from the favourable government budget outturn for January.
The Board then discussed the extent of repricing of goods and services this January, which was an uncertainty of the inflation forecast. Tomáš Nidetzký said that this year’s repricing could be amplified by the increase in prices of energy commodities. Oldřich Dědek added the return of VAT on electricity and gas, which had been waived in November and December, to the uncertainty surrounding the level of inflation in January. However, the board members agreed that the high, almost 10% growth in prices at the beginning of the year should be only temporary and inflation would start to decrease in the second half of the year.
Uncertainty was also identified in the duration of the overloading of global production and supply chains. Tomáš Nidetzký said that the supply chain disruptions would constrain the economy throughout this year and, in his view, were a significant inflationary factor. Marek Mora also expected the problems in global chains to fade out later, especially given the global economy’s strong dependence on China, where zero tolerance to the coronavirus was causing outages in local production. According to Tomáš Holub, by contrast, the impact of these problems on the Czech economy at the end of last year had been milder than expected, and they might also fade out faster than assumed by the forecast and hence represent an anti-inflationary risk of the forecast.
The Board discussed in detail the factors underlying the current high inflation in the global and domestic economy. A majority of the board members viewed the domestic growth in consumer prices as a broad phenomenon caused largely by excess demand. Jiří Rusnok said that while supply had fallen as a result of supply chain disruptions, energy market problems and green policies, demand remained pressurised. Marek Mora added that thanks to interventions by governments and central banks, the worldwide demand of households and firms had not been affected too much by the pandemic. Tomáš Holub said that although import prices of representative consumer goods items had been flat or had even fallen year on year in November, their retail prices were still rising strongly. In his opinion, therefore, most of the inflation was not imported but was a result of rising prices in the domestic part of the distribution chain, where rising profit margins, wages and rents and other pressures from the overheated domestic economy were making themselves felt. Oldřich Dědek disagreed with this view and attributed the intensity and broad nature of the price pressures to the joint effect of extremely expensive inputs impacting on related price categories. In this regard, Jiří Rusnok said that he saw substantial differences in prices of tradable goods between the Czech Republic and neighbouring countries, differences that might partially be structural in origin.
Part of the debate was devoted to the optimal response of the CNB, including the option of applying escape clauses in a situation of rapid growth in energy prices. According to Oldřich Dědek, the CNB should not react to supply-side price pressures faced by the economy as a result of higher energy prices and transport costs. Raising interest rates increases the price of capital, which in turn puts more pressure on firms. By contrast, according to Marek Mora and Tomáš Holub, escape clauses could not be applied at the moment, because the current price growth was broad-based and mainly reflected domestic factors. This view was supported by Jiří Rusnok, who said that given that the Czech Republic had a positive output gap and the lowest unemployment rate in Europe, and given that inflation was well above the target, the CNB had to take action under its statutory mandate and continue to tighten the monetary conditions.
The board members discussed the projected interest rate path, which implied a substantial rise in interest rates at first, followed by a gradual decline from the second half of the year onwards. Vojtěch Benda said that the outlook for a decline in rates could be called into question by a build-up of upside risks to inflation and that, for him, a rate increase of 0.75 percentage point at the meeting today would not rule out the possibility of further growth in rates in the months ahead. According to Tomáš Nidetzký, rates would remain at their present level for longer than assumed by the forecast. Tomáš Holub also said that interest rates could stay at their peak until there were visible signs of inflation and inflation expectations falling towards the inflation target. By contrast, Aleš Michl disagreed with a rapid increase in rates, because he felt that in order to bring down the current inflation there was primarily a need for a decrease in prices of raw materials and a reduction in the quantity of money in circulation, including a need for wage restraint, lower government debt and tighter mortgage lending conditions.
At the close of the meeting the Board decided to increase the two-week repo rate by 75 basis points to 4.50%. At the same time, it increased the discount rate to 3.50% and the Lombard rate to 5.50%. 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 Filáček, Monetary Department