Minutes of the Bank Board Meeting on 29 September 2022

Present at the meeting: Aleš Michl, Marek Mora, Eva Zamrazilová, Oldřich Dědek, Tomáš Holub, Jan Frait, Karina Kubelková.

The meeting opened with a presentation of the sixth situation report assessing the information obtained since the summer forecast was drawn up. Consistent with the forecast was broad stability of market interest rates initially, followed by a gradual decline next year.

In light of the new information, the prevailing view was that the risks and uncertainties of the summer forecast were significant and going in both directions. The board members stated that the Czech economy was in a period of exceptional uncertainty. According to Oldřich Dědek and Karina Kubelková, the current huge degree of uncertainty necessitated a careful assessment of daily information and leading indicators. In their opinion, the new incoming data supported a policy of stable rates.

The board members repeatedly said that maintaining price stability was the central bank’s primary duty. Aleš Michl emphasised that there was a need to constantly explain to the public the CNB’s commitment to continue fighting inflation until it was fully under control, i.e. stabilised at the 2% target. This meant interest rates would remain higher than they had been in the previous ten years for some time. There was a consensus among the board members that inflation was probably now close to peaking. The coming global recession and the diminishing tensions in global value chains would contribute to a decline in inflation. However, Tomáš Holub and Marek Mora felt that, among other things, the foreign producer price outlooks and monetary policy tightening by foreign central banks were inflationary factors fostering a need to raise domestic interest rates. The decreasing interest rate differential might meanwhile exert depreciation pressure on the koruna in the short term, so it was desirable to increase interest rates. According to the said two members, this would additionally end market speculation about the unwillingness of the Board in its new line-up to use interest rates as a monetary policy instrument. Both said that in the interests of reaching a consensus they were prepared to support a rate increase of smaller magnitude than they preferred personally.

The other board members regarded interest rates as commensurate with the current situation. The previous sharp increase in interest rates had tamed the growth in the quantity of money in circulation and curbed interest in new loans and was also succeeding in slowing house price growth. According to Eva Zamrazilová, rates were likely to remain elevated for some time and could not be reduced until inflation was clearly heading towards the target. Jan Frait said that ex ante real rates could be regarded as positive if one took financial markets’ inflation expectations into account. Moreover, long-term yields had risen appreciably in recent weeks. This represented a significant tightening of financial conditions. However, he did not rule out the need to raise interest rates if foreign monetary policy tightening were to be signalled and the koruna were to come under pressure. Given the global recession and the signs of financial disruption in many countries, he regarded this as an outside possibility. Marek Mora and Tomáš Holub said that fiscal and monetary policy coordination would be desirable and beneficial to society as a whole. Nonetheless, political realities were clearly pressing for additional public spending and fiscal policy would be more expansionary than previously assumed this year and the next. According to Marek Mora, this had to be faced by tightening monetary policy.

Faster fundamental wage growth in market sectors than forecasted in the spring of this year was identified as an upside risk to inflation. Tomáš Holub regarded this, coupled with the newly promised 10% wage increase across the board in the public sector and unions’ demands for a substantial increase in the minimum wage, as a clear sign that the high inflation was having second-round effects on wages, with the risk of the onset of a wage-price spiral. He called for the CNB send out a clear signal of its commitment to fight inflation. Karina Kubelková did not see such a strong risk of a wage-price spiral, as unions’ minimum wage demands had never been met in full in the past. The same went for public sector pay demands. According to Aleš Michl, moderate wage bargaining demands were important. Any new information signalling potential risks for demand-pull inflation would be carefully assessed. Should the said risk materialise, monetary conditions would be tightened. For Eva Zamrazilová, this risk was still relevant. Oldřich Dědek was convinced that the substantial decline in real wages and the harsh impacts of the energy crisis on firms and households would preclude a wage-price spiral.

Part of the debate was devoted to the anchoring of inflation expectations. Eva Zamrazilová said that a de-anchoring would be reflected in increased household demand for goods that consumers expected to go up in price. This, however, was not happening. On the contrary, households were worried about the worsening financial situation and job losses, which was reducing their willingness to spend. Karina Kubelková was also not seeing people investing massively in safe assets, which are usually regarded as protection against inflation. According to Marek Mora, the economy had been in an environment of very high inflation above the 2% target for more than a year. This was having an effect on the central bank’s credibility and on inflation expectations. Monetary policy should therefore anchor inflation expectations, i.e. clearly communicate to the public that the CNB is prepared to do anything to return inflation quickly to the target.

The Board went on to discuss some of the downside risks to inflation. Besides the growing likelihood of recession abroad, mention was made of measures to limit growth in energy prices at the domestic or European level and a stronger-than-forecasted downturn in domestic consumer and investment demand.

At the close of the meeting the Board decided to leave interest rates unchanged. The two-week repo rate remains at 7%, the discount rate at 6% and the Lombard rate at 8%. Five members voted in favour of this decision, Aleš Michl, Eva Zamrazilová, Oldřich Dědek, Jan Frait and Karina Kubelková. Two members, Marek Mora and Tomáš Holub, voted for increasing rates by 0.75 percentage point. The Czech National Bank will continue to prevent excessive fluctuations of the koruna.

Author of the minutes: Jan Syrovátka, Monetary Department