Minutes of the Bank Board meeting on 21 December 2022

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

The meeting opened with a presentation of the eighth situation report based on an assessment of the information obtained since the autumn forecast was drawn up. The Board assessed the risks and uncertainties of the outlook as being significant and going both directions. The upside risks to inflation included faster-than-forecasted wage growth, more expansionary fiscal policy and the threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral. By contrast, the growing likelihood of recession abroad, a stronger-than-forecasted downturn in domestic consumer and investment demand and a faster-than-expected decline in core inflation were downside risks. The extent of repricing of goods and services in January, which will affect annual inflation throughout 2023, was a risk in both directions. The Bank Board stated that it stood ready to react appropriately to any materialisation of the risks of the forecast and to raise interest rates, especially if the risk of demand-pull inflation increased.

The Board discussed the appropriateness of the current level of monetary policy interest rates. Aleš Michl preferred to keep interest rates unchanged. In his opinion, responsible fiscal policy and moderate wage bargaining demands were needed to reduce inflation. According to Oldřich Dědek, the current level of rates was dampening demand inflationary pressures. This was being reflected in significant declines in the volumes of new housing loans and loans to firms. According to Jan Frait, the increased cost of living was making it impossible for some households to defer consumption in favour of saving, including precautionary saving, so it would take a sharp increase in interest rates to cool demand. This, however, would have a negative impact on the performance of firms taking out koruna loans. On the other hand, Marek Mora and Tomáš Holub felt that the current level of interest rates did not guarantee a sufficiently rapid decline in inflation towards the CNB’s 2% target. Although they also thought that inflation would fall in 2023, a further rate hike was needed to eliminate the risk of inflation staying above the target for a long time.

According to Eva Zamrazilová, the new information – especially the larger-than-expected decline in consumption – was anti-inflationary. In her view, negative household sentiment and expected layoffs on the labour market were also acting in the same direction. According to Karina Kubelková, too, the upside risks to inflation, which were putting upward pressure on interest rates, had decreased compared with the autumn forecast in light of the latest available data. By contrast, according to Marek Mora and Tomáš Holub, the risks of the autumn forecast were still tilted upwards in terms of the outlook for inflation and interest rates. Marek Mora assessed the labour market situation as still robust.

Part of the Bank Board’s discussion concerned the near-term inflation outlook in the context of the traditional repricing of goods and services in January. According to Eva Zamrazilová, Oldřich Dědek and Karina Kubelková, a significant rise in prices in January would justify an increase in rates at one of the next meetings. According to Karina Kubelková, given the rapid growth in prices recently, it was possible that some repricing had already occurred, so the January effect might not come only as a negative surprise. Jan Frait said that a major January repricing might be more a one-off shock to the price level than a systematic inflationary pressure, although its second-round effects should not be underestimated.

In its discussion, the Board assessed the effect of the rest of the world on domestic inflation. According to Karina Kubelková, the synergy of monetary policy tightening by foreign central banks might lead to a faster-than-forecasted decline in inflation. By contrast, Eva Zamrazilová and Jan Frait said there was a risk that foreign central banks would not raise interest rates sufficiently to dampen the still relatively strong demand. In such case, according to Eva Zamrazilová, the Czech economy would face increased imported inflation. According to Jan Frait, it would be appropriate in such a situation to consider tightening monetary policy further.

Part of the discussion was also devoted to the interaction of monetary and fiscal policy. According to Eva Zamrazilová, there was a risk of fiscal policy having a significant future inflationary effect. This risk would justify a rise in interest rates. Marek Mora and Tomáš Holub stated that the central bank’s primary objective was price stability and that monetary policy should overcome any inflationary effect of fiscal policy on inflation. Jan Frait, on the other hand, said that historical experience showed that attempts to force a sharp change in fiscal policy through monetary restriction lead to conflicts and have adverse social consequences.

According to Eva Zamrazilová, Oldřich Dědek and Karina Kubelková, the risk of inflation expectations becoming unanchored had decreased. According to Oldřich Dědek, the current Bank Board’s prudent approach to setting interest rates had contributed to reducing this risk. Marek Mora and Tomáš Holub conversely felt that the risk of inflation expectations becoming unanchored persisted and monetary policy should respond to it. Marek Mora said that one of the factors that had contributed to the fact that a wage-inflation spiral had not yet started was the interest rates increases until June 2022.

In its discussion, the Bank Board touched on the long-term monetary policy stance. Aleš Michl said interest rates would remain higher than in the previous ten years for some time. Jan Frait said central banks should return to an approach in which the monetary policy interest rate is kept largely above inflation. In his opinion, the current high inflation in developed countries was due in part to the fact that central banks had abandoned this approach for a number of years.

At the close of its December 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 0.5 percentage point.

Author of the minutes: Jan Brůha, Monetary Department