Minutes of the Bank Board meeting on 2 February 2023

Present at the meeting: Aleš Michl, Marek Mora, Eva Zamrazilová, Oldřich Dědek, Jan Frait, Tomáš Holub, Karina Kubelková. Minister of Finance Zbyněk Stanjura was present at part of the open meeting.

The meeting opened with a presentation of the first situation report and the new macroeconomic forecast. According to this forecast, inflation had risen sharply in January by comparison with December. From spring onwards, however, it would decline quite quickly due to tight monetary conditions and easing cost pressures, falling below 10% in the second half of the year. At the monetary policy horizon – in the first half of 2024 – inflation would return to the CNB’s 2% target. Consistent with the baseline scenario of the forecast was a rise in market interest rates initially, followed by a gradual decline.

The Bank Board assessed the risks and uncertainties of the baseline scenario of the forecast as being significant and going in both directions. More expansionary fiscal policy was an upside risk. The threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral also remained significant risks in the same direction. By contrast, a stronger-than-forecasted downturn in domestic consumer and investment demand was a downside risk. A faster-than-expected decline in core inflation was also an anti-inflationary risk. The extent of repricing of goods and services in January, which will affect annual inflation throughout 2023, was a risk in both directions. The general uncertainties of the outlook included the future course of the war in Ukraine, the availability and prices of energy, and the future monetary policy stance abroad.

Aleš Michl opened the meeting by saying that the strong koruna was significantly helping in the fight against inflation. The Real Monetary Conditions Index showed that the CNB had the tightest monetary policy in more than 20 years. Aleš Michl continued to prefer to keep interest rates unchanged. However, reducing inflation was in his view also contingent on responsible fiscal policy and moderate wage bargaining demands. According to Aleš Michl, interest rates would remain higher for some time than they had normally been in the past ten years. He then called on the other board members to express their expert opinion at this time of extreme uncertainty.

In the discussion, the board members agreed that after rising at the beginning of this year, inflation would start to decline gradually and should fall to single digits in the second half of the year. Eva Zamrazilová said that the inflation dynamics had slowed in the second half of last year. Oldřich Dědek added that core inflation had been showing a downward tendency for two months in a row. There was also consensus that the path of inflation in the first few months of this year was highly uncertain with regard to the extent of repricing. In this context, Eva Zamrazilová said that if the January or February repricing was higher than expected by the forecast, especially in the core components of inflation, she was ready to vote in favour of raising interest rates in the future. 

A significant part of the debate was devoted to inflation expectations and the risk of a wage-price spiral. Karina Kubelková would not underestimate the risk of unanchored inflation expectations, taking into account the strong wage growth seen in 2022 Q3 and the uncertain wage developments going forward. Tomáš Holub warned of the risk of inflation not falling to the 2% target at the start of 2024 if people expected higher price growth in the future and adjusted their behaviour accordingly. He described the current nominal wage growth as unsustainable in the long term. Oldřich Dědek also felt that some data from the labour market were worrying, although it could not yet be said that wage growth was becoming detached from fundamentals. Jan Frait agreed with the Monetary Department that the labour market was not cooling as fast as would be appropriate for a reliable return of inflation to close to the 2% target next year. In his opinion, the high corporate profitability and dynamic wage growth were also not signalling any major recessionary tendencies. They were also being countered by easing financial conditions via a fall in long-term market interest rates. Marek Mora also felt that the domestic labour market had inflationary potential, although it had yet to materialise. However, he would associate the potential emergence of a wage-price spiral with a situation where the central bank lost credibility. Eva Zamrazilová considered the forecasted average wage growth of 8.5% this year to be overestimated, especially in comparison with the forecasts of analysts and other institutions.

According to Oldřich Dědek, it was necessary to distinguish between measured inflation expectations and whether those expectations were being reflected in the real behaviour of households and businesses. Eva Zamrazilová noted that financial market analysts’ inflation expectations were volatile and characterised by high dispersion across analysts. Tomáš Holub expressed a preference for a prudential approach to monetary policy – he would rather react pre-emptively to the risk of unanchored inflation expectations than deal ex post with the situation if this risk was underestimated.

Another topic of discussion was the effect of fiscal policy. Eva Zamrazilová viewed relaxed fiscal policy as a long-term risk to achieving price stability. Karina Kubelková also considered fiscal policy to be a significant risk, as various government pricing measures could cause large swings in inflation and subsequently have an impact on wage bargaining and the degree of repricing. This could in turn jeopardise the achievement of the inflation target at the monetary policy horizon. On the other hand, Marek Mora and Tomáš Holub assessed the risk associated with the effect of fiscal policy as symmetrical, as the government was communicating its ambition to consolidate public finances. The expected government expenditure related to price caps was also decreasing in parallel with the fall in European gas and electricity prices.

Part of the discussion was devoted to developments abroad, in particular the interest rate settings of the European Central Bank. Eva Zamrazilová stated that according to the ECB’s latest forecast, the fulfilment of the ECB’s inflation target had been postponed until mid-2025, so it was likely that the Czech economy would be importing inflation from the euro area in the coming years. According to Marek Mora, the ECB would continue to raise interest rates, and this could foster a weakening of the koruna. According to Karina Kubelková and Marek Mora, there was a risk of an upward correction of foreign producer prices. Marek Mora also mentioned the reopening of the Chinese economy as an upside risk to inflation. 

The exchange rate was also discussed in detail. The consensus was that the recent appreciation was dampening inflation pressures and contributing to the fulfilment of the inflation target. Jan Frait favoured tightening the monetary conditions in both components – interest rate and exchange rate – so that the effects of monetary policy were distributed evenly between the domestic and export-oriented parts of the economy. Marek Mora expressed some concern about the appreciation of the koruna amid deteriorating economic fundamentals. Karina Kubelková also felt that the fundamentals spoke rather in favour of a weakening of the koruna. Oldřich Dědek did not believe that large speculative positions would be built against the koruna.

A majority of the Bank Board agreed that any future decline in interest rates should occur later than indicated by the baseline scenario of the forecast. In this respect, the scenario of keeping interest rates unchanged in 2023 Q1–Q3 was considered useful. As emphasised by Eva Zamrazilová and Oldřich Dědek, this scenario did not deviate significantly from the baseline scenario in terms of inflation and other variables. Eva Zamrazilová expressed a preference for keeping interest rates above the neutral level for longer. Jan Frait also said that to remove the inflation pressures from the economy, the CNB would have to maintain a restrictive monetary policy for longer. He expressed the belief that relatively tight credit conditions and weakening credit demand would have significant anti-inflationary effects over the medium term.

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 0.50 percentage point. The Czech National Bank will continue to prevent excessive fluctuations of the koruna.

Author of the minutes: Jan Filáček, Monetary Department