Minutes of the Bank Board meeting on 29 March 2023
Present at the meeting: Aleš Michl, Eva Zamrazilová, Jan Frait, Tomáš Holub, Karina Kubelková, Jan Kubíček, Jan Procházka.
The meeting opened with a presentation of the second situation report containing an assessment of the information obtained since the winter forecast was drawn up. Consistent with the forecast was a rise in market interest rates initially, followed by a gradual decline.
In the light of the new information, the prevailing view was that the risks and uncertainties of the winter forecast were significant and going in both directions. The board members agreed that an interest rate cut was not on the horizon. There was debate on whether to raise rates or leave them at their current levels. Aleš Michl preferred to keep them unchanged and said that the Board would reassess the data at the next meeting and consider whether to keep interest rates unchanged or raise them. For Karina Kubelková, the overall message of the new information was a cautionary raised finger, but she did not find sufficient support for a rate hike at the moment. According to Jan Procházka, too, the new information did not yet force the central bank to reconsider its current strategy of keeping interest rates unchanged. Any change would be illegible to the financial and corporate sectors. However, if significant inflationary factors were to coalesce as a result of a change in the Fed’s or ECB’s strategies and a greater degree of labour market overheating were to be confirmed, he would vote for a rate hike at the next monetary meeting. Jan Kubíček would currently regard a CNB policy rate hike as a signal, but not one which would actually affect loans, aggregate demand or inflation. Moreover, such a signal might not be understood and, given the current jitters on the financial markets, could paradoxically lead the koruna to depreciate. Conversely, Tomáš Holub proposed to raise interest rates, as he viewed the current risks as generally inflationary, or speaking in favour of somewhat tighter monetary policy not only in relation to the current stance, but also in relation to the winter forecast, which was consistent with higher interest rates.
Faster wage growth in a tight labour market was identified as one of the upside risks to inflation. According to Karina Kubelková, with better-than-expected economic and labour market developments, the domestic demand pressures could be stronger and longer-lasting at the forecast horizon. Jan Procházka agreed. According to Eva Zamrazilová, the only warning sign was the wage growth in industry in January, but the time series of wages was very volatile, so it was not possible to draw strong conclusions about the risk of a wage-price spiral from a single figure. She considered the information on the projected wage growth of only 5% in the public sector in 2023 to be an important signal, and the wage expectations of financial market analysts and firms were also not a cause for concern. Jan Frait expected that firms would encounter certain barriers preventing them from continuing to increase their selling prices and would eventually have to start limiting cost growth, including wage growth. Tomáš Holub described the observed wage growth as incompatible with meeting the 2% inflation target in the medium term. In his view, the CNB should react preventively to the risk of a wage-price spiral, as an ex post response would be unnecessarily costly for the economy.
A large part of the debate was devoted to the effectiveness of monetary policy transmission through the interest rate channel. According to Eva Zamrazilová, it was clearly functional for households and was being reflected in a dramatic decline in new loans. However, the dominant part of domestic corporate sector financing was not under the control of domestic monetary policy, as firms were drawing on resources within multinational groups, direct foreign currency financing from abroad, or cheaper foreign currency loans from domestic banks. It was therefore important to control the exchange rate channel. A strong koruna was also preferred by Aleš Michl. Karina Kubelková saw a strong currency as a bonus in the fight against inflation and not as a cornerstone of monetary policy, which should be based primarily on rate setting. According to Jan Procházka, too, interest rates remained the main monetary policy instrument, and their current level – together with the anti-inflationary exchange rate of the koruna – was sufficient to return inflation to the target at the monetary policy horizon, given the information available so far. However, with the exception of the exchange rate channel, the ability of the remaining transmission channels to transmit further interest rate increases to the real economy was limited in the current conditions. According to Jan Frait, the Czech private sector was not overleveraged, so an increase in interest rates would not have dramatic effects associated with increased debt service. Due to the relatively high incidence of clients fixing interest rates for longer periods, the previous increases in yields on the financial market had been relatively slow to feed through to loan repayments.
The discussion also touched on inflation expectations. For Tomáš Holub, their unanchoredness, together with wage developments in a tight labour market, represented the main upside risk to inflation. According to Karina Kubelková, the risk of inflation expectations becoming unanchored was growing over time and should not be downplayed; it could play a more significant role in decision-making at future monetary policy meetings than it had so far. Jan Procházka said that financial analysts’ inflation expectations had already decreased noticeably, as had those of households, whose concerns about rising prices had fallen to their lowest level since 2016. Only the inflation expectations of firms remained elevated, including at the three-year horizon. This was probably one of the factors causing the persisting labour market tightness and the resulting wage pressures. Eva Zamrazilová argued that analysts’ inflation outlooks and consumers’ inflation concerns were diminishing and there were visible signs of future price stability.
The Board also discussed some other risks. Aleš Michl emphasised that a reduction in the government budget deficit would be useful in the fight against inflation, as it would mean less money circulation and lower inflation. He would welcome it if the government had the ambition to balance the budget as soon as possible – this would substantially reduce inflation, and quickly. Karina Kubelková identified the effect of fiscal policy as a significant negative risk. Jan Kubíček mentioned food prices, whose decoupling from prices in nearby countries was striking, and also pointed to energy prices, where capping could paradoxically act as a brake on lowering inflation. Tomáš Holub saw a risk in pricing by firms, which have so far been successful in passing on their higher costs to customers, and have thus increased their profit margins. He regarded insufficiently tight monetary policy and inflation staying above the target next year as a far greater threat than the risk of excessively tight monetary policy.
The current turmoil in the financial markets following the collapse of several US banks and the problems of European banks was identified as a new uncertainty. According to Karina Kubelková, this uncertainty was associated with a higher probability of volatility of the koruna exchange rate and hence a possible significant depreciation of the koruna. On the other hand, the stability of Czech banks was not at risk and, according to the CNB’s statutory mandate, financial stability is as important as price stability. Jan Procházka also emphasised that thanks to the CNB’s proactive microprudential and macroprudential supervision, Czech banks were not at risk of getting into difficulty. Jan Frait assessed the impacts of the problems of banks in other countries as uncertain, but expected that they would lead to a tightening of lending standards and, ultimately, to a reduction in global inflationary pressures.
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%. Six members voted in favour of this decision: Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Jan Kubíček and Jan Procházka. Tomáš Holub voted for increasing rates by 0.25 percentage point. The Czech National Bank will continue to prevent excessive fluctuations of the koruna.
Author of the minutes: Jan Syrovátka, Monetary Department