Minutes of the Bank Board meeting on 2 May 2024

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 third situation report and the new macroeconomic forecast. According to this forecast, inflation would stay close to the CNB’s 2% target over the entire forecast horizon. Consistent with the forecast was a further decline in market interest rates.

The Bank Board assessed the risks and uncertainties of the outlook as being modestly inflationary. A slower decline in the elevated inflation expectations was a risk in this direction. Given the tight labour market, this could be reflected in stronger wage demands. Higher-than-expected inertia in services inflation and a halt in tradables disinflation, which had so far been due mainly to fading supply-side problems, were additional upside risks. Movements in the koruna exchange rate, which could cause prices of imported goods to go up, were also an upside risk to tradables prices. An inflationary risk in the longer term was a potential acceleration of money creation in the economy stemming from a significant recovery in lending activity, especially on the property market. By contrast, a stronger-than-expected downturn in global economic activity and weaker German economic output were a downside risk to inflation. The future monetary policy stance abroad remained an uncertainty of the outlook.

Aleš Michl began by saying that annual inflation had reached 2% – exactly the CNB’s target – in February and March this year. Inflation had last been at the target five years ago, in December 2018. Price stability – the CNB’s statutory mandate – had been restored. Aleš Michl then noted that when he was appointed governor, he had said that the CNB would deliver low inflation within two years, and it had. He added that the Board would assess the new data from meeting to meeting and decide accordingly. The interest rate reduction process could be paused or terminated at any time at levels that were still restrictive if inflation – especially its core component – did not develop in line with the forecast.

A large part of the Board’s debate concerned the structure of inflation and especially the gap between services inflation and goods inflation. Eva Zamrazilová said that in her view this was an upside risk to inflation. The current difference in market services inflation and goods inflation might be justified in line with economic theory if it were being accompanied by real economic convergence, but such convergence had not been seen in recent years. Jan Kubíček agreed. He asked whether the current elevated growth in services prices was just a reverberation of the previous wave of inflation or a separate outbreak of inflation that posed a risk going forward. He felt that arguments could be found for either, but he too felt that services prices posed an upside risk given the absence of real convergence. Jan Procházka also saw the structure of inflation as a threat, adding that the relatively volatile prices of food and energy might stop offsetting the elevated services inflation at any time. Eva Zamrazilová added that services prices were also viewed as a risk in advanced economies, for which convergence processes could not be used as an argument. According to Tomáš Holub, the CNB was in a phase of stamping out the inflation fire, and the lingering embers could still be seen in elevated services inflation. On the other hand, this came as no surprise to him, as services are the most persistent segment of inflation. On top of that, the 2% target pertained to headline inflation, not services inflation, which is traditionally higher. In his opinion, there was a need to keep an eye on services inflation, but it was not currently a reason for not continuing to ease monetary policy. Jan Frait agreed.

In the context of services prices, some Board members discussed the property market and the related imputed rent. Eva Zamrazilová expressed the opinion that the elevated saving rate represented deferred demand for property rather than deferred consumption. She thus saw an upside risk to inflation in potential faster-than-expected growth in imputed rent as a result of the property market recovery. Tomáš Holub said that for the time being he saw the property price recovery as something that had to be monitored, but there was no need to get too concerned about it at the moment. However, it was a factor that represented an argument for not upping the pace of monetary policy easing.

Part of the Board’s discussion concerned the natural rate of interest. Jan Frait said that the idea that the natural rate had gone up to some degree was now widely shared in central banks and on financial markets. This by itself was a reason to take a cautious approach to lowering monetary policy rates further. Tomáš Holub said that in his view, the level of the natural rate was not a key issue for this or the next few meetings and would not increase in relevance until monetary policy rates in real terms neared the estimates of the natural rate. For now, though, they were safely higher. According to Jan Kubíček, natural rates abroad would be of primary importance – if the ECB were to start assuming a higher natural rate of interest, there would be implications for the CNB’s terminal rate or the long-term appreciation of the koruna.

Karina Kubelková said that the upside risks to inflation had decreased in number and intensity since the previous forecast. In her view, later and slower interest rate cuts by the major central banks and their impacts on the koruna exchange rate were virtually the only upside risk, albeit a significant one. For Jan Frait, the upside risks included potential efforts by part of the labour force to increase the pace of wage growth in order to make up for the previous fall in real income, and the still modestly elevated inflation expectations. In his opinion, households could become concerned about inflation in our geographical area due to still high public finance deficits in nominal terms and to reports of sizeable future public expenditure associated, for example, with the energy system, transport infrastructure and the climate transition. Jan Kubíček noted that the forecast’s assumption of fiscal consolidation up to a public finance deficit of 1.2% of GDP in 2025 might be too optimistic, not least because 2025 is an election year. For Eva Zamrazilová, household consumption was another upside risk. Given the growth in wages, she expected it to be higher compared to the forecast. According to Jan Procházka, there had to a large extent been a return to last autumn’s economic story, which had expected a gradual but quite robust recovery of the domestic economy. Some of the inflationary risks from the real economy identified by the last forecast, had thus now become part of the baseline scenario. 

Turning to the downside risks, Jan Frait expressed the belief that certain lagged effects of the elevated interest rate level might yet materialise internationally, as many corporate debt contracts would not be refinanced until this year or next year. Jan Procházka mentioned a slower-than-forecasted decline in the saving rate as a downside risk. Karina Kubelková said that the main downside risk of the previous forecast – a stronger-than-expected downturn in global economic activity and in German economic output – had not materialised, but the situation in Germany remained uncertain. Several of the board members assessed the overall balance of risks of the forecast as broadly neutral (Jan Frait, Tomáš Holub, Jan Procházka). 

From the monetary policy decision-making perspective, Jan Procházka said that the rate path in the current forecast had moved roughly to the centre of the band he could conceive of, given the risks and uncertainties. Eva Zamrazilová also essentially agreed with the rate path in the forecast, although her perception of the current economic situation was different in some respects to that of the forecast and some of the other board members. In light of the upside risks discussed earlier, she was inclined to cut rates slightly more slowly than in the forecast. Karina Kubelková expressed a preference for a cautious and gradual decline in interest rates and said the base rate would remain at a restrictive level even after a reduction of 0.5 percentage point at this meeting. Tomáš Holub said he would even consider a cut of 0.75 percentage point at this meeting, but the developments since the last meeting argued more in favour of a slower reduction in rates. Jan Frait also mentioned a 0.75 percentage point cut as an option, but he too ultimately ended up favouring a more moderate step. 

At its meeting, the Bank Board lowered the two-week repo rate by 0.5 percentage point to 5.25%. At the same time, it lowered the discount rate by the same amount to 4.25% and the Lombard rate to 6.25%. All seven members voted in favour of this decision.

Author of the minutes: Vojtěch Molnár, Monetary Department