Minutes of the Bank Board meeting on 27 June 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 fourth situation report based on an assessment of the information obtained since the spring forecast was drawn up. 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, but because the present interest rate settings were sufficiently restrictive, the main current question was how fast to ease this restriction. Increased wage demands in the private and public sector were an inflationary risk. Excessive wage growth in the public sector would also lead to a risk of the state budget having an inflationary effect. 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. 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 said that the fight against inflation was not over. Even if the Board lowered interest rates further, they would remain markedly positive in real terms and would dampen inflation. However, he added that at the coming meetings, the Board should discuss the option of slowing the decline in rates or stabilising rates for some time.

The other board members concurred that the CNB’s monetary policy would remain significantly restrictive after today’s rate cut, even though some of them (Karina Kubelková and Jan Kubíček) felt the policy neutral rate might be higher than assumed in the forecast. The tight effect of interest rates was evidenced by a decline in private investment, among other things. In this regard, Jan Kubíček said that despite the reduction of monetary policy interest rates, long-term interest rates had gone up in recent months due to developments abroad.

Jan Frait said that the koruna may currently be undervalued, as indicated by the favourable evolution of the current account and by the tight labour market. In his opinion, the exchange rate component of the monetary conditions might thus be easier than would be desirable. Karina Kubelková expressed concern whether the decrease in domestic interest rates below the Fed’s policy rates would lead to a greater and longer-lasting weakening of the koruna. On the other hand, she saw a strengthening of the downside risk to inflation in the form of a potential slowdown in external and domestic demand. Eva Zamrazilová mentioned the importance of the koruna exchange rate for the current decision. Were monetary policy to be eased in excess of the market outlook, there was a risk that the koruna would weaken further and potentially also be more volatile. 

Part of the Board’s discussion was devoted to the optimal reaction of domestic monetary policy to the continuously changing market outlooks for foreign interest rates. A majority of the board members agreed that the market outlook volatility may be an unintended consequence of the policies of central banks, which for some time now had been emphasising the need to respond primarily to new incoming data. For this reason, Tomáš Holub, Jan Kubíček and Jan Procházka preferred to pay less attention to the short-term volatility of market outlooks and new information and focus on a medium-term and forward-looking monetary policy orientation. This was supported by Jan Frait, who in this regard added that the effects of tighter monetary policy could come later than in the past, for example because of fiscal support or implicit guarantees made by key central banks for financial stability and public debt. 

It continued to be highlighted in the discussion that the decline in inflation had been due to volatile components of inflation (food prices in particular), while the persistent components (core inflation and, within it, services inflation) remained elevated. Eva Zamrazilová regarded this as the principal upside risk to inflation, even though annual growth in prices of services for firms was now slowing. According to Jan Frait, the current high growth in prices of services for households did not reflect high demand and was most probably a temporary phenomenon. Jan Procházka said that households’ inflation expectations were gradually falling as inflation returned close to the 2% target. He added that although it could not be ruled out that inflation would increase to 3% at the year-end due to last year’s low base, this should not be a barrier to lowering interest rates further.

Part of the meeting was devoted to wages. According to Tomáš Holub, the faster-than-forecasted wage growth observed in market sectors in the first quarter of this year was an important piece of information, because it could foster inertia in services prices. Wage growth in the public sector was also a risk going forward. According to Karina Kubelková, possible higher growth in the pay of public employees had the potential to seep into wages in the private sector. Eva Zamrazilová said that concerns of a general relaxation of the government’s consolidation efforts, especially next year, were also linked with pay growth in the public sector. Other board members (Jan Kubíček and Jan Procházka) also saw a risk of more relaxed fiscal policy in the next, election year.

The Board moved on to discuss the surprise in the area of fixed investment. Tomáš Holub said that the effect of fixed investment on inflation had no clear direction. In the short term, lower investment could have an anti-inflationary effect via weaker domestic demand. In the medium term, however, its negative effect on the supply side of the economy may prevail and it may therefore conversely have an inflationary effect, especially if investment activity failed to recover quickly. Eva Zamrazilová added that she viewed the information value of the current investment data as weak and that there was great uncertainty associated with investment going forward.

It was said repeatedly during the meeting that a further reduction of interest rates would not create risks to financial stability. However, the property market situation was an upside risk to inflation that would need to be monitored going forward. Lowering the monetary policy rate by 0.5 percentage point would conversely help non-financial corporations that are financed in koruna. Eva Zamrazilová and Jan Procházka were concerned about the sharp growth in new loans for consumption, which may signal a turnaround in households’ sentiment in the optimistic direction.

At its meeting, the Bank Board lowered the two-week repo rate by 0.5 percentage point to 4.75%. At the same time, it lowered the discount rate by the same amount to 3.75% and the Lombard rate to 5.75%. Five members voted in favour of this decision: Aleš Michl, Jan Frait, Tomáš Holub, Jan Kubíček and Jan Procházka. Eva Zamrazilová and Karina Kubelková voted for reducing rates by 0.25 percentage point.

Author of the minutes: Jan Filáček, Monetary Department