Minutes of the Bank Board Meeting on 21 December 2011

Present at the meeting: Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Kamil Janáček, Lubomír Lízal, Pavel Řežábek, Eva Zamrazilová.

The meeting opened with a presentation of the eighth situation report assessing the new information and its effect on the fulfilment of the inflation forecast contained in the seventh situation report. The risks of the forecast were moderately inflationary and tilted towards slightly higher interest rates by comparison with the baseline scenario of the forecast. The external demand outlook was converging towards the alternative scenario of the forecast. In the spirit of the alternative scenario, the risks were strengthening in the direction of lower GDP and a weaker exchange rate of the koruna. In contrast to both scenarios, however, there had been a further decline in the outlook for interest rates in the euro area. The domestic economy had deviated somewhat from the forecast. Annual GDP growth had been 1.2% in Q3, i.e. 0.5 percentage point lower than forecasted. By contrast, annual inflation had been 2.5% in November, i.e. 0.5 percentage points higher than forecasted. The current exchange rate of the koruna was an upside risk to inflation. A more detailed discussion of the risks of the inflation forecast can be found in the commentary on the Graph of Risks to the Inflation Projection (GRIP).

In the discussion that followed the presentation of the situation report, the board members agreed that the appropriate monetary policy response was to leave rates at the current level. The prevailing opinion was that the risks of the inflation forecast were slightly on the upside relative to the baseline scenario of the forecast. It was said repeatedly that the situation was converging towards the alternative scenario of the forecast, which assumed lower GDP growth and a weaker exchange rate. It was added that the balance of risks assessed in relation to the alternative scenario, which assumes a higher interest rate path, is anti-inflationary. It was said several times that there was still considerable uncertainty going forward due to the external situation.

The Board discussed in detail the reasons for the higher observed inflation compared to the forecast. Several of the board members expressed the view that, as in the past, this had been a consequence of advance pass-through of the higher VAT rate to prices in the run-up to Christmas. However, it was also said several times that it would be necessary to wait for the January and February 2012 data to confirm this hypothesis. It was added that inflation expectations were firmly anchored in the long run. The opinion was also expressed that the rise in inflation may have been due to the lagged pass-through of the high international commodity and food prices to domestic prices. It was said that food import prices had risen sharply in recent months and might continue to feed through to consumer prices in the year ahead. However, there were also opinions that prices of relevant import commodities were generally falling and that the pass-through of import prices to consumer prices was low. The opinion was expressed that global oil stocks were falling and demand for oil was rising, and that this might affect future oil prices. Inflation measurement uncertainty linked with the difference between the CPI and the HICP was also discussed.

It was said several times that the Czech economy was slowing and that no domestic demand-pull inflation pressures were apparent. It was said that the rate of growth of nominal monetary aggregates, including loans, was easing. The opinion was expressed that the risk to lending to the domestic economy posed by the deleveraging in the euro area and the fulfilment of the new regulatory requirements by European banks was not yet clear. It was also said that the spread between monetary policy and market interest rates was stable in the Czech Republic, whereas it had increased sharply in the euro area.

It was said repeatedly that the exchange rate represented an upside risk to inflation. It was said that the exchange rate trend in recent months was linked with investor nervousness due to the euro area debt crisis and with aversion to European currencies, and that the exchange rate might stay at lower levels. Against this, it was also said that according to the koruna-euro interest rate differential and to the latest balance of payments data the exchange rate should tend to appreciate. The opinion was also expressed that the overall monetary conditions were more relaxed thanks to the weaker exchange rate, so there was no need to change monetary policy interest rates.

The Board also discussed the labour market situation. The opinion was expressed that the expected evolution of wages in the forecast was over-optimistic and also that current nominal unit wage costs were anti-inflationary. It was also said that the current decline in unemployment was connected with a decrease in the labour force, caused probably by the change in the early retirement rules effective from 1 January 2012.

The Board went on to discuss the external situation. It was said several times that the situation in the euro area could be assessed as anti-inflationary owing to reduced outlooks for economic growth, inflation and the interest rate path. The opinion was expressed that although there was still no solution to the euro area debt crisis, the impacts of the crisis on the economy had not yet materialised fully. It was added that developments had been and would continue to be very mixed across the euro area and that the situation in some countries could be regarded as a pressing crisis.

The opinion was expressed several times that owing to the external situation there were risks and uncertainties that were difficult to quantify. It was said that a large part of the uncertainty was linked with the inconsistency of political solutions to the debt crisis over the past year. However, the opinion was also expressed that some facts, such as fiscal consolidation in some countries and the clearing of problem assets from bank portfolios, could be regarded as positive.

At the close of the meeting the Board decided unanimously to leave the two-week repo rate unchanged at 0.75%. Miroslav Singer, Mojmír Hampl, Vladimír Tomšík, Kamil Janáček, Lubomír Lízal, Pavel Řežábek and Eva Zamrazilová voted in favour of this decision.

Author of the minutes: Bořek Vašíček, Adviser to the Board