Minutes of the Bank Board Meeting on 6 February 2013

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 first situation report and the new macroeconomic forecast covering the horizon to the end of 2014. Headline inflation had decreased significantly in 2012 Q4, reaching 2.4% in annual terms at the end of the year. It was thus above the CNB’s inflation target. At 1.1%, monetary-policy relevant inflation was close to the lower boundary of the tolerance band around the target. Tax changes, food price growth and gradually fading import price growth were the sources of the observed inflation. By contrast, the domestic economy was dampening inflation. The year-on-year decline of the domestic economy had deepened further in 2012 Q3, to -1.3%. A similar year-on-year contraction in real GDP was forecasted for Q4.

According to the new forecast, headline inflation would be close to the CNB’s 2% target this year despite substantial impacts of tax changes, and would fall slightly below the target after these impacts fade away. Monetary-policy relevant inflation would be in the lower half of the tolerance band around the target until the end of 2014. Domestic economic activity would decrease slightly overall this year owing to subdued domestic demand amid continuing fiscal consolidation. It would recover gradually in the second half of the year thanks to growth in external demand. Real GDP growth would continue to accelerate in 2014, reaching about 2% for the year as a whole. The nominal exchange rate was appreciating slightly from its current level at the forecast horizon. Consistent with the forecast was a slight decline in market interest rates, followed by a rise in rates as from mid-2014.

In the discussion that followed the presentation of the situation report, the Board agreed that there had been no major changes in its assessment of the overall economic situation since the discussion of the last situation report. There was also a consensus that the risks to the new forecast were balanced and that the appropriate monetary policy response was to leave rates unchanged. It was noted several times that the risks to the forecasts had eased in both directions. A majority of the board members viewed the likelihood of the need to further ease the monetary conditions as smaller given the persisting weak exchange rate of the koruna at the forecast horizon compared to the situation at the turn of the year. In this regard, it was also said several times that new economic data might change this view in the months ahead and the likelihood of the need for monetary easing might go up again.

In a discussion of the sources of current inflation and the outlook for inflation, it was said that domestic economic activity was still very subdued and anti-inflationary and that demand-pull inflation pressures were not apparent at the horizon of the new forecast either. It was also said that all price categories – apart from food prices – were showing low growth or a decline. With regard to food prices, it was said that the uncertainty associated with global changes in demand for food might give rise to more sustained growth in food prices. The current evolution of prices of emission allowances for heating plants was identified as a possible anti-inflationary factor.

The Board went on to discuss domestic economic activity. It was noted that the 2009 prediction that there would be a double-dip in GDP growth had been correct. A double dip had indeed occurred and the domestic economy was now in a deeper-than-expected recession. It was said that the outlook for investment activity was more favourable as from the second half of 2013, but was subject to uncertainty associated with the external demand forecast.

In a discussion of the structure of domestic growth, attention was devoted to household consumption. The Board agreed on the relatively large uncertainty associated with the outlook for consumption growth and also with the data on consumption in recent quarters. The recent revisions of the real household consumption data, which had changed the view of private consumption in 2011 quite significantly, were also discussed. The Board considered whether a revision could also be expected for the 2012 figures currently indicating a sizeable fall in consumption.

Several of the board members stated that an upward revision of household consumption was likely and that the observed jump in the saving rate accompanying the sharp fall in consumption was not realistic. In this context, it was said that a major change in household behaviour leading to a higher saving rate was unlikely because, for example, of the negative real interest rates, which were reducing the incentive to save. Another reason mentioned was the outlook for minimal tax changes in the future, which was reducing the motive of uncertainty as a cause of increased saving. It was also said that any slight upward revision of the consumption data would not affect the overall view of households’ situation and of the strongly subdued domestic demand in general. The opinion was expressed that real household consumption was overestimated due to the consumption deflator, which was diverging downwards from consumer price inflation.

The Board stated that the debate on household consumption indicated potential upside and downside risks to inflation. Any upward revision of consumption represented an upside risk if it were to pass through fully to overall GDP. Conversely, more subdued consumption as a result of a sustained increase in the saving rate was a downside risk. These two risks implied a potential shift in rates in opposite directions. The Board agreed that the shift in rates under discussion was only marginal and would thus not lead to a need to change its view on the monetary policy settings.

The board members then discussed the outlook for the external situation and the related uncertainties. It was said that the situation in the euro area had long represented the biggest uncertainty associated with the forecast. Europe was described as being in a period of sustained low growth and burdened by numerous economic problems. It was noted that the higher Euribor rate path together with higher foreign producer prices was an inflationary factor and the deepening downturn in the effective euro area was an anti-inflationary factor. Overall, the effect of these external factors on the domestic economy was approximately neutral, whereas in the previous forecast it had been slightly anti-inflationary. It was also said that it was difficult to find sources of higher growth in Europe and that the potential sources of a global recovery would probably not have a direct effect on the situation in Europe.

At the close of the meeting the Board decided unanimously to leave the two-week repo rate unchanged at 0.05%. 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: Michal Franta, Adviser to the Board