Minutes of the Bank Board Meeting on 2 May 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 third situation report and the new macroeconomic forecast covering the horizon to the end of 2014. Headline inflation had dropped to 1.7 % in 2013 Q1 and was thus below the CNB’s inflation target. At 0.9 %, monetary-policy relevant inflation was just below the lower boundary of the tolerance band around the target. The sources of observed inflation were again tax changes together with growth in administered prices, although the contribution of both had decreased significantly. Food prices were also continuing to rise. Import prices were slightly inflationary because of the recent depreciation of the koruna. By contrast, the domestic economy was dampening inflation.

According to the new forecast, headline inflation would be slightly below the 2% target this year and next year. Monetary-policy relevant inflation would be close to the lower boundary of the tolerance band this year and then return slowly to the target. This year, GDP would decline by 0.5 % amid continuing fiscal consolidation and an only gradual recovery in external demand. In 2014, the economy would grow by 1.8 %. The exchange rate of the koruna against the euro would appreciate very slowly from a weak initial level. Consistent with the forecasts was a slight decline in market interest rates, followed by a rise in rates in 2014.

In the discussion that followed the presentation of the situation report, the Board agreed that anti-inflationary factors had accumulated since the previous situation report and that no significant upside risks to inflation were apparent over the entire forecast horizon. The opinion was expressed that both the domestic and external situation represented downside risks going beyond the framework of the forecast. However, the opinion was also expressed that the forecast reflected all the available information and that no additional downside risks were visible. A majority of the board members agreed that the appropriate response was to leave rates unchanged and to maintain them at technical zero over a longer horizon until inflation pressures increase significantly.

It was said several times that the 2% inflation target was a significant anchor of inflation expectations and that a long-term undershooting of the target should not be tolerated. Some of the board members expressed the opinion that in light of new data, the probability of the need for monetary easing via foreign exchange interventions had increased. The Board agreed that there was no tangible risk of deflation despite the strengthening anti-inflationary factors.

It was said in the discussion that it was necessary in the present situation to consider the overall monetary conditions index, which, along with interest rates, is formed by the exchange rate. The ability of the exchange rate to offset the existing downside risks to inflation was discussed. In this context, it was said that the currently weaker-than-forecasted exchange rate of the koruna was further easing the monetary conditions. The opinions were expressed that the exchange rate was currently being significantly affected by external factors and that its future path was subject to uncertainty. However, the opinion was also expressed that the exchange rate would probably stay at weak levels and that the low performance of the domestic economy and the slow recovery in external demand were reasons for further depreciation of the koruna.

The Board discussed the domestic economy and its growth structure in detail. A majority of the board members agreed that there were no tangible signs of imminent economic recovery. It was said that the saving rate was at a historical high and that this implied limited consumption. The prospects of a recovery in household consumption were discussed. The opinion was expressed that the current evolution of consumption was structurally differentiated. It was said that stabilisation of food and energy prices might create room for growth in household consumption, as could refinancing of mortgages under more favourable terms and conditions. In this regard, it was also said that a reduction in nominal disposable income might imply a risk of a debt trap and hinder the possibility of a recovery in consumption.

In the discussion of the growth outlook for the domestic economy, it was said repeatedly that the government’s declared intention to ease its fiscal consolidation drive was relevant information. It was said that easier fiscal policy could contribute to an economic recovery and be an inflationary factor. The opinion was also expressed that an easing of the fiscal consolidation programme could have a positive psychological effect on consumer sentiment.

In the debate on domestic economic activity, it was discussed whether the sharp rise in inventories might be signalling an economic recovery. However, it was also said that the growth in inventories might be linked rather with falling exports. The opinion was expressed that the weaker exchange rate had done little to boost exports, as shown by the evidence for the car industry. It was mentioned that firms were trying to diversify their foreign trade. It was also said that growth in competition in oligopolistic industries and lower growth in regulated prices were acting in the anti-inflationary direction.

The Board also discussed the external situation. It was said repeatedly that the external situation represented more of a downside risk to inflation. It was said that a recovery had still not emerged in euro area countries and that there were signs of falling sentiment even in the core countries of the euro area. It was said that inflation in the euro area was lower than expected. The opinion was expressed that a reduction of interest rates by the ECB could reduce the market rate outlook in the euro area and thus foster a decline in domestic rates. It was also said that the falling outlooks for prices of crude oil and natural gas, as well as growth in the share of new primary energy sources such as shale gas, were anti-inflationary factors.

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: Bořek Vašíček, Adviser to the Board