Minutes of the Bank Board Meeting on 26 September 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 sixth situation report assessing the new information and its effect on the fulfilment of the inflation forecast contained in the fifth situation report. The new situation report assessed the risks to the forecast as being slightly anti-inflationary and tilted to a need for slightly easier monetary conditions. Annual headline inflation had gone down by 0.1 percentage point to 1.3% in August and was thus 0.3 percentage point lower than forecasted. The deviation had been due primarily to weaker growth in administered prices, caused mainly by a decline in natural gas prices, and to lower adjusted inflation excluding fuels. According to the situation report, the year-on-year decline in real GDP had slowed noticeably to -1.3% in Q2, and in year-on-year terms seasonally adjusted real GDP had in fact grown by 0.6%, the first increase since the end of 2011. The published GDP growth figures were thus 0.4 percentage point higher than forecasted. This deviation from the prediction had been due mainly to significantly better than expected net exports on the back of recovering external demand. The contribution of government consumption had been positive, while gross capital formation had continued to decline significantly in both the fixed investment and inventories categories. The labour market was slightly anti-inflationary by comparison with the forecast, owing primarily to slower annual wage growth in Q2. The exchange rate of the koruna was only slightly weaker than forecasted on average. A more detailed discussion of the risks to 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 clearly agreed that the economy was moving essentially in line with the forecast from the fifth situation report. There was also a consensus that the appropriate monetary policy response was to leave monetary policy rates at the current level of technical zero and to maintain them at this level over a longer horizon until inflation pressures increase significantly. In this regard, some of the board members repeated their earlier opinion that a further easing of the monetary conditions was needed in order to fulfil the assumptions of the forecast and hit the inflation target, and that given the zero lower bound on monetary policy rates, this could only be achieved by easing the exchange rate component of the monetary conditions. A majority of the board members thus agreed that the likelihood of commencing foreign exchange interventions was unchanged from the previous situation report and remained high.
In this context, several of the board members then spoke in favour of immediately commencing foreign exchange interventions. The main argument given in support of this step was the risk of a larger and longer-lasting undershooting of the inflation target. It was said repeatedly that the economy was on a low-inflation path and that no major inflation pressures could be expected in the future from any segment of consumer prices except fuel prices. The absence of inflation pressures had also caused an unexpected decline in monetary-policy relevant inflation to 0.5%. In this regard, some of the board members raised concerns about the economy slipping into deflation, which the central bank should be proactive in preventing. Against this, however, it was said repeatedly that the observed build-up of anti-inflationary risks was still not generating any major risk of a deflation-recession spiral. This was also evidenced by the fact that measured inflation expectations remained anchored and were not falling despite the observed decline in inflation. It was also said that the monetary developments were also signalling no risks of deflation, as M2 growth had picked up to 5.1% in spite of the GDP contraction and low inflation. Some of the board members expressed doubts about whether using the exchange rate was the correct response to a negative demand shock in the current situation and whether the associated rise in cost-push inflation might give rise to another drop in private consumption and to lower economic activity. The opinion was also expressed that monetary-policy relevant inflation had gone down thanks mainly to a fall in administered prices and that the central bank should not react to this. On the other hand, the role of the estimated strongly negative output gap, which would continue to have a strong anti-inflationary effect despite the signs of economic recovery, was emphasised.
The Board went on to discuss the movements in the external and domestic economic outlook. The Board agreed that the risk mentioned in the previous situation report regarding a later external economic recovery was not currently materialising. At the same time, it was said that this recovery remained fairly slow and fragile and would be subject to considerable uncertainties, linked, for example, with the level of public debt in some European countries, with the process of deleveraging of their economies and with political risks. There were still significant differences between the periphery and core of the euro area, while the Czech economy was tied more closely to faster-growing economies such as Germany.
As regards the assessment of domestic economy activity, the Board agreed that the figures from the domestic economy were signalling the start of an economic rebound. With regard to the economic recovery, mention was made of improving leading indicators such as growth in industrial orders and consumer confidence indicators, in respect of which households’ persisting concerns about rising prices were emphasised. As for the evaluation of the expenditure structure of GDP, some of the board members expressed the belief that in this phase of the recovery it would be counterproductive to try to create inflation pressures using exchange rate tools, because a rise in inflation could slow the emerging process of growth in private consumption. Against this, it was said that in a small open economy dependent on exports, a loosening of the exchange rate would necessarily lead to higher economic growth. Some of the board members also expressed some doubts about the reliability of the GDP data. The quarter-on-quarter recovery in GDP was due, among other things, to growth in value added in the insurance sector caused by a one-off accounting transaction. The impact of this transaction on the structure of use of GDP was unclear.
In connection with the growth outlook for the domestic economy, the Board also discussed the effect of real wages and the role of the current wage restraint. In this context, the role of foreign-controlled firms and the possibility of cross-border contagion via a deterioration in the financial condition of multinational firms were mentioned. In a discussion of cost factors, energy prices, which up to now had been fostering higher inflation and higher costs for firms and households, were also discussed. The risk of a faster decline in these prices in the future was also mentioned.
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. The Board also voted on whether to commence foreign exchange interventions as an additional instrument for easing the monetary conditions and decided not to use this option.

Author of the minutes: Michal Hlaváček, Adviser to the Board