Minutes of the Bank Board Meeting on 30 June 2016

Present at the meeting: Miroslav Singer, Mojmír Hampl, Kamil Janáček, Lubomír Lízal, Jiří Rusnok.

The meeting opened with a presentation of the fourth situation report assessing the new information and its effect on the fulfilment of the forecast contained in the third situation report. The forecast assumed that market interest rates would be flat at their current very low level and the exchange rate would be used as a monetary policy instrument until mid-2017. In line with the forecast, annual headline inflation had fallen to 0.1% in May. The individual components of inflation had also developed as expected. The increase in consumer prices had been due solely to adjusted inflation excluding fuels, positively reflecting growth in the domestic economy and wages. Annual adjusted inflation excluding fuels had reached 1.1%. By contrast, the contributions of all other components of inflation had been negative, owing to anti-inflationary cost effects mainly from abroad. Administered prices had started to decline year on year as a result of lower prices of natural gas for households, and food prices had also returned to a year-on-year decrease. Fuel prices had continued to record a deep year-on-year decline.

As expected, annual growth in the Czech economy had slowed to 3% in 2016 Q1. In line with the forecast, the slowdown in economic growth had been due to a marked fall in the contribution of fixed investment as a result of an only gradual start to the drawdown of EU funds in the new programme period. The slowdown in growth had been smaller than forecasted, mainly because of higher growth in inventories and household consumption. Net exports had acted in the opposite direction on the deviation of economic growth from the forecast. Annual gross value added growth had also moderated to 3%, having slowed in some service industries and in construction. The continuing domestic economic growth had also fostered a further improvement in the labour market situation. The seasonally adjusted unemployment rate had fallen further in Q1 to 4.3%. Annual growth in the average wage had accelerated to 4.4% in Q1, and was therefore 0.4 percentage point higher than forecasted. Growth in both total employment and the number of employees had also picked up pace in Q1, standing above the current forecast.

In the discussion that followed the presentation of the situation report, the Board assessed the effect of the newly available information on the risks to the current inflation forecast. There was a consensus that the balance of risks to the current forecast was slightly anti-inflationary at the monetary policy horizon. It was said repeatedly that the new information contained no major surprises and the forecast had largely materialised. There was a consensus that the appropriate response to the current situation was to leave monetary policy rates unchanged at technical zero and that a need to maintain easy monetary conditions persisted. In this context, the Board also discussed the likely timing of the discontinuation of the exchange rate commitment. It was said several times that the new information did not represent grounds for changing the view regarding the exit date. The board members agreed that the exchange rate commitment was likely to be discontinued in mid-2017, in line with the forecast. All the Board’s earlier statements that it would not discontinue the use of the exchange rate as a monetary policy instrument before 2017 meanwhile remained valid.

In a discussion about domestic economic developments, there was a consensus that the economic growth could be regarded as robust and sustainable. It was said that easy monetary policy was fostering stable growth. In a discussion about the outlook for the domestic economy, it was noted that the economic growth estimate for 2017 was over-optimistic. In this context, it was mentioned several times that the contribution of fiscal policy might be smaller in 2017 because of a slower recovery in government investment. However, it was also said that the effect of lower investment on economic growth might be offset by higher wage growth in the non-business sector.

The Board assessed the labour market situation in depth. It focused primarily on wage growth, as this implied upward pressure on domestic prices. It was said that the observed wage growth exceeding the forecast in 2016 Q1 represented a modest upside risk to inflation. In connection with wage growth, the Board also discussed the risk of a decline in inflation expectations stemming from the long-running low inflation. A majority of the board members viewed the potential decline in inflation expectations as a downside risk to inflation, one that would materialise as more subdued wage growth. However, this risk was not significant given the currently observed upswing in wage growth. It was also said that the risk of a decline in inflation expectations via more subdued wage growth would not materialise in the rest of this year either.

In the discussion about wage growth, the Board also discussed the median wage. A majority of the board members agreed that the faster growth in the median wage than the average wage implied faster growth in the wages of lower-paid employees. In this context, it was said several times that lower-paid employees have a higher propensity to consume, so stronger growth in the median wage indicates possible stronger growth in household consumption, leading in turn to stronger demand-pull inflation pressures. However, it was also said repeatedly that growth in the median wage should be interpreted with care given the frequent revisions made to this indicator.

The Board also discussed the risks and uncertainties arising from developments abroad. It was said that the only major new piece of information from abroad was the result of the referendum on EU membership in the UK. The board members agreed that the referendum result primarily implied an increase in uncertainty and that the main economic impacts associated with the probable Brexit lay beyond the monetary policy horizon, so they were not particularly relevant to current decision-making. It was also said that in the short term the increased uncertainty would lead to a downturn in investment activity. In a discussion about inflation abroad, it was said repeatedly that there was a persisting anti-inflationary risk associated with possible more subdued industrial producer price inflation in the euro area, which would lead to more subdued inflation in the domestic economy as well. In the context of inflation abroad as compared with the domestic situation, it was also noted that the domestic economy had jumped from the bottom to the top of the inflation ranking by comparison with its most important trading partners, i.e. domestic inflation was now rising the fastest by comparison with those countries.

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, Kamil Janáček, Lubomír Lízal and Jiří Rusnok voted in favour of this decision. The Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene in the foreign exchange market if needed to weaken the exchange rate so as to keep the exchange rate of the koruna close to CZK 27 to the euro.

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