Minutes of the Bank Board Meeting on 22 December 2016
Present at the meeting: Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Lubomír Lízal, Pavel Řežábek.
The meeting opened with a presentation of the eighth situation report assessing the new information and its effect on the fulfilment of the forecast contained in the seventh 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. Annual headline inflation had gone up in recent months. In November, it had returned to the lower half of the tolerance band around the CNB’s target after three years. Consumer price inflation in November had been 1.5%, i.e. 0.5 percentage point higher than forecasted. This deviation had been due most of all to a stronger-than-expected recovery in food price inflation. Adjusted inflation excluding fuels had also been slightly above the forecast. This indicator of core inflation positively reflected continued growth of the domestic economy and rising wage growth.
The growth of the Czech economy had slowed further in year-on-year terms to 1.9% in Q3. It had been 0.6 percentage point below the current forecast as a result of a smaller contribution of net exports. By contrast, total investment had declined more moderately than forecasted. However, the expectation of a marked decline in investment due to an only gradual start to the new programme period for EU funds was still materialising. Household consumption growth had accelerated further in line with the forecast. This had confirmed the CNB’s view that the previous slowdown in consumption growth had been temporary.
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 forecast. The prevailing view was that the risks to the current forecast were balanced. The higher-than-expected inflation was due predominantly to food prices, which are generally very volatile. It was said several times that it would be wrong to overestimate the effect of volatile items on the inflation outlook. It was also said that the lower-than-expected GDP growth in Q3, the slowdown in industrial production growth and the year-on-year decline in exports in October represented downside risks to inflation. Nonetheless, a majority of the board members agreed that the slowdown in industrial production growth and the drop in exports were temporary.
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 timing of the discontinuation of the exchange rate commitment. The Board’s earlier statement that it would not discontinue the use of the exchange rate as a monetary policy instrument before 2017 Q2 remained valid. The Board still considered it likely that the commitment would be discontinued in mid-2017.
The Board discussed economic developments abroad. The policy rate increase in the USA and the extension of the ECB’s quantitative easing policy by nine months were identified as important events. There was a consensus that both these events had been expected by the markets and therefore did not represent unexpected shocks. It was said that these factors were reflected in an outlook for a weaker exchange rate of the euro against the dollar. It was said repeatedly that the weaker outlook for the euro against the dollar could have favourable second-round effects for Czech exporters.
The growth of the Czech economy was assessed as robust. In this context, the previous slowdown in consumption growth in Q2 was evaluated as a temporary phenomenon and it was said that household consumption was returning to its equilibrium growth path. It was said several times that the robust growth of the domestic economy meant that the dependence of inflation on external factors was decreasing.
The Board assessed labour market developments, primarily with regard to the low unemployment rate and faster wage growth. It was said repeatedly that the low general unemployment rate was fostering rapid wage growth. The latter had been higher than forecasted in Q3 and was repeatedly assessed as being consistent with sustainable inflation at the monetary policy horizon.
In the discussion, the board members assess the potential output of the Czech economy. It was said that low private investment growth coupled with very low unemployment implied relatively slow potential output growth. In this regard, it was said that private investment was tied too closely to public investment. The fact that private investment activity can be affected by non-market factors such as drawdown of European funds was identified by one board member as an unsound structural factor of the Czech economy. On the other hand, a view of the supply side of the economy was presented according to which a recovery in investment activity would occur due to market reasons, which in the future would manifest itself in higher growth in potential output. It was said that potential output considerations were important from the medium-term perspective, but did not have a direct effect on the current settings of the monetary conditions or on the timing of the exit from the exchange rate commitment.
The Board discussed negative interest rates. Views were expressed that negative interest rates were an appropriate tool for supporting the exchange rate commitment and a smooth exit from the commitment, especially in a form targeted at additional inflows of speculative capital. Against that, it was said repeatedly that negative interest rates could represent a risk to financial stability in the longer term and that the introduction of negative rates was not consistent with discontinuation of the exchange rate commitment, as it should occur at a time of expected gradual tightening of the monetary conditions. However, it was said that the Board had never abandoned this tool.
At the close of the meeting the Board decided unanimously to leave the two-week repo rate unchanged at 0.05%. Jiří Rusnok, Mojmír Hampl, Vladimír Tomšík, Vojtěch Benda, Lubomír Lízal and Pavel Řežábek 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: Jan Brůha