PRAGUE, Feb 10 (Reuters) - Following is the full text of
the minutes from the Czech central bank (CNB) governing board's
Feb. 2 monetary policy meeting, released on Friday.
Present at the meeting: Aleš Michl, Marek Mora, Eva
Zamrazilová, Oldrich Dedek, Jan Frait, Tomáš Holub, Karina
Kubelková. Minister of Finance Zbynek Stanjura was present at
part of the open meeting.
The meeting opened with a presentation of the first situation
report and the new macroeconomic forecast. According to this
forecast, inflation had risen sharply in January by comparison
with December. From spring onwards, however, it would decline
quite quickly due to tight monetary conditions and easing cost
pressures, falling below 10% in the second half of the year. At
the monetary policy horizon – in the first half of 2024 –
inflation would return to the CNB’s 2% target. Consistent with
the baseline scenario of the forecast was a rise in market
interest rates initially, followed by a gradual decline.
The Bank Board assessed the risks and uncertainties of the
baseline scenario of the forecast as being significant and going
in both directions. More expansionary fiscal policy was an
upside risk. The threat of inflation expectations becoming
unanchored and the related risk of a wage-price spiral also
remained significant risks in the same direction. By contrast, a
stronger-than-forecasted downturn in domestic consumer and
investment demand was a downside risk. A faster-than-expected
decline in core inflation was also an anti-inflationary risk.
The extent of repricing of goods and services in January, which
will affect annual inflation throughout 2023, was a risk in both
directions. The general uncertainties of the outlook included
the future course of the war in Ukraine, the availability and
prices of energy, and the future monetary policy stance abroad.
Aleš Michl opened the meeting by saying that the strong koruna
was significantly helping in the fight against inflation. The
Real Monetary Conditions Index showed that the CNB had the
tightest monetary policy in more than 20 years. Aleš Michl
continued to prefer to keep interest rates unchanged. However,
reducing inflation was in his view also contingent on
responsible fiscal policy and moderate wage bargaining demands.
According to Aleš Michl, interest rates would remain higher for
some time than they had normally been in the past ten years. He
then called on the other board members to express their expert
opinion at this time of extreme uncertainty.
In the discussion, the board members agreed that after rising at
the beginning of this year, inflation would start to decline
gradually and should fall to single digits in the second half of
the year. Eva Zamrazilová said that the inflation dynamics had
slowed in the second half of last year. Oldrich Dedek added that
core inflation had been showing a downward tendency for two
months in a row. There was also consensus that the path of
inflation in the first few months of this year was highly
uncertain with regard to the extent of repricing. In this
context, Eva Zamrazilová said that if the January or February
repricing was higher than expected by the forecast, especially
in the core components of inflation, she was ready to vote in
favour of raising interest rates in the future.
A significant part of the debate was devoted to inflation
expectations and the risk of a wage-price spiral. Karina
Kubelková would not underestimate the risk of unanchored
inflation expectations, taking into account the strong wage
growth seen in 2022 Q3 and the uncertain wage developments going
forward. Tomáš Holub warned of the risk of inflation not falling
to the 2% target at the start of 2024 if people expected higher
price growth in the future and adjusted their behaviour
accordingly. He described the current nominal wage growth as
unsustainable in the long term. Oldrich Dedek also felt that
some data from the labour market were worrying, although it
could not yet be said that wage growth was becoming detached
from fundamentals. Jan Frait agreed with the Monetary Department
that the labour market was not cooling as fast as would be
appropriate for a reliable return of inflation to close to the
2% target next year. In his opinion, the high corporate
profitability and dynamic wage growth were also not signalling
any major recessionary tendencies. They were also being
countered by easing financial conditions via a fall in long-term
market interest rates. Marek Mora also felt that the domestic
labour market had inflationary potential, although it had yet to
materialise. However, he would associate the potential emergence
of a wage-price spiral with a situation where the central bank
lost credibility. Eva Zamrazilová considered the forecasted
average wage growth of 8.5% this year to be overestimated,
especially in comparison with the forecasts of analysts and
other institutions.
According to Oldrich Dedek, it was necessary to distinguish
between measured inflation expectations and whether those
expectations were being reflected in the real behaviour of
households and businesses. Eva Zamrazilová noted that financial
market analysts’ inflation expectations were volatile and
characterised by high dispersion across analysts. Tomáš Holub
expressed a preference for a prudential approach to monetary
policy – he would rather react pre-emptively to the risk of
unanchored inflation expectations than deal ex post with the
situation if this risk was underestimated.
Another topic of discussion was the effect of fiscal policy. Eva
Zamrazilová viewed relaxed fiscal policy as a long-term risk to
achieving price stability. Karina Kubelková also considered
fiscal policy to be a significant risk, as various government
pricing measures could cause large swings in inflation and
subsequently have an impact on wage bargaining and the degree of
repricing. This could in turn jeopardise the achievement of the
inflation target at the monetary policy horizon. On the other
hand, Marek Mora and Tomáš Holub assessed the risk associated
with the effect of fiscal policy as symmetrical, as the
government was communicating its ambition to consolidate public
finances. The expected government expenditure related to price
caps was also decreasing in parallel with the fall in European
gas and electricity prices.
Part of the discussion was devoted to developments abroad, in
particular the interest rate settings of the European Central
Bank. Eva Zamrazilová stated that according to the ECB’s latest
forecast, the fulfilment of the ECB’s inflation target had been
postponed until mid-2025, so it was likely that the Czech
economy would be importing inflation from the euro area in the
coming years. According to Marek Mora, the ECB would continue to
raise interest rates, and this could foster a weakening of the
koruna. According to Karina Kubelková and Marek Mora, there was
a risk of an upward correction of foreign producer prices. Marek
Mora also mentioned the reopening of the Chinese economy as an
upside risk to inflation.
The exchange rate was also discussed in detail. The consensus
was that the recent appreciation was dampening inflation
pressures and contributing to the fulfilment of the inflation
target. Jan Frait favoured tightening the monetary conditions in
both components – interest rate and exchange rate – so that the
effects of monetary policy were distributed evenly between the
domestic and export-oriented parts of the economy. Marek Mora
expressed some concern about the appreciation of the koruna amid
deteriorating economic fundamentals. Karina Kubelková also felt
that the fundamentals spoke rather in favour of a weakening of
the koruna. Oldrich Dedek did not believe that large speculative
positions would be built against the koruna.
A majority of the Bank Board agreed that any future decline in
interest rates should occur later than indicated by the baseline
scenario of the forecast. In this respect, the scenario of
keeping interest rates unchanged in 2023 Q1–Q3 was considered
useful. As emphasised by Eva Zamrazilová and Oldrich Dedek, this
scenario did not deviate significantly from the baseline
scenario in terms of inflation and other variables. Eva
Zamrazilová expressed a preference for keeping interest rates
above the neutral level for longer. Jan Frait also said that to
remove the inflation pressures from the economy, the CNB would
have to maintain a restrictive monetary policy for longer. He
expressed the belief that relatively tight credit conditions and
weakening credit demand would have significant anti-inflationary
effects over the medium term.
At the close of the meeting the Board decided to leave interest
rates unchanged. The two-week repo rate remains at 7%, the
discount rate at 6% and the Lombard rate at 8%. Five members
voted in favour of this decision: Aleš Michl, Eva Zamrazilová,
Oldrich Dedek, Jan Frait and Karina Kubelková. Two members,
Marek Mora and Tomáš Holub, voted for increasing rates by 0.50
percentage point. The Czech National Bank will continue to
prevent excessive fluctuations of the koruna.
ENDS
(Reporting by Jan Lopatka)
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