Present at the meeting: Aleš Michl, Eva Zamrazilová, Jan Frait, Tomáš Holub, Karina Kubelková, Jan Kubícek, Jan Procházka.
The meeting opened with a presentation of the second
situation report containing an assessment of the information
obtained since the winter forecast was drawn up. Consistent with
the forecast was a rise in market interest rates initially,
followed by a gradual decline.
In the light of the new information, the prevailing view was
that the risks and uncertainties of the winter forecast were
significant and going in both directions. The board members
agreed that an interest rate cut was not on the horizon. There
was debate on whether to raise rates or leave them at their
current levels. Aleš Michl preferred to keep them unchanged and
said that the Board would reassess the data at the next meeting
and consider whether to keep interest rates unchanged or raise
them. For Karina Kubelková, the overall message of the new
information was a cautionary raised finger, but she did not find
sufficient support for a rate hike at the moment. According to
Jan Procházka, too, the new information did not yet force the
central bank to reconsider its current strategy of keeping
interest rates unchanged. Any change would be illegible to the
financial and corporate sectors. However, if significant
inflationary factors were to coalesce as a result of a change in
the Fed’s or ECB’s strategies and a greater degree of labour
market overheating were to be confirmed, he would vote for a
rate hike at the next monetary meeting. Jan Kubícek would
currently regard a CNB policy rate hike as a signal, but not one
which would actually affect loans, aggregate demand or
inflation. Moreover, such a signal might not be understood and,
given the current jitters on the financial markets, could
paradoxically lead the koruna to depreciate. Conversely, Tomáš
Holub proposed to raise interest rates, as he viewed the current
risks as generally inflationary, or speaking in favour of
somewhat tighter monetary policy not only in relation to the
current stance, but also in relation to the winter forecast,
which was consistent with higher interest rates.
Faster wage growth in a tight labour market was identified
as one of the upside risks to inflation. According to Karina
Kubelková, with better-than-expected economic and labour market
developments, the domestic demand pressures could be stronger
and longer-lasting at the forecast horizon. Jan Procházka
agreed. According to Eva Zamrazilová, the only warning sign was
the wage growth in industry in January, but the time series of
wages was very volatile, so it was not possible to draw strong
conclusions about the risk of a wage-price spiral from a single
figure. She considered the information on the projected wage
growth of only 5% in the public sector in 2023 to be an
important signal, and the wage expectations of financial market
analysts and firms were also not a cause for concern. Jan Frait
expected that firms would encounter certain barriers preventing
them from continuing to increase their selling prices and would
eventually have to start limiting cost growth, including wage
growth. Tomáš Holub described the observed wage growth as
incompatible with meeting the 2% inflation target in the medium
term. In his view, the CNB should react preventively to the risk
of a wage-price spiral, as an ex post response would be
unnecessarily costly for the economy.
A large part of the debate was devoted to the effectiveness
of monetary policy transmission through the interest rate
channel. According to Eva Zamrazilová, it was clearly functional
for households and was being reflected in a dramatic decline in
new loans. However, the dominant part of domestic corporate
sector financing was not under the control of domestic monetary
policy, as firms were drawing on resources within multinational
groups, direct foreign currency financing from abroad, or
cheaper foreign currency loans from domestic banks. It was
therefore important to control the exchange rate channel. A
strong koruna was also preferred by Aleš Michl. Karina Kubelková
saw a strong currency as a bonus in the fight against inflation
and not as a cornerstone of monetary policy, which should be
based primarily on rate setting. According to Jan Procházka,
too, interest rates remained the main monetary policy
instrument, and their current level – together with the
anti-inflationary exchange rate of the koruna – was sufficient
to return inflation to the target at the monetary policy
horizon, given the information available so far. However, with
the exception of the exchange rate channel, the ability of the
remaining transmission channels to transmit further interest
rate increases to the real economy was limited in the current
conditions. According to Jan Frait, the Czech private sector was
not overleveraged, so an increase in interest rates would not
have dramatic effects associated with increased debt service.
Due to the relatively high incidence of clients fixing interest
rates for longer periods, the previous increases in yields on
the financial market had been relatively slow to feed through to
loan repayments.
The discussion also touched on inflation expectations. For
Tomáš Holub, their unanchoredness, together with wage
developments in a tight labour market, represented the main
upside risk to inflation. According to Karina Kubelková, the
risk of inflation expectations becoming unanchored was growing
over time and should not be downplayed; it could play a more
significant role in decision-making at future monetary policy
meetings than it had so far. Jan Procházka said that financial
analysts’ inflation expectations had already decreased
noticeably, as had those of households, whose concerns about
rising prices had fallen to their lowest level since 2016. Only
the inflation expectations of firms remained elevated, including
at the three-year horizon. This was probably one of the factors
causing the persisting labour market tightness and the resulting
wage pressures. Eva Zamrazilová argued that analysts’ inflation
outlooks and consumers’ inflation concerns were diminishing and
there were visible signs of future price stability.
The Board also discussed some other risks. Aleš Michl
emphasised that a reduction in the government budget deficit
would be useful in the fight against inflation, as it would mean
less money circulation and lower inflation. He would welcome it
if the government had the ambition to balance the budget as soon
as possible – this would substantially reduce inflation, and
quickly. Karina Kubelková identified the effect of fiscal policy
as a significant negative risk. Jan Kubícek mentioned food
prices, whose decoupling from prices in nearby countries was
striking, and also pointed to energy prices, where capping could
paradoxically act as a brake on lowering inflation. Tomáš Holub
saw a risk in pricing by firms, which have so far been
successful in passing on their higher costs to customers, and
have thus increased their profit margins. He regarded
insufficiently tight monetary policy and inflation staying above
the target next year as a far greater threat than the risk of
excessively tight monetary policy.
The current turmoil in the financial markets following the
collapse of several US banks and the problems of European banks
was identified as a new uncertainty. According to Karina
Kubelková, this uncertainty was associated with a higher
probability of volatility of the koruna exchange rate and hence
a possible significant depreciation of the koruna. On the other
hand, the stability of Czech banks was not at risk and,
according to the CNB’s statutory mandate, financial stability is
as important as price stability. Jan Procházka also emphasised
that thanks to the CNB’s proactive microprudential and
macroprudential supervision, Czech banks were not at risk of
getting into difficulty. Jan Frait assessed the impacts of the
problems of banks in other countries as uncertain, but expected
that they would lead to a tightening of lending standards and,
ultimately, to a reduction in global inflationary pressures.
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%. Six members
voted in favour of this decision: Aleš Michl, Eva Zamrazilová,
Jan Frait, Karina Kubelková, Jan Kubícek and Jan Procházka.
Tomáš Holub voted for increasing rates by 0.25 percentage point.
The Czech National Bank will continue to prevent excessive
fluctuations of the koruna.
(Reporting by Jason Hovet)
