The meeting opened with a presentation of the third
situation report and the new macroeconomic forecast. According
to this forecast, inflation would continue to decrease in the
months ahead, dropping to single digits in the second half of
this year. It would slow markedly further next year and be close
to the CNB’s 2% target at the monetary policy horizon.
Consistent with the baseline scenario of the forecast was market
interest rate stability initially, followed by a gradual
decline.
The Bank Board assessed the risks and uncertainties of the
outlook as being significant and going in both directions.
Expansionary fiscal policy was having an inflationary effect.
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. 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.
At the start of the Board’s discussion, Aleš Michl
summarised that domestic monetary conditions were now the
tightest in 20 years, interest rates were at a level that was
dampening domestic demand pressures, and household consumption
had fallen for six quarters in a row. House prices had also
started to come down. Jan Frait said that ex ante real interest
rates were positive according to both the CNB’s forecast and
analysts’ expectations, and monetary policy appeared to be
relatively tight in terms of lending to the private
non-financial sector as well. Both Aleš Michl and Eva
Zamrazilová also highlighted the positive significance of the
strong koruna. Karina Kubelková and Jan Procházka, on the other
hand, pointed to the resilience of the economy and the labour
market, the fact that they had cooled only slightly in recent
months, and the current recovery in sentiment, which could
complicate a return to the 2% inflation target. Jan Frait also
saw inflationary risks from the real economy, as he felt the
economy was getting into a similar situation as in 2016 and 2017
– the pessimistic mood was ending, the labour market was
overheated, corporate profits were strong and bankruptcies were
almost non-existent.
The Bank Board devoted a substantial part of its discussion
to the labour market and wage growth. Jan Kubícek noted that the
latest data on the collection of social insurance indicated
lower-than-forecasted wage growth at the start of this year and
pointed out that despite the high nominal wage growth, real
wages were still falling at an unprecedented rate. The current
nominal wage growth may therefore not be inflationary. Eva
Zamrazilová viewed the labour market as overheated but
considered the overall signals from the economy to be mixed
given the negative output gap and noted that wage growth in the
CNB’s new forecast was at the upper end of the estimates of this
variable made by domestic analytical institutions. Karina
Kubelková expressed concern about the risk of a wage-price
spiral, the partial materialisation of which was already being
signalled by the available analyses. Tomáš Holub agreed, adding
that, despite the significant real decline in wages, the nominal
wage growth of around 10% represented a further increase in
firms’ costs, one which could feed through to prices and thus
exacerbate the price spiral. From his point of view, the main
monetary policy task was to prevent such a development, and with
inflation in double digits, this took absolute priority over any
impacts of an interest rate increase on the real economy in a
situation of very low unemployment. Jan Procházka also mentioned
the long-term tight labour market and the risk of it having
further inflationary effects as a result of structural changes
in the coming years.
For Aleš Michl, the main inflation risk going forward was
now fiscal policy. In this context, Eva Zamrazilová stated that
fiscal consolidation was a necessary condition for meeting the
inflation target in the long term. According to Jan Procházka,
the likelihood that fiscal policy would help fight inflation had
decreased significantly since the last meeting. Even if the
government did ultimately prepare a consolidation plan, given
the length of its implementation and transmission, it could not
be taken too much into account in the current monetary policy
decision. Karina Kubelková agreed. For her, inflationary fiscal
risks persisted, especially those relating to the impacts of the
compensation paid as a result of the caps on energy prices and
the possible annulment of lower pension indexation by the
Constitutional Court. Against this, Jan Kubícek argued that some
form of fiscal consolidation would occur and should be taken
into account, even though its specific form was not yet known
and its effects thus could not be quantified precisely. He did
not consider the current evolution of the state budget to be
unfavourable enough to be, for him, an impetus to change the
monetary policy stance. For Tomáš Holub, the planned fiscal
consolidation represented the only tangible anti-inflationary
risk of the baseline scenario of the forecast, and, even then,
only if a large part of the consolidation did not take place
through an increase in indirect taxes. Although changes to
indirect taxes in the Czech Republic do not normally have
significant second-round price effects, he would be concerned
about them at a time of double-digit inflation. Eva Zamrazilová
agreed with the risk of an increase in indirect taxes having
secondary effects.
Another topic discussed was inflation expectations. Tomáš
Holub noted that although the elevated inflation expectations
had not had much effect on households’ consumption behaviour,
their role in other parts of the economy, especially in the
areas of corporate pricing and wage growth, should not be
underestimated. For Karina Kubelková, the risk of inflation
expectations becoming unanchored persisted. In contrast, Eva
Zamrazilová argued that the current practice of measuring
inflation expectations was subject to numerous uncertainties;
moreover, there were no concrete estimates of the propagation of
inflation expectations to future inflation, so the current state
of knowledge in this area did not provide a reliable basis for
monetary policy decision-making. Jan Kubícek also pointed to the
uncertainties associated with measuring and interpreting
inflation expectations. Jan Frait pointed out that in our
geographical area, households also probably form their inflation
expectations on the basis of public finance deficits. This had
been clearly visible in 2021 after the launch of expansionary
fiscal programmes, when people started buying property en masse
in an attempt to hedge against future inflation. The current
deficits in the hundreds of billions of koruna, although not
dramatically high relative to GDP, could undermine the stability
of inflation expectations in this respect.
The board members agreed that an interest rate cut was not
on the horizon. There was a debate on whether to raise rates or
leave them at their current level. For Eva Zamrazilová, the
impetus for raising interest rates would be
faster-than-forecasted wage growth or a slower-than-forecasted
decline in inflation, or potentially insufficient consolidation
of public finances. Jan Kubícek favoured the scenario of keeping
interest rates unchanged for longer. For Karina Kubelková, the
risks had shifted in the inflationary direction, so a rate hike
was justified. She would see a 0.25 percentage point increase as
merely a signal and less effective than a more forceful rate
hike. Tomas Holub agreed that an increase of 0.25 percentage
point would act more as a signal, but given what he felt to be
the upside balance of the risks of the forecast, even such a
rate hike made sense. Jan Procházka said the expected fall in
inflation was due in large part to the fading of the rise in
energy import prices and expressed the view that if monetary
policy had not responded fully to their rise last year (for
example through a shift in the monetary policy horizon), then it
did not have to respond fully in the opposite direction when the
shock was fading. For this reason, and taking into account the
upside perception of the risks, he expressed a preference for a
higher rate path than in the baseline scenario of the forecast.
Jan Frait said that a 0.25 percentage point rate increase would
act more as a signalling tool. A stronger koruna, or a
longer-term nominal appreciation of the koruna, as well as some
increase in longer rates, could contribute more to reducing the
risk of inflation settling at a higher level in the longer term.
This could be aided by a tightening of monetary policy abroad,
which was still relatively easy, especially in the euro area.
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%. Four members voted in favour of this
decision: Aleš Michl, Jan Frait, Eva Zamrazilová and Jan
Kubícek. Two members, Karina Kubelková and Jan Procházka, voted
in favour of a 0.50 percentage point rate increase in the first
round of voting, and then supported a motion to raise rates by
0.25 percentage point in an effort to find a consensus. In the
second round, three members, Karina Kubelková, Jan Procházka and
Tomáš Holub, voted for increasing rates by 0.25 percentage
point. This ratio of votes (four members in favour of no change
and three members in favour of a 0.25 percentage point increase)
was then communicated at the press conference following the
monetary policy meeting. The Czech National Bank will continue
to prevent excessive fluctuations of the koruna.
(Reporting by Jason Hovet)
PRAGUE, May 12 (Reuters) - Following is the full text of
the minutes from the Czech central bank (CNB) board's May 3
monetary policy meeting, released on Friday.
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