Minutes of the Bank Board Meeting on 26 March 2020

Present at the meeting: Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Vojtěch Benda, Oldřich Dědek, Tomáš Holub, Aleš Michl.

The meeting opened with a presentation of the second situation report containing an extraordinary update of the CNB’s macroeconomic forecast, which served as a basis for the Board’s decision. It was complemented by additional relevant analyses and considerations from the financial stability area and information about the situation in each segment of the financial market and financial sector in relation to the coronavirus pandemic.

The board members said repeatedly that the rapid changes in the situation implied unprecedented uncertainty in the creation of future economic outlooks. Any estimates of macroeconomic variables were changing as the situation developed and it was very difficult to pin them down to specific numbers. Decision-making at this turbulent time was therefore based on economic intuition as well as model-based projections.

The Board agreed on the need to lower the CNB’s key interest rates by more than the standard step of 0.25 percentage point. While the risk of error with an immediate rate cut was regarded as virtually zero, the degree to which rates should be lowered was discussed. There were considerations of reducing rates by 0.50 percentage point (Tomáš Nidetzký, Oldřich Dědek), as the market was expecting such a step and there was no need to surprise it with a larger cut in the current turbulent conditions. The CNB would thus send out another clear signal that it was helping to stabilise the economy in these difficult times and was simultaneously leaving itself room for the necessary stimulation in the future in the case of this instrument. The other board members were inclined towards stronger action, pointing, among other things, to the immediate interest cost saving this would generate for firms hit by current cash shortages (Tomáš Holub, Aleš Michl). In the end, the Board reached a consensus on the levels at which interest rates should be set.

There was also an in-depth discussion of the exchange rate, which had depreciated significantly as a result of the substantially worse economic outlook and financial market panic. On the one hand, this constituted a desirable easing of the monetary conditions that was partially weakening the anti-inflationary pressures and simultaneously mitigating the anti-growth impacts of the coronavirus epidemic. On the other hand, a majority of the board members concurred that excessive depreciation could have negative side effects. If, therefore, the exchange rate levels were to put price and financial stability at risk, it would be appropriate to dampen excessive exchange rate swings using foreign exchange interventions. The ideal solution would be a combination of interest rate cuts and potential foreign exchange interventions that would help stabilise the economy to the maximum possible extent and thus contribute to fulfilling the CNB’s mandate. Reducing rates in relatively large steps and conducting simultaneous interventions against the weakening of the koruna did not at first glance constitute a traditional combination of monetary policy actions, but in the present extraordinary situation it would be an appropriate response consistent with inflation targeting (Tomáš Holub, Vojtěch Benda, Tomáš Nidetzký). Oldřich Dědek and Marek Mora agreed, noting that the sale of the CNB’s international reserves would be aimed primarily at ensuring financial stability and that making a profit would be just a side effect. Conversely, Aleš Michl said that he regarded the exchange rate as a market variable and did not agree with any interventions and sales of international reserves and that, on the contrary, there was a need to invest the reserves and earn interest and dividends.

Part of the debate was devoted to ways of further supporting the Czech economy amid the coronavirus pandemic and related preventive measures. According to Jiří Rusnok, the macroeconomic starting conditions were favourable (sufficient capital buffers in the banking sector, low national debt, etc.). The other board members also welcomed the fact that expansionary fiscal policy was having a countercyclical effect in this extraordinary situation. The Czech government had a strong fiscal starting position and the plans it had approved and announced were welcome. Financing the budget measures was contingent on keeping the Czech government bond market functioning. The approval of the amendment to the Act on the CNB would help support the functioning of markets. The amendment broadened the set of financial instruments and eligible counterparties for central bank operations and thus gave the CNB more ways of supplying the necessary liquidity to the financial system in order to maintain its stability. The sharp downturn in economic activity could be expected to have an adverse effect on the quality of banks’ loan portfolios. The board members concurred that a gradual release of the countercyclical capital buffer could – in combination with the postponement of dividend payments announced by banks – support banks’ ability to finance the real economy. According to a majority of the board members, people and businesses primarily needed cash at the moment. It would therefore be appropriate, by agreement with the government and banks, to declare a loan repayment holiday lasting at least three months.

The Board also agreed that given the high uncertainty regarding future economic developments, it regarded it as prudent to extend its recommendation to halt dividend payouts to insurance companies and pension management companies in addition to banks.

At the close of the meeting the Board unanimously lowered the two-week repo rate by 75 basis points to 1.00%. At the same time, it lowered the Lombard rate to 2.00% and the discount rate to 0.05% with effect from 27 March 2020. The Board also lowered the countercyclical capital buffer rate to 1.00% with effect from 1 April 2020. In view of the extraordinary nature of the present situation, the Board announced that it was prepared to lower interest rates further and adopt measures to address any potential liquidity problems in the Czech financial sector. The Board emphasised that the CNB stood ready to react to any excessive exchange rate fluctuations using its instruments, in line with the managed float exchange rate regime. Further monetary and financial stability policy measures could be adopted as needed, including at an extraordinary meeting of the Board.

Author of the minutes: Jan Syrovátka, Monetary Department