Minutes of the Bank Board Meeting on 24 June 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 fourth situation report assessing the fulfilment of the macroeconomic forecast contained in the third situation report in the light of the newly available information. The forecast had been prepared in unprecedented conditions of a peaking coronavirus pandemic and related huge uncertainty. Its baseline scenario was largely materialising so far, although the published data may be subject to an increased degree of uncertainty. After the fall in domestic market interest rates in May, consistent with the forecast was broad stability of rates in the following quarters.

The board members said that the risks to the inflation forecast at the monetary policy horizon were broadly balanced, although the uncertainty associated with the course of the pandemic was still very high. The board members agreed there was no need to ease monetary policy further in the current situation. In this context, a majority of the board members said that the sharp monetary policy easing adopted at previous meetings had been appropriate and was creating sufficiently accommodative monetary conditions commensurate with the present situation.

The Board discussed core inflation, which had recently been above¹ the forecast. A majority of the board members said that the inflation figures might have been affected by data collection issues at the time of the quarantine measures. It was therefore too early to assess the smaller-than-expected decline in core inflation as a fundamental factor. Tomáš Nidetzký said that the decline in inflation pressures was already showing up in the producer price index, unlike the consumer price index, and that he expected the drop in domestic demand to manifest itself as a decrease in consumer inflation in the future. Oldřich Dědek said that the smaller-than-expected decline in inflation could be connected with some service providers wanting to make up for their previous fall in revenues by raising their prices after the quarantine measures had been lifted.

Jiří Rusnok, Vojtěch Benda and Tomáš Holub said that inflation expectations remained anchored close to the CNB’s target and that there were no deflation risks evident at the moment. In this context, Tomáš Holub also said that any systematic decrease in inflation expectations would imply a need to ease monetary policy further. However, with inflation staying above the target, there was currently no danger of inflation expectations falling 

Tomáš Holub assessed the exchange rate, which had been stronger than forecasted in recent weeks, as a modestly anti-inflationary factor. Marek Mora and Tomáš Holub meanwhile said that owing to the Board’s May decision, market interest rates were lower than the forecast had expected, so the overall monetary conditions were broadly in line with the forecast.

Aleš Michl said that short-term indicators such as electricity consumption were indicating that the Czech economy was now at the trough of its decline. The situation was similar in other countries. Despite this observation, however, the economic outlook was still uncertain.

Tomáš Nidetzký and Tomáš Holub mentioned the persisting risk of a resurgence of the pandemic. However, materialisation of the risk of a second wave could not affect monetary policy, and this risk remained hypothetical. There was therefore no need to change monetary policy for this reason.

Aleš Michl said that in the short run, and with interest rates close to zero, expansionary fiscal policy via higher government and municipal investment was the most suitable instrument for responding to the current crisis. Marek Mora and Tomáš Holub also said that expansionary fiscal policy was currently acting as a stabilising factor for the domestic economy and was thus contributing to the fact that there was no need to ease monetary policy further. Jiří Rusnok, Marek Mora and Tomáš Holub mentioned that fiscal policy was also expansionary in Germany, which is one of the Czech Republic’s key trading partners. The fiscal expansion in Germany could thus favourably affect the Czech economy through trade links.

Vojtěch Benda said that an important factor for the future path of inflation was how much the economic contraction would be reflected in a decline in potential output. If there were a more substantial decrease in potential output, the inflation slowdown could be more modest than predicted by the forecast.

Jiří Rusnok and Marek Mora said that the anti-pandemic measures could increase the barriers to international trade and that this would imply supply-side price pressures in the medium run. Oldřich Dědek mentioned the existence of other risks in the global economy, such as a resurgence of the trade war between the USA and China and a disorderly Brexit. Both posed a risk to the domestic economy as well.

At the close of the meeting the Board decided unanimously to leave interest rates unchanged. The two-week repo rate remains at 0.25%, the discount rate at 0.05% and the Lombard rate at 1%.

Author of the minutes: Jan Brůha, Monetary Department

¹ Corrected on 3 July 2020 at 2.00 p.m. from previous incorrect wording “The Board discussed core inflation, which had recently been below the forecast."