Minutes of the Bank Board meeting on 3 May 2023

Updated on 12 May 2023, 10:40:26 a.m.

Present at the meeting: Aleš Michl, Jan Frait, Eva Zamrazilová, Tomáš Holub, Karina Kubelková, Jan Kubíček, Jan Procházka.

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 Kubíček 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 Kubíček 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 Kubíček 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 Kubíček 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 Kubíček. Two members, Karina Kubelková and Tomáš Holub, 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.

Author of the minutes: Jan Brůha, Monetary Department