PRAGUE, Jan. 7 (Reuters) – Here is the full text of the minutes of the December 22 monetary policy meeting of the board of directors of the Czech central bank (CNB), released on Friday.
Present at the meeting: Governor Jiri Rusnok, Vice-Governors Marek Mora and Tomas Nidetzky, Board members Vojtech Benda, Oldrich Dedek, Tomas Holub and Ales Michl.
The meeting opened with the presentation of the eighth progress report assessing the achievement of the macroeconomic forecasts contained in the seventh progress report in the light of new information available. In line with the fall forecast, a sharp rise in market interest rates in late 2021 and early 2022 in response to exceptionally strong pricing pressures from foreign and domestic economies. Inflation is currently forecast to rise significantly at the end of 2021 and approach 7% in the first months of 2022, with all of its components contributing to the rise. It would decline gradually over the remainder of 2022, due to, among other things, a firming of the exchange rate and a significant increase in interest rates beforehand. The inflation rate is expected to return to close to the Czech National Bank‘s 2% target over the monetary policy horizon, i.e. end 2022 and early 2023.
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Most board members felt that the new data and information available was markedly inflationary and therefore required a faster increase in interest rates compared to the fall forecast. A majority of board members agreed that the risks included the threat of a weaker anchoring of inflation expectations in an environment of long-standing sharply exceeding the 2% inflation target, a possible faster and more sustainable growth in industrial producer prices abroad, and a potential weakening of the koruna’s exchange rate response to growth in domestic interest rates.
The Council examined in detail the factors influencing inflation. There was consensus that global cost pressures were a major source of domestic price growth. In addition to high commodity and energy prices, these pressures reflected persistent problems in global production chains. However, a majority of the board members, namely Jiri Rusnok, Marek Mora, Tomas Nidetzky, Vojtech Benda and Tomas Holub, also viewed as significant the contribution of strong domestic demand, supported by a long overheated labor market. . Monetary policy has had to respond to these domestic inflationary pressures, the importance of which, moreover, increased over time. Conversely, according to Oldrich Dedek and Ales Michl, the movement of inflation stems from strong pressures on costs from the external environment, which monetary policy has not been able to counteract. Against this, Jiri Rusnok argued that while the CNB’s monetary policy would not directly affect external cost pressures, it could not respond to them either, given their potential to affect domestic inflation.
The Council also discussed inflation in the international context. Oldrich Dedek pointed out that the Czech Republic was not visibly out of step with the rest of the EU in terms of HICP inflation, so there did not appear to be anything specific about domestic inflation. requiring a firm monetary policy response. On the other hand, Tomas Holub, Tomas Nidetzky and Marek Mora noted that inflation in the Czech Republic and the euro area was only superficially similar, as the changes in the VAT had opposite effects, currently reducing the inflation rate. inflation in the national economy and increasing it in the euro zone due to Germany. Moreover, unlike the Czech Republic, the rise in consumer prices in the euro area now largely reflects the rise in energy prices, ie gas and electricity. Czech core inflation, meanwhile, ranked among the highest in the EU, confirming the argument of strong domestic demand pressures stemming from the specific situation of the domestic labor market, to which monetary policy should react. Regarding this argument, OldÅich DÄdek observed that core inflation was largely influenced by strong cost shocks.
The Council also discussed the anchoring of inflation expectations. According to the majority of the board members, there was a significant risk that they would fall away from the inflation target in the current situation. This required a firm monetary policy response. In contrast, Oldrich Dedek said he had no concerns about pegging inflation expectations, given that the three-year analysts’ expected inflation rate was only just above. the 2% target. He added that he saw no sign of a wage inflation spiral in wage negotiations.
During a debate on economic activity, Oldrich Dedek pointed out that GDP growth was mainly driven by household consumption, while investment growth had been significantly lower than expected. At the start of 2022, however, households would face high energy prices, with a very negative impact on consumption. Tomas Holub agrees but nevertheless does not expect the drop in consumption to be enough to reduce inflation. He argued that monetary policy could not count on a slowdown in inflation due to deliberately reduced household consumption.
The Council also discussed the exchange rate of the koruna. Oldrich Dedek linked its recent trend to the marked deterioration in the Czech Republic’s current account, which was covered by a large inflow of short-term capital. He felt that this made the Czech economy more vulnerable. In contrast, Marek Mora said global factors – including the abandonment of risky assets in financial markets – were more important. It has been said several times in the debate that the krone could strengthen with the opening of new investment positions at the start of the year in a situation of very positive interest rate differential. Tomas Holub noted that the Fed’s shift towards tightening could conversely favor a weaker exchange rate. According to Vojtech Benda, if the krone does not strengthen as much as expected against the euro, this would imply the need for a more substantial tightening of monetary policy in the interest rate component.
In the debate on the upside risks to inflation, reference has also been made on several occasions to the inflation of producer prices in the national economy and especially abroad. According to TomÃ¡Å¡ Nidetzky, inflationary pressures in the production sector have remained strong, suggesting a further rise in consumer price inflation. Jiri Rusnok agreed, saying these pressures would be longer lasting due to high energy prices. Another upside risk was the Omicron variant, according to Marek Mora, as it had the potential to prolong supply chain problems and therefore also the effect of increased cost pressures on inflation.
The Council also discussed some downside risks to inflation. Among them, Tomas Holub spoke of the current decline in the price of crude oil on world markets and, in the longer term, the effect of the Fed’s tightening, which would dampen demand, and the future consolidation of public budgets. Marek Mora said the anti-inflationary risks also include the possibility that supply chain issues will dissipate faster than expected, despite the threat resulting from the spread of the Omicron variant. Despite these minor downside risks, a majority of board members agreed that the overall balance of risks to the CNB’s current forecast was markedly inflationary.
At the end of the meeting, the Board decided to increase the two-week repo rate by 100 basis points to 3.75%. At the same time, it increased the discount rate to 2.75% and the Lombard rate to 4.75%. Five members voted in favor of this decision: Jiri Rusnok, Marek Mora, Tomas Nidetzky, Vojtech Benda and Tomas Holub. Two members, Oldrich Dedek and Ales Michl, voted to keep interest rates unchanged.
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Reporting by Mirka Krufova
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