Minutes released Friday from the Czech National Bank's most recent policy meeting make clear the bank stands ready to tighten monetary policy if the ongoing Middle East conflict causes a durable rise in core inflation.
The bank's board voted unanimously, 7-0, on May 7 to hold its principal two-week repo rate at 3.50%. The minutes say that officials expect their June meeting to center on whether it will be appropriate to keep policy unchanged or to raise rates further in response to incoming data.
Participants in the meeting discussed the inflationary implications of the Middle East conflict, which the minutes link to disruptions in oil and gas shipments and to higher fuel prices. While a number of policymakers judged the initial inflation shock from the conflict could be absorbed without an immediate policy response, that assessment was described as becoming less tenable the longer the conflict endures.
Governor Ales Michl is quoted in the minutes as stressing the importance of keeping policy tight and of not underestimating the magnitude of the cost shock. The bank reiterated that it would be prepared to tighten policy should risks to core inflation materialize.
The minutes note that Czech consumer prices rose 2.5% year-on-year in April, an increase of 1.1 percentage points since February. Despite that acceleration, the CNB's projection indicates inflation should remain below the upper 3% boundary of the tolerance band surrounding the 2% target.
Individual board members set out differing emphases on the appropriate path. Jan Prochazka flagged that the bank must be ready to raise rates if the medium-term inflation outlook deteriorates markedly because of second-round effects. Vice Governor Jan Frait suggested that the bank has scope to wait and assess newly arriving data, while Jakub Seidler said the prospect of tolerating the shock without a policy reaction was shrinking as the conflict continued.
Vice Governor Eva Zamrazilova observed in the minutes that the longer the conflict persists, the more likely a policy response becomes. By contrast, board member Karina Kubelkova saw room for the bank to manage through current uncertainties without immediately resorting to a rate increase.
Central bankers at the CNB remain focused on the risk that inflationary pressures could spread through the economy, particularly if higher energy costs translate into rising wages or altered inflation expectations. The minutes underscore the bank's readiness to act should those second-round effects emerge and alter the medium-term inflation path.