“Banco de la República’s board decides unanimously to begin normalizing monetary policy

This decision was based on the following considerations:

• A recovery in economic activity that was interrupted by roadblocks and a third wave of COVID-19 in the second quarter was restored in the third quarter. A strengthening of demand both domestically and among Colombia’s major trade partners would be expected to encourage economic dynamism over the rest of the year, with GDP growth now projected at 8.6% in 2021 and 3.9% in 2022. The higher-than-expected forecasts suggest that excess productive capacity could be closed more quickly than previously anticipated.

• Annual inflation continued on an upward trajectory in August, reaching 4.4%; core inflation (CPI excluding food and regulated items) reached 2.3%. The increase can be explained in large part by domestic and international supply shocks that are expected to be transitory but whose durations may vary. The partial reversion of some price relief measures, amid more dynamic demand and a reduction in excess capacity, would also be a factor.

• The persistence of external shocks, indexation to higher inflation rates on some prices, and a faster-than-expected closure of the output gap have led the technical staff to revise its inflation forecasts upward to 4.5% for the end of 2021 and 3.5% for the end of 2022. Expected inflation has increased, though in the medium term remains close to the target. The increased persistence of supply shocks and their upward effects on prices could distance expectations from the target rate.

• The more positive performance of demand relative to supply has been reflected in an increase in the current account deficit, which according to the technical staff’s most recent estimates will reach 5.0% of GDP at the end of 2021, higher than the 3.6% deficit in 2020. This can be explained in large part by a greater trade imbalance on goods and services associated with a significant increase in imports compared to exports. Capital flows, including foreign investment, will provide the primary source of financing, underlining the importance of macroeconomic stability.

• In reviewing the balance of risks the board of directors was cognizant of the significant amount of uncertainty surrounding these forecasts, as well as of the remaining risk of the COVID-19 pandemic once again worsening and affecting recovery in domestic and international demand. The board also recognized the risk of deviation in expected inflation compared to the target becoming a persistent phenomenon that could lead to indexation at higher rates of inflation.  “

At its meeting today, the Bank Board of the Czech National Bank increased the two-week repo rate by 75 basis points to 1.50%. At the same time, it increased the discount rate to 0.50% and the Lombard rate to 2.50%. Five members voted in favour of this decision and two members voted for leaving rates unchanged.

This decision of the Bank Board is underpinned by the summer macroeconomic forecast and by an assessment of information obtained since it was prepared. Consistent with the forecast is a rise in market interest rates from the middle of this year onwards. The Bank Board assessed the risks and uncertainties of the summer forecast as being markedly inflationary and hence requiring a faster rise in interest rates compared with the current forecast. The pace of further tightening of monetary policy will be conditional on future developments and on the message of the autumn forecast.

The current outlook for foreign industrial producer price inflation has been revised markedly upwards, especially for the near future. This is due to persisting disruptions to material and component supplies and high global demand for the production of the industrial sector. Along with rising prices of electricity and gas on commodity exchanges, this will also lead to an increase in the outlook for consumer price inflation this year and the next. Expected GDP growth in the effective euro area is slightly higher this year. The outlook for still low foreign interest rates is unchanged.

The outlooks for the Brent crude oil price and the euro-dollar exchange rate also remain almost unchanged from the assumptions of the current forecast.

So far in Q3, domestic inflation has been visibly above the 3% upper boundary of the tolerance band around the CNB’s inflation target. Annual consumer price inflation was higher than forecasted in July and accelerated significantly further in August, exceeding the forecast by one percentage point. The main factor underlying this was a further unexpected strong rise in core inflation. It was due primarily to increasing growth in the cost of owner-occupied housing and rising prices in the reopened services sector. However, goods prices, including food prices, also accelerated. Fuel prices continued to rise apace year on year, in line with the forecast. Administered price inflation remained subdued, but the current forecast expects it to rise sharply in the autumn on the back of increasing prices of electricity and natural gas for households. According to the summer forecast, inflation will return towards the 2% target next year, aided by this year’s tightening of monetary conditions. However, there are significant upside risks to this inflation outlook, especially for the next few quarters, as newly available information points to unexpectedly strong inflation pressures from the domestic and foreign economy.

The Czech economy returned to growth in Q2. This was due mainly to an easing of most pandemic measures. The pace of economic recovery lagged only slightly behind the CNB’s forecast. The deviation was due almost exclusively to a smaller contribution of net exports. The worse export performance stems from the overloading of global production and supply chains, which led to forced restrictions of the output of Czech industry. Government consumption was also slightly lower than forecasted, despite still recording solid growth. By contrast, household consumption was well above the forecast. Gross capital formation was also slightly higher, due almost exclusively to higher additions to inventories. According to the current forecast, the Czech economy will grow by 3.5% this year and pick up slightly further next year.

Industrial production growth slowed further in July. This was due to labour shortages and the above disruptions to material and component supplies, which are also fostering a rapid rise in prices of industrial production inputs and outputs. Growth in retail sales also slowed in July, but it remains high despite a slight decrease in sales in the automotive segment. Growth in construction output remains muted.

The labour market, which did not cool too much during the pandemic, has started to show clear signs of renewed overheating in recent months. Unemployment has been falling faster than forecasted in recent months, and the reopened services sector has been facing frequent shortages of skilled employees. Wage growth lagged slightly behind the forecast in Q2, owing to somewhat lower wage growth in market sectors. However, this was partly offset by slightly higher-than-expected wage growth in non-market sectors.

The koruna-euro exchange rate was almost as forecasted on average in July–September. The koruna started to appreciate gradually in early September on market expectations that the interest rate differential would widen more significantly than previously expected. According to the current forecast, the koruna will continue to firm gradually, strengthening beyond CZK 25 to the euro in late 2021 and early 2022.

The summer forecast was drawn up in an environment of still elevated risks and uncertainties. To sum up its materialisation, economic growth and average wage growth lagged only slightly behind the forecast in Q2. The share of unemployed persons was somewhat lower during the summer months than in the current forecast. By contrast, inflation was markedly higher in August. In this context, we can already state now that our autumn forecast will contain a sizeable increase in the inflation outlook, especially in the short run.

The three large banks are strong, their capital and liquidity are well above regulatory minima, and they have ready access to liquidity in both krónur and foreign currencies. As a result, they are highly resilient.

In recent months, the rapid rise in house prices has gone hand-in-hand with increased household debt. Therefore, with the aim of containing long-term systemic risk, the Financial Stability Committee (FSN) has decided to adopt rules on maximum debt service-to-income (DSTI) ratios, as is provided for in Article 27 of the Act on Mortgage Lending to Consumers, no. 118/2016. In general, the maximum DSTI ratio shall be 40% for first-time buyers and 35% for all other borrowers. The ratio shall be calculated based on a specified maximum loan maturity. Lenders are granted an exemption from the rules for up to 5% of the total amount of new mortgage loans issued each quarter.

Uncertainty about financial institutions’ position has receded, and loan quality has improved. As a result, financial institutions are resilient enough to lend to households and businesses. In the FSN’s opinion, the scope it had granted to financial institutions after the pandemic reached Iceland, in the form of a reduction in the countercyclical capital buffer (CCyB), is no longer needed. The FSN is of the view that the combination of rapidly rising asset prices and increased household debt has already raised cyclical systemic risk to at least the pre-pandemic level. As a consequence, in view of the build-up of cyclical systemic risk, the FSN has decided to increase the CCyB from 0% to 2%. This decision will take effect twelve months from now, in accordance with the rules that apply to the countercyclical capital buffer. The CCyB proved its worth during the pandemic, and the Committee has given consideration to what a neutral buffer value should be in the future.

The FSN has concluded its annual review of the capital buffer for systemic importance (O-SII buffer) and has decided to hold it unchanged at 2% for all exposures at the parent company and the group level. The review of systemically important financial institutions, carried out in accordance with European Banking Authority methodology, confirmed the systemic importance of Arion Bank hf., Íslandsbanki hf., and Landsbankinn hf.

In view of recent cyberattacks and operational disruptions in payment intermediation, the FSN urges operating entities to examine the security of their systems and take steps to ensure business continuity. The Committee is of the view that, alongside payment cards, Iceland needs to have in place a domestic electronic retail payment solution that is independent of international financial infrastructure. This will bring increased operational security and efficacy. The Central Bank is preparing for the implementation of such a solution.

The Financial Stability Committee will continue to use every tool at its disposal to safeguard financial stability in Iceland.”