Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2015 > Statement of the Bank Board for the press conference

Statement of the Bank Board for the press conference following the monetary policy meeting

5 Feb 2015

At its meeting today, the Bank Board of the Czech National Bank decided unanimously to keep interest rates unchanged at technical zero. The Bank Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna so that the exchange rate of the koruna is kept close to CZK 27 to the euro. The asymmetric nature of this exchange rate commitment, i.e. the willingness only to intervene against appreciation of the koruna below the announced level, is unchanged.

This decision is underpinned by a new macroeconomic forecast. The forecast expects market interest rates to be flat at their current very low level and the koruna exchange rate to be used as a monetary policy instrument until the end of 2016, i.e. over the entire forecast horizon. The subsequent return to conventional monetary policy will not imply appreciation of the exchange rate to the level recorded before the CNB started intervening, as the weaker exchange rate of the koruna is in the meantime passing through to domestic prices and other nominal variables. The forecast expects both headline and monetary policy-relevant inflation to be at zero or slightly negative levels in 2015 and then rise to the 2% target in 2016. The Bank Board considers the risks to the new forecast to be balanced, although the degree of uncertainty has increased. In this situation, the Bank Board stated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016. The Czech National Bank stands ready to move the level of the exchange rate commitment if there were to be a long-term increase in deflation pressures capable of causing a slump in domestic demand, renewed risks of deflation in the Czech economy and a systematic decrease in inflation expectations.

As regards the assumptions of the forecast regarding the external environment, euro area demand growth should accelerate this year and the next. The decrease in energy commodity prices is reflected in an outlook for continuing subdued growth in industrial producer prices, which will not start rising until the second half of this year. They will increase at a stronger pace in 2016 as the economic recovery gathers pace and the effect of the slump in oil prices dissipates. Euro area consumer price inflation will also rise only slightly from its negative current levels owing to slowly recovering demand. The European Central Bank responded to the subdued inflation by further easing monetary policy. This is reflected in the outlook for foreign interest rates, which is close to zero until the end of 2016, and a weakening of the euro against the dollar. However, the January measures of the European Central Bank have yet to pass through fully to the outlooks for euro area economic activity and inflation, so in this respect the current situation is associated with an increased degree of uncertainty.

The price of Brent crude oil has fallen to a very low level and will rise only slightly in the period ahead according to the forecast assumptions. With regard to koruna prices of energy, the low oil price will be partly offset over the entire forecast horizon by a continuing weakening of the euro against the US dollar. Overall, the external environment outlook is having a marked anti-inflationary or even deflationary effect on the forecast for the Czech economy. At the same time, however, the slump in oil prices is a significant pro-growth impulse.

Owing to the decline in energy prices and a temporary decrease in food prices, headline inflation will be exceptionally muted this year. As a result of the expected sharp fall in fuel prices and administered prices, which will gradually reflect the fall in energy commodity prices on global markets, inflation will temporarily turn slightly negative in Q3. However, headline inflation will increase next year (which is relevant for the decision-making on the current monetary policy settings) and reach the 2% target in the second half of 2016. This is due to an expected unwinding of the year-on-year fall in energy commodity prices and of the deflationary tendencies in the euro area, combined with a continuing inflationary effect of the domestic economy.

Monetary policy-relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will be somewhat lower than headline inflation until the end of 2015 and will therefore be slightly negative. Core inflation – also called adjusted inflation excluding fuels – will fall temporarily from its current levels exceeding 1%, but will remain positive and start rising again at the end of this year. Together with the unwinding of the fall in fuel prices and food prices, this will contribute to a return of monetary policy-relevant inflation to the 2% target at the end of the monetary policy horizon.

Following a temporary slowdown in late 2014 and early 2015, GDP growth will accelerate gradually to 3% in 2016. Domestic economic growth will be boosted by a recovery in external demand, still easy monetary conditions, the positive cost effect of low oil prices and this year also a recovery in government investment. The continuing economic growth will lead to a further improvement in the labour market situation. The number of employees will continue to rise, while the unemployment rate and the number of unemployed persons will decrease further. Wage growth in the business sector will increase over the next two years and wage growth in the non-business sector will also pick up pace significantly this year.

The forecast expects market interest rates to be flat at their current very low level and the koruna exchange rate to be used as a monetary policy instrument over the entire forecast horizon.

The forecasts for headline and monetary policy-relevant inflation are considerably lower than in the previous prediction over the entire forecast horizon owing to the slump in world prices of energy commodities, which is reflected in a lower outlook for domestic administered prices and net inflation. Despite lower external demand, GDP growth has been revised slightly upwards for this year and the next, mainly because of the favourable effect of the significantly lower oil prices. Expected nominal wage growth in the business sector has shifted lower as a result of slower observed wage growth in 2014 and more subdued future inflation. By comparison with the previous forecast, expected domestic interest rates are considerably lower next year, reflecting the extension of the expected use of the exchange rate as a monetary policy instrument in reaction to anti-inflationary pressures from abroad.

The Bank Board considers the risks to the new forecast to be balanced. However, a higher degree of uncertainty is associated with the effects of the measures adopted by the European Central Bank on the euro area outlook and also with the future evolution of domestic wages in an environment of very low inflation and a positive cost shock in the shape of the slump in oil prices.

The Czech National Bank’s analyses confirm that the slump in oil prices is a positive supply shock which will boost Czech economic growth in 2015. In line with its previous communication, the Czech National Bank will not respond to the first-round effects of this shock on the price level. This means it is prepared to tolerate inflation moving temporarily close to, or even slightly below, zero this year. Next year, however, the first-round effects of this shock will unwind, and it remains the Czech National Bank’s intention to ensure that inflation returns towards the 2% target. Therefore, it will be important to prevent any second-round effects of the current slump in energy commodity prices, which would be reflected in inflation in the longer run.

The Bank Board therefore again stated that the level of the exchange rate commitment could be moved. From this perspective, the effectiveness of the European Central Bank’s measures to combat deflation, the market evolution of the koruna exchange rate and domestic wage developments will be crucial in the period ahead. The Bank Board also stated that the Czech National Bank would not discontinue the use of the exchange rate until the monetary policy horizon, i.e. before the second half of 2016.