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

26 Mar 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. In line with this, the Czech National Bank still stands ready to intervene automatically, i.e. without the need for an additional decision of the Bank Board, and without any time or volume limits. 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 based on the message of the current forecast and on an assessment of newly available information obtained since the current forecast was prepared. 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 Bank Board assesses the risks to the current forecast at the monetary policy horizon as being anti-inflationary. In this situation, the Bank Board repeated 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 remains 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.

Domestic inflation was slightly above the forecast in February, but remains close to zero. This mainly reflects the drop in oil prices, which is a positive supply shock boosting Czech economic growth. It still applies that 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 in line with the current forecast.

As expected, annual growth of the Czech economy slowed to 1.5% in 2014 Q4. The slight downward deviation from the forecast was due to lower-than-expected additions to inventories. By contrast, the other GDP components rose faster than forecasted. Following a temporary slowdown in late 2014 and early 2015, GDP growth will, according to the forecast, accelerate gradually to 3% in 2016, 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.

According to new information on developments abroad obtained from the March Consensus Forecasts survey, the outlook for external demand has increased slightly for this year, while the outlooks for consumer price inflation and especially for producer price inflation in the euro area have decreased. This primarily reflects the incorporation of the oil price decrease in late 2014 and early 2015. Expected inflation in the euro area next year is broadly unchanged. The current market outlook for foreign interest rates has been slightly lowered again for this year and the next, nearing zero levels.

The market outlook for Brent crude oil prices has risen by about five dollars a barrel. This is due partly to a recent upward correction of oil prices, stemming chiefly from an expected decline in oil production this year. As regards oil prices in euro terms and, in turn, koruna terms, the weaker outlook for the exchange rate of the euro against the dollar is acting in the same direction over the entire forecast horizon. The weaker outlook for the euro is due to the additional easing of monetary policy by the European Central Bank in a situation where the US central bank is, conversely, already preparing for the first increase in its policy rates. However, the predictions of foreign analysts entering our forecasts do not yet fully reflect the benefits to the European economy of the European Central Bank’s measures and the significant weakening of the euro against the dollar.

The continuing domestic economic growth is fostering a further improvement in some labour market indicators. The growth in total employment exceeds the expectations of the forecast, with growth in the number of employees accelerating, even when converted into full-time equivalents. The number of job vacancies is also increasing and reached its highest level in six years in February. The seasonally adjusted general rate of unemployment fell further at the close of last year, in line with the forecast, and the share of unemployed persons declined faster than expected in the first few months of this year. On the other hand, wage growth in the business sector lagged significantly behind the forecast in 2014 Q4. Moreover, the January figures for industry and construction do not as yet point to any marked recovery in wage growth either. However, the total volume of wages is not lagging so significantly behind the forecast and is continuing to foster growth in household consumption. We continue to view wage developments as one of the key indicators of how much the current low-inflation environment will affect prices in the longer term.

Industrial production continued to show solid growth in late 2014 and early 2015, and construction output has also been rising – with some fluctuations – in recent months. Retail sales are still increasing rapidly in both the automotive segment and the segment of other non-food products. Their growth picked up further at the start of this year.

Prices in manufacturing began to fall year on year in November 2014 and their decline deepened in subsequent months. However, this was due to the dramatic fall in oil prices. The year-on-year decrease in agricultural producer prices intensified as well in late 2014 and early 2015. Price growth in market services almost came to a halt in year-on-year terms in February 2015. However, prices of construction work continued to rise modestly.

To sum up the important facts about recent developments in the Czech economy, annual GDP growth was slightly below the forecast at the end of last year. By contrast, inflation was slightly higher in February. The average wage rose considerably more slowly than expected in 2014 Q4. The seasonally adjusted share of unemployed persons declined slightly faster than forecasted.

The Bank Board assessed the balance of risks to the current forecast as being anti-inflationary at the monetary policy horizon. Of the three factors which the Bank Board identified at its previous meeting as being crucial in preventing adverse second-round effects of the oil price decrease, domestic wages and the koruna-euro exchange rate have so far moved in the anti-inflationary direction. The increased uncertainty about the overall expected benefits of the measures adopted by the European Central Bank for developments in the euro area and the Czech economy, which is the third of the said factors, persists. In this situation, the Bank Board repeated 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. In addition, the Bank Board emphasised again that it was ready to move the level of the exchange rate commitment if needed. Given the aforementioned anti-inflationary balance of risks to the forecast, the probability of such a step has increased compared to the previous Bank Board meeting.