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

7 May 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 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 close to zero in 2015 and then rise to the 2% target in 2016. The Bank Board assessed the risks to the new forecast at the monetary policy horizon as being anti-inflationary. In this situation, the Bank Board stated again 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 exchange rate commitment if there were to be a long-term increase in deflation pressures capable, among other things, of causing a slump in domestic demand or a systematic decrease in inflation expectations.

As regards the assumptions of the forecast regarding the external environment, euro area demand growth is expected to pick up this year and the next. The decline in producer prices, reflecting the recent fall in prices of oil and other energy commodities, should fade at the end of this year. Producer prices will then rise slightly. Consumer price inflation will also rise gradually from very low levels owing to 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.

The price of Brent crude oil partly reversed its previous decline and the market outlook is for a further slow increase over the monetary policy horizon. Compared to the previous forecast, this outlook has been revised slightly upwards over the entire horizon. The impact of the rising oil price on koruna prices of energy will be amplified by a weaker outlook for the euro-dollar exchange rate, reflecting the unconventional monetary policy of the European Central Bank. Koruna prices of oil will thus continue to fall markedly year on year in 2015. This represents a favourable supply-side shock from the point of view of the Czech economy, although to a rather smaller extent compared with the previous forecast.

Headline inflation was close to zero, i.e. well below the lower boundary of the tolerance band around the Czech National Bank’s target, at the start of this year. This was due mainly to the drop in global oil prices, deflation in the euro area and a decline in food prices. The forecast expects inflation to remain close to zero in the second half of this year because of a marked decline in administered prices, which will gradually reflect the fall in energy commodity prices on global markets, and a continuing year-on-year decrease in fuel prices. Next year, inflation will rise to the 2% target as the year-on-year fall in energy commodity prices and the deflationary tendencies in the euro area dissipate. In addition, growing domestic economic activity and accelerating wage growth will foster higher inflation over the entire forecast horizon.

Monetary policy-relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will be only slightly lower than headline inflation. At the end of 2016, it will be slightly below the 2% inflation target.

The growth rate of the Czech economy slowed temporarily at the end of 2014. However, GDP growth will start to accelerate again this year, owing to easy domestic monetary conditions, recovering external demand, low oil prices and rising government investment. GDP will grow by 2.6% this year. In 2016, economic growth will exceed 3%. The favourable economic developments will also be reflected in a further improvement in the labour market situation. The number of employees converted into full-time equivalents will continue to rise and the unemployment rate and the number of unemployed persons will decrease further. Wage growth in the business sector will increase and wages in the non-business sector will rise rapidly, especially 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 until the end of 2016, i.e. over the entire forecast horizon.

Compared to the previous forecast, the prediction for both headline and monetary policy-relevant inflation is slightly higher this year and slightly lower next year. This is due to a more moderate decline in administered prices and fuel prices this year, whereas next year administered prices will rise at a slightly slower pace. A slightly stronger external demand outlook has led to a moderate upward revision of GDP growth next year. The assumption of flat market interest rates at their current very low level and the use of the exchange rate as a monetary policy instrument until the end of 2016 is unchanged.

The Bank Board assessed the balance of the risks to the new forecast at the monetary policy horizon as being anti-inflationary. Of the three factors which the Bank Board identified at its previous meetings 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 been moving in the anti-inflationary direction. By contrast, the optimism about the overall expected benefits of the measures adopted by the European Central Bank for developments in the euro area and in the Czech Republic is growing. In this situation, the Bank Board stated again 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.