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

25 Jun 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 assumes market interest rates to be flat at their current very low level and the exchange rate to be used as a monetary policy instrument until the end of 2016. 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 prices and other nominal variables. The Bank Board assesses the risks to the current inflation forecast at the monetary policy horizon as being balanced. 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. However, the probability of such developments has decreased since the Bank Board’s previous monetary policy meeting. Nevertheless, the Bank Board stated that even in the light of the data which have become available since its previous monetary policy meeting, the assumption that inflation will merely approach the target from below at the monetary policy horizon remains in place.

Domestic inflation increased in the last two months. In May, it reached 0.7%, i.e. 0.4 percentage point above the forecast. This pick-up in inflation was due to all consumer basket components, especially food prices. Adjusted inflation excluding fuels also contributed to higher inflation, reflecting the rapid growth in the domestic economy and the marked improvement on the labour market, as well as the impact of the weaker exchange rate of the koruna against the dollar. By contrast, the direct effect of the weakened exchange rate of the koruna against the euro on inflation through import prices is unwinding and inflation abroad remains subdued. On the basis of new information, inflation can be expected to be higher than the current forecast, but still well below the inflation target, in the next 12 months, i.e. before the monetary policy horizon.

The annual growth of the Czech economy accelerated sharply to 4.2% in 2015 Q1, whereas the forecast had been less than half this figure. The unexpectedly sharp increase in economic growth was due chiefly to a rise in inventories, which accounted for more than one-half of the annual GDP growth. However, the other expenditure components except net exports also recorded positive contributions to economic growth. Although the result for Q1 was largely affected by one-off factors which may undergo a correction in the future, GDP growth was relatively strong even when adjusted for these factors. It is therefore probable that the Czech economy will continue to record faster annual growth in the rest of this year compared to the forecast.

According to new information about developments abroad obtained from the June Consensus Forecasts survey, the growth rate of effective external demand is expected to be slightly higher than assumed in the current forecast. By contrast, the outlook for industrial producer prices this year has been lowered on account of a substantial price decline observed in Q1. Growth in producer prices is not expected to resume until next year, coupled with increasing growth in economic activity and an unwinding of the effect of lower oil prices. However, slightly higher consumer price inflation is expected over the entire forecast horizon in connection with the accelerating economic activity and observed price developments in the euro area. The outlook for the three-month EURIBOR in 2016 has increased somewhat as a result of higher bond yields, faster economic growth and higher inflation expectations in the euro area.

The market outlook for Brent crude oil prices has shifted marginally upwards over the entire horizon owing to currently higher prices. However, as regards oil prices in euro terms and, in turn, in koruna terms, this increase is outweighed by a shift of the outlook towards a stronger euro against the dollar in the rest of this year. This revision was due mainly to less favourable macroeconomic data in the USA.

The accelerating domestic economic growth is fostering a further improvement in the labour market situation. The growth rates of total employment and the number of employees have increased further. In May 2015, the number of unemployed persons was the lowest since June 2009 and the number of job vacancies registered with labour offices was the highest since December 2008. Average wage growth in the business sector picked up pace in 2015 Q1, standing slightly above the current forecast. The April data on industry also suggest continuing wage growth in corporations.

Indicators from the real economy point to ongoing robust economic growth. In year-on-year terms, industrial production is rising steadily at a pace above 4% and construction output growth exceeded 8% in April. Retail sales also continued to rise apace in both the automotive segment and the non-automotive segment.

The price decrease in manufacturing, which started in November 2014 in connection with the drop in oil prices and a decline in euro area producer prices, still persists, but its pace has been falling gradually since March. By contrast, the year-on-year decline in agricultural producer prices has been deepening further this year. The price increase in market services has almost halted since February, but prices of construction work are still rising moderately.

To sum up the important facts about recent developments in the Czech economy, annual GDP growth was considerably above the forecast in 2015 Q1 and inflation was also higher than forecasted in May. The average wage increased slightly faster than expected in Q1, owing to developments in the business sector. The seasonally adjusted share of unemployed persons fell somewhat more sharply compared to the forecast. However, the output of the domestic economy is still below potential.

The Bank Board assessed the balance of risks to the current inflation forecast as being balanced at the monetary policy horizon. This means that even in the light of the data which have become available since its previous monetary policy meeting, the assumption that inflation will merely approach the target from below at the monetary policy horizon remains in place. 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 repeated that it was ready to move the level of the exchange rate commitment if needed.