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

24 Sep 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 that market interest rates will be flat at their current very low level and the koruna exchange rate will be used as a monetary policy instrument until the end of 2016. Inflation is still well below the CNB’s target of 2%. Despite an expected increase, it will remain below the target for most of next year. According to the forecast, sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will not occur until early 2017. A need to maintain significantly expansionary monetary conditions therefore persists. The Bank Board assesses the risks to the current forecast over the next few quarters as being anti-inflationary. At the monetary policy horizon, these anti-inflationary risks are offset by better-than-forecasted data from the domestic economy.

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 exchange rate will therefore be at CZK 27 to the euro or weaker at least until mid-2016. The subsequent return to conventional monetary policy will not imply appreciation of the exchange rate at the forecast horizon to the slightly overvalued level recorded before the CNB started intervening, among other things because the weaker exchange rate of the koruna is in the meantime passing through to domestic prices and other nominal variables.

Annual headline inflation has been falling so far in Q3. It stood at 0.3% in August, 0.4 percentage point below the forecast. This deviation was mainly due to food prices, which returned to a modest year-on-year decline in August. To a lesser extent, the lower inflation was due to a larger-than-forecasted decrease in fuel prices stemming from a further drop in oil prices. The other inflation components were in line with the forecast. As expected, administered prices switched to a moderate decline at the start of Q3. Despite still very subdued inflation abroad, adjusted inflation remained stable just above 1%, reflecting continued buoyant growth of the domestic economy and marked improvements in the labour market.

The growth of the Czech economy accelerated to 4.4% in Q2, whereas the forecast had expected it to slow compared to the previous quarter. The one percentage point deviation of GDP growth from the forecast was due almost exclusively to higher additions to inventories. Economic growth remains balanced, with all the expenditure components contributing in year-on-year terms. The dynamic growth in economic activity is also evidenced by a further slight pick-up in gross value added growth. Its increase is being driven mainly by industry, but to an increased extent also by services and other sectors linked to domestic demand.

New information on developments abroad obtained from the September Consensus Forecasts suggests that demand in the effective euro area will continue to rise at a steady pace. By contrast, the forecast for euro area producer prices has been revised slightly downwards for the rest of this year and the first half of next year. Growth in producer prices is still not expected to resume until next year as the effect of the fall in oil prices unwinds. Owing to lower energy prices for households, the outlook for consumer price inflation in the effective euro area has also shifted slightly downwards for this year and the next. However, consumer price inflation is still expected to rise gradually towards 2%. The market outlook for the 3M Euribor remains unchanged at zero for this year and the next. The expected slight increase in interest rates in 2017 has been reduced further. This reflects recent ECB communication confirming its readiness to extend and increase its quantitative easing programme.

The market outlook for Brent crude oil prices has decreased markedly over the entire forecast horizon. Moreover, the new outlook has reduced the expected weakening of the euro against the dollar, which in turn lowers expected euro and koruna prices of oil.

The accelerating domestic economic growth is fostering a further improvement in the labour market situation. Total employment growth accelerated further in 2015 Q2. Growth in labour demand is also documented by a steadily rising number of vacancies, which exceeded 100,000, almost double the level of a year earlier. The general unemployment rate fell further in Q2 and the decline in the share of unemployed persons has also continued in Q3 so far. At the end of August, labour offices registered 450,000 job applicants, 85,000 fewer than in the same period of last year. Driven by both the business and non-business sectors, annual wage growth picked up pace much more strongly than expected by the CNB forecast. The July data on industry also indicate continuing wage growth.

Indicators from the real economy point to continued robust economic growth in 2015 Q3. Annual industrial production growth has been accelerating since April and slightly exceeded 7% in July. The growth rate of construction output reached double figures. Retail sales are also still rising apace in both the automotive and non-automotive segments.

The price decrease in manufacturing, which started in November 2014 in connection with the drop in oil prices and a continuing decline in euro area producer prices, still persists and has gradually been gaining pace since June this year. By contrast, the year-on-year decline in agricultural producer prices has been slowing in recent months. The price increase in market services has almost halted since February, with market prices even edging down year on year in July and August. On the other hand, construction work prices 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 Q2, whereas inflation was lower than forecasted in August. The average wage increased faster than expected in Q2, owing to developments in both the business and non-business sectors. Unemployment has been falling broadly in line with the forecast.

It can be said that the risks to the current forecast over the next few quarters are anti-inflationary, owing chiefly to lower food and fuel prices and administered energy prices. These risks are linked with the decline in world prices of oil and other commodities. This decline is leading to expectations of more subdued inflation in the global economy and means that the easy monetary policies in effect around the world will probably last longer than previously expected. At the monetary policy horizon, these anti-inflationary risks are offset by better-than-forecasted data from the domestic economy, i.e. stronger growth in GDP and wages. In this situation, the Bank Board therefore repeated that the Czech National Bank would not discontinue the use of the exchange rate before the second half of 2016.