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

16 Dec 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%. According to the forecast, inflation will increase and hit the 2% target at the monetary policy horizon. In 2017, it will be slightly above the target. According to the forecast, sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will occur from early 2017. The Bank Board therefore assessed the risks to the current forecast at the monetary policy horizon as being broadly balanced.

A need to maintain significantly expansionary monetary conditions persists. The Bank Board’s repeated statements that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016 remain valid. At the same time, the Bank Board stated again that the likely timing of the discontinuation of the exchange rate commitment is around the end of 2016. The subsequent return to conventional monetary policy will not imply appreciation of the exchange rate at the monetary policy 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 Q4. In November it was only 0.1%, i.e. 0.5 percentage point below the CNB forecast. This deviation was due predominantly to food prices, whose growth almost halted, whereas the forecast had expected it to accelerate. Administered prices and fuel prices also declined more sharply than forecasted. By contrast, core inflation (adjusted inflation excluding fuels) was slightly above the forecast. In recent months, this indicator of core inflation has been affected by growth of the domestic economy and wages and by depreciation of the koruna against the dollar. However, these effects are being largely offset by a continued decline in foreign producer prices.

The growth rate of the Czech economy slowed somewhat to 4.5% in Q3, whereas the forecast had expected it to accelerate slightly. The 0.3 percentage point deviation of GDP growth from the forecast was due to a smaller contribution of household consumption. Annual growth in total investment was also slightly below the CNB forecast. However, fixed investment was a moderately positive surprise and the resulting overall downward deviation was thus due solely to the traditionally volatile inventories. All components of domestic demand contributed to the year-on-year increase in GDP. The contribution of net exports was again slightly negative.

New information on developments abroad obtained from the December Consensus Forecasts suggests that demand in the effective euro area will continue to rise at a steady pace close to 2%. By contrast, the forecast for euro area producer prices has been revised 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. The outlook for consumer price inflation has been lowered only slightly. Inflation in the effective euro area is thus expected to rise gradually from close to zero this year towards 2% at the close of next year. The market outlook for the three-month Euribor has declined by 0.1 percentage point on average and is slightly negative for the next two years. The shift of the interest rate outlook compared to the assumptions of the current forecast reflects continued subdued inflation in the euro area and the reaction of the European Central Bank, which lowered its deposit rate to a more negative level and extended its quantitative easing programme at least until the end of March 2017.

The market outlook for the Brent crude oil price in the next two years has been lowered significantly. The Brent price is therefore expected to rise only gradually until the end of 2017, from its current level below USD 40 a barrel to around USD 54 a barrel. However, this factor represents a positive supply-side shock to the Czech economy and the Bank Board points out that its first-round effects are exempted as a rule. Compared with the assumptions of the current forecast, the outlook for the euro-dollar exchange rate has shifted to a weaker level.

The rapid domestic economic growth is fostering a further improvement in the labour market situation, broadly in line with the forecast. Annual growth in total employment again exceeded 1% in 2015 Q3. Growth in labour demand is also documented by a high number of vacancies, which has been above 100,000 for several months, roughly double the level of a year earlier. The general unemployment rate fell further in Q3 and the decline in the seasonally adjusted share of unemployed persons has also continued in Q4 so far. At the end of November, labour offices registered around 431,000 job applicants, 86,000 fewer than in the same period of last year. Annual growth in the average wage in the economy accelerated to 3.8% in Q3, driven by the business sector, and was therefore slightly above the forecast.

Indicators from the real economy point to continued robust economic growth in 2015 Q4. Industrial production and retail sales are also still rising apace year on year in both the automotive and non-automotive segments. Only construction output saw a slight year-on-year decline in October for the first time in quite a while, amid continuing growth in civil engineering construction related to government investment in infrastructure.

The price decrease in manufacturing, which had been deepening since June 2015, has moderated somewhat in Q4 so far. Following more than two years of decline, agricultural producer prices returned to year-on-year growth. Prices in market services were flat year on year, whereas construction work prices continued to rise moderately.

To sum up the important facts about recent developments in the Czech economy, annual GDP growth was slightly below the forecast in 2015 Q3 and inflation was markedly lower than forecasted in November. By contrast, the average wage increased slightly faster than expected in Q3, owing to developments in the business sector. Unemployment has been approximately in line with the forecast so far in Q4.

The anti-inflationary risks stemming from the observed year-on-year stagnation in domestic food prices and continued deflation abroad, including a further decline in oil prices, will be offset next year by faster growth in domestic wages and probable non-materialisation of the forecasted decline in administered prices. The Bank Board therefore assessed the risks to the forecast at the monetary policy horizon as being broadly balanced. The Bank Board’s repeated statements that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016 remain valid. At the same time, the Bank Board stated again that the likely timing of the discontinuation of the exchange rate commitment is around the end of 2016.