Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2016 > Statement of the Bank Board for the press conference

Statement of the Bank Board for the press conference following the monetary policy meeting

4 Feb 2016

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 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 assumes that market interest rates will be flat at their current very low level and the exchange rate will be used as a monetary policy instrument until the end of 2016. According to the forecast, inflation will increase, hitting the 2% target at the monetary policy horizon (i.e. in the first half of next year) and then moving slightly above it. According to the forecast, sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will occur in the first half of 2017. The Bank Board assessed the risks to the new forecast at the monetary policy horizon as being broadly balanced.

A need to maintain expansionary monetary conditions at least to the current extent persists. In view of the above, discontinuation of the exchange rate commitment earlier than assumed by the forecast, i.e. at the start of 2017, can now be ruled out. The Bank Board therefore states that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2017. The Bank Board considers it likely that the commitment will be discontinued in the first half of next year.

As regards the assumptions of the forecast regarding the external environment, growth in economic activity in the euro area will accelerate slightly further this year and fluctuate around 2% over the entire forecast horizon. Industrial producer prices in the euro area are still falling, owing mainly to a continuing drop in energy commodity prices. Foreign industrial producer prices are thus not expected to return to annual growth before the end of this year, i.e. later than assumed in the previous forecast. The currently low consumer price inflation in the euro area will increase gradually owing to rising demand and the unwinding of the effect of the slump in oil prices, and will approach 2% next year. The European Central Bank responded to the subdued inflation by further easing monetary policy. This is reflected in the outlook for three-month Euribor rates.

The Brent crude oil price fell sharply again in late 2015 and early 2016. According to market outlooks it should start rising slowly, but its outlook has been revised downwards markedly over the entire horizon compared to the previous forecast. At the same time, a further slight depreciation of the euro against the US dollar is expected.

Domestic headline inflation fell further in 2015 Q4, approaching zero. This was due mainly to a halt in food price growth and a deeper decline in fuel prices. According to the forecast, renewed food price growth and a moderation of the decline in fuel prices will contribute to a renewed increase in inflation already in early 2016. The domestic economy will continue to foster higher costs and consequently higher consumer prices, mainly via accelerating wage growth. At the same time, the current strongly anti-inflationary effect of import prices, stemming from a fall in producer prices in the euro area and in global commodity prices, will fade gradually. According to the forecast, headline inflation will thus increase, hitting the 2% target at the monetary policy horizon and then moving slightly above it.

Monetary policy-relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will follow a similar path to headline inflation, although it will be slightly lower owing to the impact of increases in excise duty on tobacco products. Core inflation, i.e. adjusted inflation excluding fuels, will continue to rise gradually, approaching 2% next year.

The growth of the Czech economy accelerated further in 2015 Q3, driven by all components of domestic demand, especially fixed investment and household consumption. The economy also recorded robust growth in the rest of last year. According to a CNB estimate, GDP thus increased by 4.7% in 2015 as a whole. According to the forecast, the growth of the Czech economy will slow markedly this year because of a temporary decline in gross capital formation due mainly to a drop in government investment financed from EU funds. However, the economy will continue to be supported by easy domestic monetary conditions via the weakened koruna and exceptionally low interest rates. A further decrease in the oil price and rising external demand are also fostering economic growth. Economic growth will pick up slightly again to 3% in 2017, with positive contributions from all components of domestic demand. The continuing economic growth will be reflected in a further improvement in the labour market situation. Employment will continue to rise, albeit at a slowing pace. The decrease in unemployment will continue, although it too will decelerate. Wage growth in the business sector will accelerate further this year and will exceed that in the non-business sector.

The forecast assumes that market interest rates will be flat at their current very low level and the exchange rate will be used as a monetary policy instrument until the end of this year. Consistent with the forecast is an increase in market interest rates in 2017. According to the forecast, the return to conventional monetary policy will not result in the exchange rate appreciating sharply 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 the price level and other nominal variables. At the same time, the Bank Board stated that any exchange rate appreciation following the discontinuation of the exchange rate commitment would be dampened, among other things, by hedging of exchange rate risk by exporters during the existence of the commitment, by the closing of koruna positions by financial investors and by possible CNB interventions to mitigate exchange rate volatility.

Compared to the previous forecast, the predictions for headline and monetary policy-relevant inflation are lower for the next few quarters owing to the lower inflation observed at the end of the year, a more subdued outlook for foreign producer prices and a further drop in oil prices. The decrease in the predictions is less marked at the monetary policy horizon – i.e. in the first half of 2017 – as the direct effect of the oil price decrease will fade and stronger growth in domestic nominal wages will foster higher inflation. The revision of GDP growth compared to the previous forecast is negligible. 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 remains unchanged in the forecast. After the exit from the exchange rate commitment, the path of market interest rates is lower in 2017, primarily as a result of the extension of quantitative easing by the European Central Bank.

The Bank Board assessed the risks to the forecast at the monetary policy horizon as being broadly balanced. The evolution of oil prices, which have recently seen marked fluctuations, is a significant source of uncertainty in both directions. The Bank Board states that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2017. The Bank Board considers it likely that the commitment will be discontinued in the first half of next year. The Bank Board again also discussed the possibility of introducing negative interest rates in light of the widening of the interest rate differential vis-à-vis the euro area and developments in domestic financial markets.