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

31 Mar 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 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 current 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 current 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 current forecast at the monetary policy horizon as being slightly anti-inflationary.

A need to maintain expansionary monetary conditions at least to the current extent persists. The Bank Board therefore states again that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2017. In view of the slightly anti-inflationary balance of risks to the current forecast, the Bank Board considers it likely that the commitment will be discontinued nearer to mid-2017. The subsequent 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 repeated 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. The Bank Board again discussed the possibility of using negative interest rates.

Annual headline inflation increased at the start of this year, reaching 0.5% in February. However, the current forecast had expected higher inflation. The deviation from the forecast was due mostly to food prices, which continued to decline year on year, whereas the forecast had predicted renewed annual growth. Adjusted inflation excluding fuels was also slightly lower than forecasted. However, this indicator of core inflation remains above 1%, reflecting the effect of the growing domestic economy and accelerating wage growth. Fuel prices dropped markedly, in line with the forecast. Administered prices went up as a result of an unexpected rise in electricity prices for households and a smaller-than-forecasted decline in natural gas prices, whereas the forecast had expected them to stay broadly flat.

The growth rate of the Czech economy slowed to 4% in 2015 Q4, whereas the forecast had expected growth to be more than one percentage point higher. The deviation of annual GDP growth from the forecast was due to significantly slower growth in gross capital formation, with growth in fixed investment and change in inventories both lagging behind the CNB’s expectations. The more modest growth of fixed investment is probably linked with earlier completion of projects co-financed from EU funds. The growth rate of exports of goods and services was also lower than forecasted. However, growth in imports was much slower than forecasted. As a result, net exports increased slightly year on year, whereas the forecast had expected them to decrease modestly. Annual growth in government consumption was only slightly above the forecast and household consumption was broadly in line with the forecast.

New information on economic developments abroad obtained from the March Consensus Forecasts suggests that demand in the effective euro area will continue to rise at a steady pace of around 2%. Growth in euro area economic activity is still being supported mainly by low oil prices and easy monetary conditions. By contrast, the forecast for euro area producer prices has been lowered as a result of the pass-through of falling energy commodity prices over the entire monitored horizon, in particular for this year. Therefore, it is now expected that the decline in foreign producer prices will not fade out before the end of this year. The outlook for consumer price inflation this year has decreased by 0.5 percentage point, owing chiefly to a continuing decline in energy prices for households. Euro area consumer price inflation is still expected to accelerate in 2017, but in this case as well the current forecast is slightly lower than the assumptions of the CNB forecast. The market outlook for the three-month Euribor has shifted deeper into negative territory owing to the March interest rate cut by the European Central Bank and the increased volume of its quantitative easing.

By contrast, the market outlook for Brent crude oil has increased by around USD 5 a barrel over the entire forecast horizon, mainly in reaction to negotiations between large world oil producers regarding a cut in production. The Brent price is therefore expected to rise gradually until the end of 2017, from its current level around USD 40 a barrel to slightly below USD 50 a barrel. The outlook for the euro-dollar exchange rate has shifted slightly towards a stronger euro over the entire forecast horizon. This reflects the Federal Reserve’s communication suggesting a more gradual tightening of its monetary policy. At the same time, the European Central Bank communicated after its March meeting that its interest rates have probably reached their trough.

The buoyant domestic economic growth is fostering a further improvement in the labour market situation. Total employment and the number of employed persons continued to rise markedly in 2015 Q4, at a higher pace than forecasted. In line with expectations, the persisting growth in labour demand was also reflected in a further drop in unemployment. By contrast, annual wage growth in the business sector rose only slightly to almost 4%, whereas the forecast had expected a sharper acceleration. In line with the forecast, wages in the non-business sector also rose by almost 4%.

Indicators from the real economy point to continued economic growth this year. Retail sales are still rising strongly. Growth in industrial production has slowed somewhat in recent months, but this is partly due to extraordinary factors. Conversely, the halt in construction output growth is consistent with the expected downturn in government investment activity connected with the only gradual start of the new programme period for EU funds.

Prices in manufacturing are still falling year on year and the decline deepened in February. The renewed annual growth in agricultural producer prices in 2016 Q4 was only short-lived and these prices have been falling again year on year in 2016 so far. Prices in market services are broadly flat year on year, whereas construction work prices are continuing to rise moderately.

To sum up the important facts about recent developments in the Czech economy, annual GDP growth was considerably slower than forecasted in 2015 Q4. Inflation in February and average wage growth in 2015 Q4 were also below the forecast. Unemployment has been approximately in line with the forecast in 2016 Q1.

The Bank Board assessed the risks to the current forecast at the monetary policy horizon as being slightly anti-inflationary. In particular, markedly lower observed domestic and foreign inflation and slower wage growth in the Czech economy are acting in this direction. The short-term food price outlook is also a downside risk to inflation. By contrast, the increase in the oil price outlook is a slight upside risk. The Bank Board states again that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2017. In view of the slightly anti-inflationary balance of risks to the current forecast, the Bank Board considers it likely that the commitment will be discontinued nearer to mid-2017. At the same time, the Bank Board again discussed the possibility of using negative interest rates.