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

5 May 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 CNB 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 mid-2017. Consistent with the forecast is an increase in market interest rates thereafter. Inflation is still well below the CNB’s target of 2%. According to the new forecast, inflation will decline temporarily close to zero in the near future, mainly due to cost-push effects from abroad. However, it will then increase, hitting the 2% target at the monetary policy horizon. According to the forecast, sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will occur from mid-2017. The Bank Board assessed the risks to the 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 CNB 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 mid-2017. Domestic inflation is still being affected by strong anti-inflationary cost-push effects from abroad, the intensity and duration of which are greater than assumed in the previous forecasts. Monetary policy looks past the first-round effects of such factors and focuses on any adverse second-round effects. The CNB therefore stands ready to move the exchange rate commitment to a weaker level if there were to be a systematic decrease in inflation expectations manifesting itself in nominal variables, especially wages. 

Turning to the assumptions of the new forecast regarding developments abroad, GDP growth in the effective euro area will fluctuate around 2%. The previous sharp decline in energy commodity prices is reflected in an outlook for subdued growth in industrial producer prices, which will not return to annual growth until the start of next year. Consumer price inflation will rise gradually from very low levels, but will again stay below 2% next year. The ECB responded to the subdued inflation by further easing monetary policy. This is reflected in the market outlook for 3M Euribor rates, which is negative until the end of 2017. The Brent crude oil price will rise slowly amid a relatively stable euro-dollar exchange rate.

Domestic inflation increased slightly in 2016 Q1, but remains well below the 2% target. The slightly positive inflation was due to the return of administered prices to annual growth and to still markedly positive adjusted inflation excluding fuels. This indicator of core inflation reflects the positive effect of growth in the domestic economy and wages. By contrast, prices of food and fuels declined as a result of persisting anti-inflationary supply shocks from abroad. Headline inflation will decline temporarily close to zero in the near future owing to a renewed decrease in administered prices, a deepening of the decline in food prices and a temporary slowdown in adjusted inflation. A dip into negative territory cannot be ruled out either. Inflation will thus remain below the target for a longer time on account of positive cost effects. At the close of this year, however, inflation will start to increase, hitting the target at the monetary policy horizon, i.e. in 2017 Q2 and Q3, and then slightly exceeding it. The domestic economy will continue to foster a rise in consumer prices amid continuing economic growth and rising wages. At the same time, the current strongly anti-inflationary effect of import prices, stemming from a fall in producer prices in the euro area, will fade gradually.

Monetary policy-relevant inflation will differ only marginally from headline inflation, as a result of only small first-round effects of indirect tax changes. It will thus turn slightly negative in the near future, but will hit the 2% target at the monetary policy horizon.

The growth of the Czech economy will slow to 2.3% this year from the exceptionally high level recorded last year. This will be due mainly to a fall in government investment as a result of an only gradual start to the drawdown of EU funds in the new programme period. On the other hand, growth in economic activity will continue to be supported by easy domestic monetary conditions, low oil prices and rising external demand. After the fall in government investment fades out, GDP growth will accelerate to over 3% next year. The rising economic activity will manifest itself in continued growth in employment. This will result in a further, albeit only modest, decrease in the unemployment rate. Wages will rise at a steady pace this year and accelerate further next year.

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 mid-2017. This is one of the factors helping inflation to return to the target in the first half of next year according to the forecast. Consistent with the forecast is an increase in market interest rates in the second half of 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 again that exchange rate appreciation following the discontinuation of the exchange rate commitment would be dampened 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 inflation prediction is markedly lower until mid-2017, owing to lower observed prices (especially food prices), a more subdued outlook for foreign producer prices and lower growth in domestic nominal wages. GDP growth in 2016 has been revised downwards, mainly as a result of a deeper fall in government investment and slower growth in private investment. By contrast, the growth forecast for 2017 has been raised slightly, partly reflecting an extension by two quarters of the expected duration of interest rate stability and the use of the exchange rate as a monetary policy instrument. Nominal wage growth is more moderate until the middle of next year, due to the halt in nominal wage acceleration observed at the close of last year and the outlook for more subdued inflation and economic growth.

The Bank Board assessed the risks to the forecast at the monetary policy horizon as being slightly anti-inflationary. Producer price inflation in the euro area is a significant risk. It may be more subdued than currently assumed, as has been the case several times in the recent past. In addition, the risk of undesirable second-round effects of foreign cost factors is rising as the duration of the period of very low inflation increases, although those factors primarily represent favourable supply shocks. The central bank reacts to any adverse second-round effects of such cost factors, unlike to their immediate price effects. In this context, the Bank Board points out that the CNB stands ready to shift the exchange rate commitment to a weaker level if there were to be a systematic decrease in inflation expectations manifesting itself in nominal variables, especially wages. At the same time, the Bank Board states again that the CNB 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 mid-2017, i.e. in line with the assumption of the new forecast. At the same time, the Bank Board again discussed the possibility of using negative interest rates.