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

22 Dec 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. It confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna against the euro 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 without any time or volume limits. The asymmetric nature of this exchange rate commitment is unchanged.

This decision is based on the message of the CNB’s current forecast and on an assessment of newly available information obtained since the current forecast was prepared. The forecast assumes that the exchange rate will be used as a monetary policy instrument until mid-2017. Inflation is rising, but is still below the 2% target. According to the forecast, inflation will increase further and slightly exceed the 2% target at the monetary policy horizon. According to the current forecast, sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will thus occur from mid-2017 onwards.

A need to maintain expansionary monetary conditions 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 Q2. The Bank Board still considers it likely that the commitment will be discontinued in mid-2017. At the same time, the Bank Board stated again 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, as well as by the closing of koruna positions by financial investors. In addition, the CNB will stand ready to intervene to mitigate potential exchange rate volatility.

Annual headline inflation has gone up in recent months. In November, it returned to the lower half of the tolerance band around the CNB’s target after three years. Consumer price inflation in November was higher than forecasted, mainly because of a stronger recovery in food price inflation. Adjusted inflation excluding fuels was also above the forecast. This indicator of core inflation reflects the effect of growth in the domestic economy and rising wage growth.

The growth of the Czech economy slowed further in Q3. It was below the current forecast as a result of a lower contribution of net exports. By contrast, total investment declined less significantly than forecasted. On the other hand, the expectation of a marked decline in investment due to an only gradual start to the new programme period for EU funds is still materialising. Household consumption growth accelerated further in line with the forecast. This confirmed the CNB’s view that its previous slowdown had been temporary.

New information on economic developments abroad largely confirms the assumptions of the current forecast. Economic growth in the effective euro area will slow slightly below 2% next year. The drop in foreign industrial producer prices is fading somewhat faster than forecasted. They are expected to return to growth at the start of next year. Consumer price inflation in the euro area will also start to increase. This will be fostered, among other things, by continued easy monetary policy of the ECB, which extended its quantitative easing programme until the end of next year but at the same time lowered its monthly volume. This is reflected in an outlook for slightly negative three-month EURIBOR rates over the entire forecast horizon.

The market outlook expects the Brent crude oil price to stay close to its current elevated levels over the next two years. The outlook is thus little changed compared to the assumptions of the forecast. By contrast, the outlook for the euro-dollar exchange rate has weakened. This is due to the different directions of the monetary policies of the ECB and the Fed.

The continuing domestic economic growth is manifesting itself in gradually increasing tensions on the labour market. Employment is rising further. This is reflected in a further decline in the unemployment rate, which is the lowest among the EU countries. Following a moderate slowdown, wage growth in the business sector accelerated again in Q3.

Indicators from the real economy are sending out a mixed message at the end of this year. Industrial production growth slowed considerably, mainly reflecting an unexpected downturn in exports in October. The long-running decline in construction output, caused mainly by a drop in public investment, slowed only marginally in October. Retail sales growth remains at solid levels.

The year-on-year price decline in manufacturing has moderated in recent months. Agricultural producer prices are still falling. Construction work prices continue to rise at a moderate pace and prices of market services are broadly stable in year-on-year terms.

To sum up the important facts about recent developments in the Czech economy, GDP growth was lower than forecasted in 2016 Q3. By contrast, inflation and average wage growth were above the forecast. Unemployment was slightly lower than forecasted.

The Bank Board assessed the risks to the current forecast at the monetary policy horizon as being balanced.