CNB Bank Board decisions from other years
Voting of the Bank Board
Statement of the Bank Board for the press conference following the monetary policy meeting
2 Feb 2017
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 underpinned by a new macroeconomic forecast. The forecast assumes that the exchange rate will be used as a monetary policy instrument until mid-2017. At the close of 2016, inflation rose sharply and returned to the 2% target. According to the forecast, inflation will increase further into the upper half of the tolerance band around the target and return to the target from above at the monetary policy horizon. According to the new forecast, the conditions for sustainable fulfilment of the 2% inflation target in the future, i.e. also after the assumed return to the conventional monetary policy regime, will be met from around mid-2017 onwards.
A need to maintain expansionary monetary conditions 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 Q2. The Bank Board still considers it likely that the commitment will be discontinued around the middle of 2017.
According to the assumptions of the new forecast, economic growth in the effective euro area will slow further at the start of this year but then gradually return towards 2%. The decline in industrial producer prices in the euro area will fade away in early 2017. These prices will then rise at a pace of just over 2% year on year. Consumer price inflation will go up as well, but it will not reach 2% before the end of 2018. The outlook for three-month EURIBOR market interest rates is negative over the entire forecast horizon, reflecting continued easy monetary policy of the European Central Bank. The ECB’s policy is also reflected in a weakening of the euro against the US dollar. The outlook for the Brent crude oil price foresees stability close to the current level.
The rise in domestic inflation at the end of last year was due mainly to a recovery in food price growth and an unwinding of the year-on-year fall in fuel prices. Core inflation, i.e. adjusted inflation excluding fuels, increased as well. Its evolution primarily reflected growth in the domestic economy and wages. In December, it was also affected by an increase in prices linked with the launch of the first phase of electronic sales registration. According to the forecast, inflation will increase further into the upper half of the tolerance band around the target. It will then return to the 2% target from above at the monetary policy horizon, i.e. in the first half of next year. Domestic costs will continue to rise apace, due mainly to rising wages. Coupled with renewed growth in industrial producer prices in the euro area, this will lead to a further increase in core inflation. Counteracting this will be a strengthening of the koruna expected by the forecast from mid-2017 onwards. Monetary policy-relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will differ only marginally from headline inflation.
The growth of the Czech economy eased further in 2016 Q3. According to the assumptions of the forecast, it reached 2.4% in 2016 as a whole. The rate of growth will increase to almost 3% in the next two years. The economy will be supported by continued growth in external demand, a gradual renewal of growth in government investment and still easy monetary conditions. However, the monetary conditions will start to shift towards a neutral effect following the assumed discontinuation of the CNB’s exchange rate commitment in mid-2017. The continued economic growth will lead to a further increase in wage growth. The unemployment rate will decrease only slightly.
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. The appreciation of the exchange rate following the return to the conventional monetary policy regime is dampened in the forecast among other things by the fact that the weaker exchange rate of the koruna has been passing through to the price level and other nominal variables in the period since the exchange rate commitment was introduced. Nevertheless, a positive interest rate differential against the euro and the effect of the ECB’s quantitative easing will manifest themselves. Renewed – although much slower than in the pre-crisis period – real convergence of the Czech economy to the advanced euro area countries will act in the same direction. According to the forecast, the koruna will thus appreciate against the euro in the second half of 2017. However, the forecast does not take into account that the appreciation of the koruna may be strongly dampened by hedging of exchange rate risk by exporters before the exit from the CNB’s exchange rate commitment, as well as by the closing of koruna positions by financial investors. This market “overboughtness” may even lead to depreciation of the koruna.
Compared to the previous forecast, the inflation outlook for this year is higher. This is due to the surprisingly strong increase in inflation at the close of last year, the higher short-term inflation forecast and faster growth in nominal wages. At the monetary policy horizon, however, the new inflation outlook differs only slightly from the previous forecast. The forecast for the growth of the Czech economy in the near future has been revised downwards on account of a lower contribution of net exports. From the whole-year perspective, however, the economic growth forecast for this year and the next is only slightly lower. Following the assumed exit from the exchange rate commitment, interest rates will rise at a slower pace than according to the previous forecast.
The Bank Board assessed the risks to the forecast at the monetary policy horizon as being balanced. The main uncertainty is the evolution of the koruna exchange rate following the exit from the exchange rate commitment, which may fluctuate in either direction in the short term. The CNB will stand ready to use its instruments to mitigate potential excessive exchange rate fluctuations following the exit from the commitment.