Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2017 > Statement of the Bank Board for the press conference

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

30 Mar 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.

At its meeting today, the Bank Board assessed the newly available information obtained since the current CNB forecast was prepared. With the end of the “hard commitment” approaching, it assessed the new information from the perspective of sustainable fulfilment of the 2% inflation target in the future. Sustainable fulfilment of the target following the return to the conventional monetary policy regime is crucial for the timing of the exit from the exchange rate commitment.

In the first two months of this year, inflation increased into the upper half of the tolerance band around the target. The last time it reached similar levels was more than four years ago. The subsequent long period of very subdued inflation ended only recently. A short-term increase in inflation above the 2% target but within the tolerance band had been predicted by the CNB back when the exchange rate commitment was introduced in late 2013. The current forecast predicted that inflation would rise above the target this year. However, this occurred slightly earlier and for the time being to a greater extent than expected. This was due primarily to a sharp increase in some traditionally volatile food prices, although, this increase may be partly short-lived. A faster-than-expected rise in core inflation affected the deviation from the forecast in the same direction. Core inflation has been reflecting continued growth in the domestic economy and wages for some time now. It has recently also been affected by renewed growth in euro area producer prices and by the one-off price impacts of the introduction of electronic sales registration in accommodation and food services.

The unwinding of – mostly foreign – anti-inflationary effects is also visible in other price categories. Industrial producer prices rose by more than 3% year on year in February following a long period of decline. The decline in agricultural producer prices moderated to just under 1% in February. Prices of construction work and market services are still increasing gradually.

The growth of the Czech economy at the close of last year was somewhat lower than expected. The deviation was due chiefly to an unexpectedly sharp decrease in fixed investment. By contrast, the positive contribution of net exports was stronger than forecasted. In line with the forecast, household consumption continued to rise at a robust pace. It thus remained the strongest and most stable driver of the economy.

The latest indicators signal continued solid economic growth in the first quarter of this year. Industrial production and retail sales are both rising at a rate of about 4%. Conversely, construction output returned to a slight year-on-year decline early this year. Confidence in the domestic economy edged down from its previous high levels in February and March.

Annual growth in the average wage in the economy in 2016 Q4 was lower than forecasted. This reflected a marked slowdown in wage growth in the business sector, which was one percentage point lower than forecasted. According to the calculations of the Czech Statistical Office, however, the median wage increased by 6% year on year in 2016 Q4, i.e. much more strongly than the average wage. This suggests that wages of lower-income employees, who traditionally have an above-average propensity to consume, are increasing more quickly.

Economic activity in the Czech Republic’s main trading partner countries is also continuing to rise. In line with the assumptions of the current forecast, however, its growth rate has slowed somewhat recently. At the same time, industrial producer prices in the euro area have returned to growth, rising more sharply than expected by the current forecast. The growth outlook for these prices for the whole of this year is increasing as well. Consumer price inflation in the euro area has also risen sharply towards 2% in recent months. As a result, the current outlook for 3M EURIBOR market rates next year has shifted slightly upwards. At its March monetary policy meeting, the European Central Bank left interest rates unchanged and made no adjustments to the parameters of its asset purchase programme.

The Brent crude oil price fell close to USD 50 a barrel, i.e. to a three-month low. The current forecast is based on the assumption that the Brent crude oil price will be around USD 57 a barrel in both 2017 and 2018. The market outlooks for the euro-dollar exchange rate are shifting towards a slightly stronger euro. This is a slight anti-inflationary risk as regards koruna prices of oil.

To sum up the important facts about recent developments in the Czech economy, inflation was slightly above the forecast and unemployment slightly below it at the start of this year. Conversely, the growth rates of GDP and the average wage at the end of last year were slightly lower than forecasted.

The CNB Bank Board assessed the risks to the current inflation forecast for the rest of this year as being inflationary. However, the newly available information provides a mixed picture at the monetary policy horizon, which currently covers 2018 Q2 and Q3. The second-round effects of the faster increase in inflation observed so far may act in the inflationary direction, although this increase is due partly to one-off factors whose first-round effects on inflation will unwind naturally within one year. By contrast, the lower-than-forecasted growth of the domestic economy and wages in the business sector at the close of last year and the current drop in world oil prices are anti-inflationary risks. Upon the expiry of the “hard commitment”, an assessment of the relative weights of these contrary pieces of information, taking into account any further analyses and data, will be crucial for the CNB’s next steps. Sustainable fulfilment of the inflation target at the monetary policy horizon remains a condition for a return to the conventional monetary policy regime. The evolution of the koruna exchange rate, which may fluctuate in either direction in the short term, is still the main uncertainty for the period following the exit from the exchange rate commitment. The CNB will stand ready to use its instruments to mitigate potential excessive exchange rate fluctuations following the exit from the commitment.