Česká národní banka

CNB > Monetary policy > CNB Board decisions > 2018 > Statement of the Bank Board for the press conference

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

27 Jun 2018

At its meeting today, the Bank Board of the Czech National Bank unanimously increased the two-week repo rate by 25 basis points to 1%. At the same time, it increased the Lombard rate by 50 basis points to 2% and kept the discount rate unchanged at 0.05%.

The May forecast expected inflation to be slightly below the 2% target this year and return very close to it during next year. Consistent with the current forecast was broad stability of market interest rates initially, followed by further growth in rates from late 2018/early 2019. At its meeting today, however, the Bank Board assessed the risks to the current forecast as being inflationary.

The outlook for foreign producer price inflation is higher compared to the assumptions of the forecast. This is particularly true for this year, owing to an increase in oil prices. The expected evolution of consumer prices, economic growth and euro interest rates is essentially unchanged in terms of annual averages. The market outlook for the Brent crude oil price is higher than the forecast. The expected dollar-euro exchange rate has shifted towards a weaker euro. These two factors are thus jointly fostering a higher koruna price of oil.

Domestic inflation has gradually increased so far in Q2 and slightly exceeded the Czech National Bank’s 2% target in May. The higher-than-forecasted inflation in May was due mainly to faster growth in prices of fuels and food. Slightly higher core inflation also contributed to a lesser extent. Growth in administered prices and the first-round effects of changes to indirect taxes were in line with the forecast.

As forecasted, the growth of the Czech economy slowed in Q1. However, the slowdown was rather more pronounced than the central bank had expected. This was due mainly to a stronger negative contribution of net exports and lower additions to inventories. Household consumption also recorded slightly slower growth. Nevertheless, it remained robust due to a strong labour market and ensuing rapid growth in household income. By contrast, the contributions of fixed investment and government consumption to economic growth were stronger than forecasted.

According to the monthly indicators, industrial and construction output and retail sales are slowing further. This suggests – in line with the Czech National Bank’s current forecast – a further slowdown in annual economic growth in 2018 Q2.

Labour market indicators point to continued overheating of the labour market. Employment continued to rise apace and exceeded the forecast amid strong labour demand. In line with expectations, unemployment declined slightly. The high labour demand coupled with a shortage of available labour led to a further marked increase in job vacancies. As expected, wage growth accelerated further in Q1. Although it fell short of the prediction in market sectors, it exceeded the forecast in non-market sectors.

To sum up the important facts about recent developments in the Czech economy, GDP growth in Q1 was below the forecast. By contrast, inflation in May was higher than forecasted. The evolution of unemployment and wages was broadly in line with the Czech National Bank’s forecast.

The Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being inflationary and speaking in favour of an earlier interest rate increase. The recent exchange rate developments mean that a desirable tightening of the exchange rate component of the monetary conditions is not taking place, and this trend may persist. It is therefore necessary and appropriate to increase interest rates earlier than implied by the current forecast presented in early May. Higher-than-forecasted domestic inflation and stronger-than-forecasted inflationary pressures from abroad, linked mainly with oil prices, also speak in favour of an interest rate increase.