Česká národní banka

CNB > Monetary policy > CNB Board decisions > 2019 > Statement of the Bank Board for the press conference

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

7 Feb 2019

At its meeting today, the CNB Bank Board decided to keep interest rates unchanged. The two-week repo rate thus remains at 1.75%, the discount rate at 0.75% and the Lombard rate at 2.75%. Five members voted in favour of this decision, and two members voted for increasing rates by 25 basis points.

The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is broad interest rate stability.

According to the external assumptions of the forecast, economic growth in the euro area will slow this year and accelerate slightly next year. Consumer and producer price inflation will be just below 2% over the next two years. The European Central Bank ended its asset purchase programme but stated that it would not start increasing interest rates until quite some time later. According to the market outlook, the 3M EURIBOR will thus remain negative until the end of 2020.

Following its recent marked drop, the oil price is expected to remain at around USD 60 a barrel over the next two years. The market expects the euro to appreciate modestly against the dollar due to convergence between euro and dollar interest rates. Overall, the outlooks for foreign variables have been revised in the anti-inflationary direction compared to the previous forecast.

Inflation in the Czech Republic will rise temporarily at the start of this year but will again be very close to the Czech National Bank’s 2% target in the following period. The persisting substantial domestic inflation pressures continue to reflect above all a tight labour market, characterised by rapid wage growth and very low unemployment. However, the inflation pressures from the domestic economy will be partly offset this year by an increasing anti-inflationary effect of import prices. This will stem from slowing growth in foreign prices and renewed appreciation of the koruna. Together with slowing wage growth, this will lead to a gradual decrease in the overall inflation pressures and thereby to stabilisation of inflation close to the target.  

Growth of the Czech economy of close to 3% this year and the next will be consistent with the long-run equilibrium growth rate. The increase in domestic economic activity will be driven mainly by growth in household consumption, which will continue to reflect buoyant growth in household income. Rising demand and still distinct labour shortages are motivating domestic firms to invest. Government investment will also grow further, mainly as a result of higher drawdown of EU funds. Fiscal policy will also contribute to economic growth this year via a significant rise in current expenditure. The record-low unemployment rate is not creating room for unemployment to fall significantly further. This will lead to slower employment growth and continued high, albeit gradually moderating, wage growth.

The forecast assumes that the negative sentiment on foreign exchange markets towards emerging markets will gradually fade out in the quarters ahead. This will lead to renewed appreciation of the koruna, supported by a wider interest rate differential vis-à-vis the euro area. Next year, the koruna will appreciate more gradually, in line with continued real convergence of the Czech economy.

Consistent with the forecast is broad interest rate stability. Upward pressure is being exerted on rates primarily by the currently weakened koruna, which is dampening the anti-inflationary effect of import prices. The strong domestic inflation pressures and the gradual pass-through of the higher administered price inflation into other components of inflation are acting in the same direction. Renewed appreciation of the koruna amid persisting negative interest rates in the euro area until the end of 2020 will subsequently have the opposite effect on rates.

Compared to the previous forecast, the inflation forecast has shifted to lower levels this year, reflecting the latest observed figures and a stronger anti-inflationary effect of import prices. At the monetary policy horizon, the inflation outlook is almost unchanged. The forecast for domestic economic growth has shifted slightly lower. Interest rates are slightly higher this year, due mainly to a weaker koruna. Next year, by contrast, rates are slightly lower, primarily reflecting a markedly lower outlook for euro area interest rates over the entire forecast horizon. The forecast expects the effect of negative sentiment, which has dampened the appreciation of the koruna, to fade away a quarter later than assumed by the previous forecast. The koruna will thus appreciate less this year than in the previous prediction, but will return to the levels of the previous forecast next year.

The Bank Board assessed the risks to the forecast as being slightly inflationary and tilted towards slightly higher interest rates compared to the forecast. Potential slower appreciation of the koruna in the course of this year compared to the forecast is a risk in this direction. Another risk is a disorderly Brexit, which could lead to a marked slowdown of the Czech economy and also to a weakening of the koruna. The impacts of protectionist measures in global trade remain a source of external uncertainty.