CNB issues Inflation Report I/2013

• Headline inflation will be close to the CNB’s target of 2% this year despite substantial impacts of tax changes, and will fall slightly below the target after these impacts fade away.
• Monetary-policy relevant inflation will be in the lower half of the tolerance band over the entire horizon, including at the monetary policy horizon.
• The Czech economy will contract by 0.3% this year, owing to continuing fiscal restriction and only slowly recovering external demand. In 2014 the economy will grow by around 2%.
• The nominal exchange rate against the euro will appreciate very slowly from the level of CZK 25.5 expected in 2013 Q1.
• Consistent with the forecast is a slight decline in market interest rates, followed by a rise in rates as from mid-2014.
• Compared to the previous forecast, the domestic economy has a stronger anti-inflationary effect, but from the perspective of the inflation and interest rate outlook this is offset by an expected weaker koruna exchange rate.

At its meeting on 14 February 2013, the Bank Board of the Czech National Bank approved this year’s first Inflation Report. The Report is one of the core elements of the central bank’s communication with the public in the inflation-targeting regime. A crucial part of the Inflation Report is a description of the CNB’s quarterly macroeconomic forecast. The forecast is a key input for monetary policy decision-making. The inflation forecast and the assumptions underlying it are published with the aim of making monetary policy as transparent, comprehensible, predictable and therefore credible as possible. The CNB submits the Inflation Report to the Chamber of Deputies of the Czech Parliament twice a year for review.

The forecast described in section II of this Report expects headline inflation to be close to the target of 2% this year and fall slightly below the target in early 2014 after the effects of an increase in both VAT rates of 1 percentage point drop out. Monetary-policy relevant inflation will be in the lower half of the tolerance band over the entire horizon, including at the monetary policy horizon. The current anti-inflationary effect of the domestic economy will continue until mid-2014.

The Czech economy will contract by 0.3% this year, owing to continuing fiscal consolidation amid an only slow recovery in external demand. The economic should return to growth in 2014, when the forecast expects GDP to rise by around 2% as a result of more robust growth in external demand and significantly less restrictive domestic fiscal policy.

On the labour market, these developments in economic activity will cause total employment to decrease somewhat and the unemployment rate to increase. Wage growth in the business sector will remain low this year, mainly reflecting the contraction of the Czech economy. It will pick up slightly in 2014 as economic activity recovers more significantly. Wages in the non-business sector will rise at a slow rate over the entire outlook owing to fiscal consolidation.

The nominal exchange rate against the euro will appreciate very slowly from the level of CZK 25.5 expected in 2013 Q1. Consistent with the forecast is a slight decline in market interest rates, followed by a rise in rates as from mid-2014. As regards the comparison of the interest rate path with the previous forecast, the more anti-inflationary effect of the domestic economy in the quarters ahead is outweighed by a weaker exchange rate outlook and to a lesser extent also by a higher administered price forecast.

• Full text of the Inflation Report (pdf, 4.9 MB)
• Tables and charts from the Inflation Report (xls)
• Current CNB forecast

Marek Petruš, CNB spokesman

Selected macroeconomic indicators