CNB issues Inflation Report I/2014

• The new forecast is based on an assumption of stable market interest rates at their current very low level and a flat exchange rate of the koruna close to CZK 27 to the euro until the start of next year.
  
• The decision made in November to start using the exchange rate as an additional monetary policy instrument significantly contributed to averting the threat of deflation.
  
• The exchange rate weakening will accelerate the return of inflation to the CNB’s 2% target, which will occur in late 2014. Headline inflation will reach the upper half of the tolerance band at the monetary policy horizon and then return from above to the target, where it should stabilise.
  
• GDP will grow by more than 2% this year thanks to a recovery in external demand and the weaker koruna. The growth will then pick up further in 2015.
   
  
• According to the forecast, monetary policy could return to the conventional regime in early 2015.
  
• The Bank Board of the Czech National Bank continues to view the level of the exchange rate commitment at CZK 27 to the euro as appropriate and foresees this commitment being maintained at least until the start of 2015.
  

At its meeting on 13 February 2014, 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. An important 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 Report contains the new macroeconomic forecast. For the first time, the baseline scenario of the forecast is based on the use of the exchange rate as an instrument for easing monetary policy. The decision made in November to start using the exchange rate as an additional monetary policy instrument significantly contributed to averting the threat of deflation. According to the new forecast, both headline and monetary-policy relevant inflation will decrease to very low – but positive – levels at the start of this year. Inflation will then return to the CNB’s 2% target by the end of the year, aided significantly by the weaker exchange rate. Headline inflation will reach the upper half of the tolerance band at the monetary policy horizon and then return from above to the target, where it should stabilise. Inflation will reach 1.2% on average this year, the second-lowest inflation rate in ten years, and 1.9% on average for this year and the next.

Following two years of decline, GDP will grow by more than 2% this year. The domestic economy will be supported by growth in external demand and the monetary policy easing executed via the weakening of the koruna. Unlike in previous years, fiscal policy will have a broadly neutral effect on economic growth. In 2015, GDP growth will rise to 2.8%. The renewed economic growth will be reflected on the labour market initially in lower use of forced part-time work and in 2015 also in a drop in the unemployment rate. Wage growth in the business sector will increase from the current low levels.

The forecast expects market interest rates to be flat at the current very low level and the exchange rate to stay close to CZK 27 to the euro until the start of next year. By that time, according to the forecast, the easier monetary conditions will lead to an economic recovery and wage growth sufficient to allow monetary policy potentially to return to the conventional regime, in which interest rates play the main role, at the start of next year.

The CNB Bank Board continues to view the level of the exchange rate commitment at CZK 27 to the euro as appropriate, as it delivers the necessary easing of the monetary conditions. The Bank Board foresees this exchange rate commitment being maintained at least until the start of 2015.

• Full text of the Inflation Report (pdf, 2.8 MB)
• Tables and charts from the Inflation Report (xlsx)
• Table of key macroeconomic indicators (xlsx, 68 kB)
• Current CNB forecast

Marek Petruš
CNB spokesman