CNB issues Inflation Report II/2011

• The new macroeconomic forecast expects inflation to be close to the 2% target in 2011 and 2012
  
• Economic growth will decrease this year as a result of the consolidation of public budgets, fading investment in inventories and slowing external economic growth. Growth will pick up as these factors subside in 2012
  
• The nominal exchange rate of the koruna is gradually appreciating over the forecast horizon
  
• Consistent with the forecast is broad stability of market interest rates in the near future and a gradual rise in rates starting in 2011 Q4
  
• In addition to the baseline scenario, an alternative scenario was drawn up, capturing the effects of a potential VAT increase
  

At its meeting on 12 May 2011, the CNB Bank Board approved this year’s second 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 forecast described in Section II of the Report expects both annual headline inflation and monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, to be close to the inflation target of 2% in 2011 and 2012. According to the forecast, economic growth will decrease this year as a result of the consolidation of public budgets, fading investment in inventories and slowing external economic growth. Net exports will be the main contributor to growth, while domestic demand will be generally subdued. No major improvement will take place on the labour market this year.

Domestic economic growth should pick up markedly in 2012 as these factors subside, with all components of domestic demand contributing; by contrast, the contribution of foreign trade should decrease slightly. As regards the labour market, the forecast expects the recovery in economic activity to lead to marked decreases in both the general and registered unemployment rate and a renewed pick-up in wage growth. The nominal exchange rate is gradually appreciating over the forecast horizon. Consistent with the forecast is broad stability of market interest rates in the near future and a gradual rise in rates starting in 2011 Q4.

In addition to the baseline scenario, an alternative scenario was drawn up, capturing potential risks stemming from the increase in the reduced VAT rate from 10% to 14% at the beginning of next year, as announced by the government. The interest rate path in this alternative scenario does not differ markedly from the baseline scenario of the forecast, assuming that inflation expectations are well-anchored.

• Full text of the Inflation Report (pdf,  4,8 MB)
• Key macroeconomic indicators (xls)
• Tables and charts from the Inflation Report (xls)
• Current CNB forecast

Marek Petruš, CNB spokesman

Selected macroeconomic indicators