CNB issues Inflation Report II/2013

• Headline inflation will be slightly below the CNB’s 2% target this year despite an increase in both VAT rates of one percentage point.
• Monetary-policy relevant inflation will be close to the lower boundary of the tolerance band this year and then return slowly to the target at the monetary policy horizon.
• Generally weak domestic demand in an environment of continuing fiscal consolidation and only slowly recovering external demand will lead to a 0.5% decline in the Czech economy this year. In 2014, the previous years’ dampening factors will largely subside and GDP will grow by 1.8%.
• The nominal exchange rate of the koruna against the euro will appreciate very slowly from a weak initial level.
• Consistent with the forecast is a slight decline in market interest rates, followed by a rise in rates in 2014.

At its meeting on 9 May 2013, the Bank Board of the Czech National Bank 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. 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 strongly affected by an increase in indirect taxes introduced at the start of the year, but to be slightly below the CNB’s 2% target owing to subdued domestic economic activity. After the first-round effects of changes to indirect taxes drop out in early 2014, headline inflation will fall more markedly below the target, but later it will slowly converge towards it again. Monetary-policy relevant inflation will be close to the lower boundary of the tolerance band this year and then return slowly to the CNB’s 2% target at the monetary policy horizon as a result of gradually weakening domestic anti-inflationary pressures and a persisting rise in import prices.

Subdued external and domestic demand amid continuing fiscal consolidation will lead to a 0.5% decline in GDP this year. However, the economy will gradually rebound during the course of this year. GDP will grow by 1.8% next year thanks to an expected recovery in external demand and the unwinding of the effect of fiscal consolidation. On the labour market, subdued economic developments this year will cause total employment to decrease somewhat and the unemployment rate to increase. The decline in employment will gradually moderate in 2014. Wage growth in the business sector will be moderate this year, but will pick up steadily in 2014 as the economy recovers. Wage growth in the non-business sector will be negligible both this year and the next.

The exchange rate of the koruna against the euro will appreciate very slowly from a weak initial level owing to a renewed slightly positive interest rate differential and a recovery in external demand, reflected in rising net exports.

Consistent with the forecast is a slight decline in market interest rates, followed by a rise in rates in 2014. The low level of foreign interest rates and low inflation, reflecting the subdued domestic economy, are the main factors fostering a decline in interest rates.

• Full text of the Inflation Report (pdf, 5.5 MB)
• Tables and charts from the Inflation Report (xls)
• Table of key macroeconomic indicators (xls, 88 kB)
• Current CNB forecast

Marek Petruš
CNB spokesman

Selected macroeconomic indicators