CNB issues Inflation Report II/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.
  
• Headline inflation will start rising in the near future owing to growth in import prices, which are gradually being affected by the weakened exchange rate of the koruna. Inflation will then begin to reflect the recovering domestic economy. Headline inflation will get slightly above the CNB’s 2% target at the start of 2015, while monetary-policy relevant inflation will return towards the target.
  
• GDP will grow by 2.6% this year thanks to accelerating external demand growth and the weakening of the koruna. The growth will pick up further to 3.3% in 2015, significantly aided by expansionary fiscal policy. The economic recovery will gradually be reflected in faster wage growth, longer working hours and – from the start of next year – also a decrease in the unemployment rate.
  
• The Bank Board has assessed the risks to the new forecast as being slightly anti-inflationary. The Bank Board continues to view the level of the exchange rate commitment at CZK 27 to the euro as appropriate and expects the exchange rate to be kept close to this level at least until the start of 2015. However, the probability of a later exit from the exchange rate commitment is increasing.

At its meeting on 15 May 2014, 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. 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.

According to the new forecast, headline inflation will start rising in the near future owing to growth in import prices, which are gradually being affected by the weakened exchange rate of the koruna. In mid-2014, inflation will begin to reflect the recovering domestic economy and faster growth in wages. Owing to the above factors, headline inflation will get slightly above the CNB’s 2% target at the start of 2015, while monetary-policy relevant inflation will return towards the target. Both headline and monetary-policy relevant inflation will then stabilise close to the target. Average inflation will be 0.8% this year and 2.2% in 2015.

Following a GDP decline in 2013, the economy will grow by 2.6% this year according to the forecast. This growth will be fostered by accelerating external demand, the easing of the monetary conditions via the exchange rate of the koruna, and slightly expansionary fiscal policy. Economic growth will then pick up to 3.3% in 2015, significantly aided by fiscal policy. The economic recovery will – with the usual time lag – affect the labour market, which will see renewed growth in the number of employees converted into full-time equivalents as average working hours per employee increase. The unemployment rate will still be flat this year owing to persisting growth in the labour force. It will decrease in early 2015. Wage growth in the business sector will increase noticeably from its current low levels.

The forecast expects market interest rates to be flat at their current very low level until the start of 2015, reflecting the 2W repo rate being left at technical zero and an unchanged money market premium. Market rates are forecasted to increase by about 0.6 percentage point in 2015. The forecast expects the exchange rate to return from its current levels to the CNB’s exchange rate commitment of CZK 27 to the euro. According to the assumptions of the forecast, the exchange rate should stay at this level as long as easy monetary conditions are needed, i.e. until the start of 2015.

The Bank Board continues to view the level of the exchange rate commitment at CZK 27 to the euro as appropriate and expects the exchange rate to be kept close to this level at least until the start of 2015. The Bank Board assessed the risks to the new forecast as being slightly anti-inflationary and – based on a discussion of the new forecast – stated that the probability of a later exit from the exchange rate commitment was increasing. At the same time the Bank Board concluded that domestic interest rates will not necessarily rise as fast as indicated by the forecast in 2015.

• Full text of the Inflation Report (pdf, 3 MB)
• Tables and charts from the Inflation Report (xlsx)
• Table of key macroeconomic indicators (xlsx, 71 kB)
• Current CNB forecast

CNB Communications Department

Selected macroeconomic indicators