CNB issues Inflation Report II/2015

• The new forecast is based on an assumption that market interest rates will be flat at their current very low level and the koruna exchange rate will be used as a monetary policy instrument until the end of 2016.
• Both headline and monetary policy-relevant inflation will be close to zero in 2015. In 2016 they will rise to the CNB’s 2% target.
• The Czech economy will grow by 2.6% this year, according to the forecast. Continued GDP growth will be fostered most of all by accelerating external demand, low oil prices, easy domestic monetary conditions and rising government investment. In 2016, GDP growth will pick up further to 3.2%.
• The rising economic activity will manifest itself in the labour market in continued growth in the number of employees converted into full-time equivalents, a decline in the unemployment rate and faster wage growth in the business sector.
• The Bank Board assessed the risks to the new forecast at the monetary policy horizon as being anti-inflationary. In this situation, the Bank Board stated again that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016. The Czech National Bank remains ready to move the level of the exchange rate commitment if there were to be a long-term increase in deflation pressures capable, among other things, of causing a slump in domestic demand or a systematic decrease in inflation expectations.

At its meeting on 14 May 2015, 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.

The forecast expects both headline and monetary policy-relevant inflation to be at zero in 2015 and then rise to the 2% target in 2016. The low inflation this year will again be mainly due to the anti-inflationary effect of import prices on account of a decline in euro area producer prices and the recent fall in global energy commodity prices, which will be reflected above all in a decline in administered prices. The anti-inflationary effect of these factors will subside in 2016 in connection with the expected return of energy commodity prices and euro area industrial producer prices to annual growth. Continued growth in domestic economic activity and accelerating wage growth will foster higher prices this year and the next.

Following a temporary slowdown at the end of 2014, the growth rate of the Czech economy will increase again this year and reach 3.2% in 2016. In 2015, the economy will be boosted by an upswing in external demand, still easy domestic monetary conditions, the positive supply-side effect of low oil prices and also by expansionary fiscal policy associated with an expected pick-up in government investment financed from domestic and especially European sources. The further strengthening of GDP growth in 2016 will be due mainly to faster growth in external demand and an improving supply side of the economy following the previous increase in investment activity. The continuing economic growth will lead to an improvement in the labour market situation, manifesting itself in further growth in the number of employees converted into full-time equivalents, a decline in the unemployment rate and rising wage growth in the business sector.

The forecast assumes market interest rates to be flat at their current very low level and the koruna exchange rate to be used as a monetary policy instrument until the end of 2016, i.e. over the entire forecast horizon.

The Bank Board assessed the risks to the new forecast at the monetary policy horizon as being anti-inflationary. Domestic wages and the koruna-euro exchange rate are moving in this direction. By contrast, the optimism about the overall expected benefits of the measures adopted by the European Central Bank for developments in the euro area and the Czech economy is growing.

In this situation, the Bank Board stated again that the Czech National Bank would not discontinue the use of the exchange rate until the monetary policy horizon, i.e. before the second half of 2016. In addition, the Bank Board emphasised again that it was ready to move the level of the exchange rate commitment if needed.

• Full text of the Inflation Report (pdf, 3.5 MB)
• Tables and charts from the Inflation Report (xls)
• Table of key macroeconomic indicators (xls, 70 kB)
• Current CNB forecast

Tomáš Zimmermann
CNB spokesman, in charge of the Communications Division of the General Secretariat

Selected macroeconomic indicators