CNB issues Inflation Report III/2010

• The CNB presents a redesigned Inflation Report in an effort to enhance the transparency of its decision-making process
  
• The new Inflation Report largely corresponds to the document used for the Bank Board’s interest rate decisions
  
• The public can now also learn about sensitivity scenarios describing risks to the baseline scenario of the forecast
  
• The new macroeconomic forecast expects headline annual inflation to be close to the 2% target in 2011.
  

At its meeting on 12 August 2010, the Bank Board of the Czech National Bank approved this year’s third Inflation Report. This Report, which is one of the core elements of the central bank’s communication with the public in the inflation-targeting regime, has been redesigned in an effort to make the Report more reader-friendly and to enhance the transparency of the CNB’s decision-making process.

An important part of the Inflation Report is a description of the CNB’s quarterly macroeconomic forecast, which 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.

Some important changes in content have been introduced in this Inflation Report. The main change consists in the merger of the Inflation Report with a non-public document called the Situation Report on Economic and Monetary Developments to form a single document that is discussed by the Bank Board and serves as a fundamental input for its monetary policy decisions. The published Inflation Report is a subset of the merged document, covering more than 90% of its content. The Inflation Report now provides the public not only with a more detailed description of the CNB’s new macroeconomic forecast and a comparison between it and the previous forecast, but also, for instance, with sensitivity scenarios which quantify the risks to the baseline scenario of the forecast and which might influence the Bank Board’s monetary policy decisions. The full internal document will be published with a lag of six years, as before. The changes are described in more detail in the foreword to Inflation Report III/2010.

The forecast described in section II of this Report expects headline annual inflation to get temporarily above the 2% inflation target at the end of 2010, owing mainly to changes to indirect taxes already implemented. After this effect unwinds, headline inflation will moderate slightly at the start of 2011 and fluctuate close to the inflation target. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will gradually rise at the forecast horizon and converge to the inflation target in 2011 H2. According to the forecast, economic growth will remain gradual this year and the next and pick up appreciably in 2012. GDP growth in 2010 and 2011 will be stimulated mainly by gradual replenishment of inventories and by net exports. From 2011 onwards it will also start to be supported by an expected recovery in household consumption. GDP growth is expected to reach 1.6% in 2010, 1.8% in 2011 and 2.9% in 2012 on average. However, this outlook for economic activity does not yet include the effects of the planned consolidation of public budgets; these effects are described in one of the sensitivity scenarios. The nominal exchange rate is gradually appreciating at the forecast horizon. Consistent with the forecast is stability of market interest rates close to their current levels initially, followed by a gradual rise in rates as from 2011 H2.

• Full text (pdf, 5 MB)
• Key macroeconomic indicators (xls)
• Tables and charts (xls)
• Current CNB forecast
   

Selected macroeconomic indicators

Marek Petruš
CNB Spokesman