CNB issues Inflation Report III/2011

• The new macroeconomic forecast expects headline inflation to rise slightly above 3% in 2012 owing to a VAT increase; it will return to the target at the start of 2013
• Monetary-policy relevant inflation will be close to the target of 2% over the entire forecast horizon
• Economic growth will slow slightly this year owing mainly to fading investment in inventories, fiscal consolidation and slackening external demand; in 2012 domestic economic growth will edge up; GDP growth will not record a strong acceleration until 2013
• 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 at the start of the forecast horizon and a gradual rise in rates starting in late 2011/early 2012. Interest rates do not react to the first-round effects of the VAT changes, and the second-round effects will be insignificant.

At its meeting on 11 August 2011, the Bank Board of the Czech National Bank approved this year’s third 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, 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.

The forecast described in section II of the Report expects that headline inflation will be just above 3% in 2012, owing to a VAT increase, and to return to the target in early 2013. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will be close to the inflation target of 2% over the entire forecast horizon.

Economic growth will slow slightly to 2.1% in 2011 as a whole, owing mainly to fading investment in inventories, fiscal consolidation and, at the end of the year, slackening external demand. Net exports will be the main source of GDP growth this year. In 2012 all components of domestic demand – most of all fixed investment and household consumption – will contribute to growth. However, the GDP growth rate will increase only negligibly, as the contribution of net exports will temporarily turn negative amid weakening external demand. Stronger economic growth will not occur until 2013, when the effect of fiscal consolidation will fade, the labour market recovery will gain momentum and external demand will rise steadily. On the labour market, these developments in economic activity will cause total employment to be stagnant in 2011 and to increase slightly in 2012. This will be reflected in a decline in the unemployment rate next year. Wage growth in the business sector will gradually rise, whereas wage growth in the non-business sector will remain subdued.

The nominal exchange rate is gradually appreciating over the forecast horizon. Consistent with the forecast is broad stability of market interest rates at the start of the forecast horizon and a gradual rise in rates starting in late 2011/early 2012. In the longer run, as domestic inflationary pressures gradually renew and interest rates abroad creep up, rates will increase towards their long-term equilibrium level. Rates do not react to the first-round effects of the VAT changes. The second-round effects of these tax changes are expected to be insignificant.

• Full text of the Inflation Report (pdf, 4.9 MB)
• Key macroeconomic indicators (xls, 82 kB)
• Tables and charts from the Inflation Report (xls)
• Current CNB forecast

Tomáš Zimmermann
Communications Department

Selected macroeconomic indicators