CNB issues Inflation Report III/2013

• Headline inflation will be below the CNB’s 2% target this year despite an increase in both VAT rates of one percentage point. After the effect of this tax change drops out in early 2014, inflation will fall more markedly below the target, but later it will slowly converge towards it again.
  
• Monetary-policy relevant inflation will be below the lower boundary of the tolerance band for the rest of this year and then return slowly towards the target over the monetary policy horizon.
  
• Generally weak domestic demand due to ongoing fiscal consolidation and an only gradual recovery in external demand will lead to a 1.5% decline in the Czech economy this year. The economy will grow by about 2% in 2014 thanks to the unwinding of the dampening effect of fiscal consolidation and a recovery in external demand.
  
• The exchange rate of the koruna against the euro will appreciate very slowly after the previous depreciation.
  
• Consistent with the forecast is a decline in market interest rates to zero, followed by a noticeable rise in rates in 2015. Given the zero lower bound on monetary policy rates, this points to a need to ease monetary policy using other instruments.
  

At its meeting on 8 August 2013, 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. 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 the Report, shows that headline inflation will be below the CNB’s 2% target this year despite an increase in both VAT rates of one percentage point, as it will be significantly affected by subdued domestic economic activity. The first-round effects of changes to indirect taxes made in January this year will drop out in early 2014 and headline inflation will temporarily fall more markedly below the target, but later it will slowly converge towards it. Monetary-policy relevant inflation will be below the lower boundary of the tolerance band for the rest of this year and then will return slowly towards the CNB’s 2% target over the monetary policy horizon, due mainly to the unwinding of the anti-inflationary effect of the domestic economy.

Subdued external and domestic demand due to existing fiscal consolidation will lead to a 1.5% decline in GDP this year. The economy will grow by about 2% in 2014 thanks to an expected recovery in external demand and the unwinding of the effect of government consolidation measures. The forecast assumes a continued slight rise in the unemployment rate and low wage growth in the business sector. This wage growth will pick up in mid-2014 as economic activity recovers more significantly. Wages in the non-business sector will continue to rise slowly.

The exchange rate of the koruna against the euro will appreciate very slowly from its current weak level. The low outlook for interest rates and a recovery in external demand, reflected in increasing net exports, will foster appreciation of the koruna.

Consistent with the forecast is a decline in market interest rates to zero, followed by a noticeable rise in rates in 2015. Given the zero lower bound on monetary policy rates, this points to a need to ease monetary policy using other instruments.

• Full text of the Inflation Report (pdf, 6 MB)
• Tables and charts from the Inflation Report (xls)
• Table of key macroeconomic indicators (xls, 91 kB)
• Current CNB forecast

Marek Petruš
CNB spokesman

Selected macroeconomic indicators