CNB issues Inflation Report III/2014

• The new forecast is based on an assumption of flat market interest rates at their current very low level and the use of the koruna exchange rate as a monetary policy instrument until 2015 Q3.
• Headline inflation will start rising in 2014 Q3 owing mainly to rising economic activity and accelerating wage growth. By contrast, the inflationary effect of import prices will fade. Headline inflation will reach the CNB’s 2% target in mid-2015, i.e. at the monetary policy horizon, and monetary-policy relevant inflation will be only slightly lower.
• Owing to accelerating external demand, easy domestic monetary conditions via a weaker koruna and low interest rates, and higher government investment, GDP will grow by almost 3% this year. A similar economic growth rate will be maintained over the next two years. The economic recovery will have a favourable effect on the labour market, especially the number of employees converted into full-time equivalents and wages in the business sector. 
• The Bank Board has assessed the risks to this outlook as being slightly inflationary and stated that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2016.

At its meeting on 7 August 2014, 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. 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 gradually in 2014 Q3 and return to the 2% target in in 2015 H2. It will then stay close to the target in 2016. The inflationary effect of import prices will fade this year owing to subdued inflation abroad amid a stable exchange rate of the koruna, while the domestic economy will start to contribute to inflation in the second half of this year, chiefly as a result of accelerating wage growth. Average inflation will be 0.4% this year and increase to 1.8% next year. Both levels are 0.4 percentage point lower than in the previous forecast.

Following a contraction of the Czech economy in the last two years, GDP will grow by almost 3% this year. Economic growth will be fostered by accelerating growth in external demand, the easing of the domestic monetary conditions via the weakened exchange rate and low interest rates, and higher government investment. In the following two years, the economy will record similar growth rates, with fiscal policy and the drawdown of EU funds making a significantly positive contribution in 2015 and a slightly negative contribution in 2016. The economic recovery will contribute to faster growth in the number of employees converted into full-time equivalents, a gradual decline in the unemployment rate and noticeably faster wage growth in the business sector as from the second half of this year. Wages in the non-business sector will rise at a rather lower rate.

Given its low observed volatility, the exchange rate is assumed to remain at CZK 27.40 to the euro over the next few quarters, slightly weaker than the announced asymmetric exchange rate commitment (i.e. CZK 27 to the euro). The forecast expects the exchange rate to be used as a monetary policy instrument until 2015 Q3. The return to conventional monetary policy will not imply appreciation of the exchange rate to the level recorded before the CNB started intervening, as the weaker exchange rate of the koruna is in the meantime passing through to prices and other nominal variables. The forecast expects market interest rates to be flat at their current very low level until 2015 Q3, reflecting the 2W repo rate being left at technical zero and an unchanged money market premium. Market rates are forecasted to increase by around 0.5 percentage point at the end of 2015 after the exit from the regime of using the exchange rate as a monetary policy instrument. Interest rates will then rise further. 

The Bank Board assessed the risks to the new forecast as being slightly anti-inflationary, with longer-lasting very subdued inflation in the euro area and lower food prices in the near future acting in this direction. The Bank Board therefore decided to continue using the exchange rate as a monetary policy instrument at least until 2016. The Bank Board would have to find a further noticeable increase in anti-inflationary factors before moving the exchange rate commitment to a weaker level.

• Full text of the Inflation Report (pdf, 3 MB)
• Tables and charts from the Inflation Report (xlsx)
• Table of key macroeconomic indicators (xlsx, 70 kB)
• Current CNB forecast

CNB Communications Department

Selected macroeconomic indicators