CNB issues Inflation Report III/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 are well below the CNB's 2% target. Despite an expected increase, they will remain below the target at the monetary policy horizon. They will not hit the target until 2017.
• A need to maintain significantly expansionary monetary conditions persists.
• In this respect, the recent exchange rate appreciation is thus an unfavourable factor that is tightening the monetary conditions and hence postponing achievement of the inflation target.
• The Czech economy will grow by 3.8% this year. Continued GDP growth will be fostered most of all by accelerating external demand, low oil prices, easy domestic monetary conditions and higher government investment. GDP growth will then slow to just below 3% in the next two years.
• The economic growth will manifest itself in growth in the number of employees, a drop in the unemployment rate and accelerating wage growth in the business sector.
• The Bank Board assessed the risks to the forecast as being broadly balanced at the monetary policy horizon; a modest downside risk may arise from the decline in oil prices.
• In this situation, the Bank Board emphasised 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 exchange rate will therefore be at CZK 27 to the euro or weaker at least until mid-2016.
• The subsequent return to conventional monetary policy will not imply appreciation of the exchange rate at the monetary policy horizon to the slightly overvalued level recorded before the CNB started intervening, among other things because the weaker exchange rate of the koruna is in the meantime passing through to domestic prices and other nominal variables.

At its meeting on 13 August 2015, 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.

The forecast expects both headline and monetary policy-relevant inflation to rise until the start of 2016, but still be below the 2% target at the monetary policy horizon. They will not hit the target until 2017. In this respect, the recent exchange rate appreciation is an unfavourable anti-inflationary factor postponing achievement of the inflation target. The anti-inflationary effect of import prices will subside in mid-2016 in connection with the expected return of energy commodity prices and euro area industrial producer prices to annual growth. Costs in the domestic economy will continue to increase due to accelerating wage growth and rising prices of other inputs amid continued growth in economic activity. Average inflation will be 0.6% this year and increase to 1.7% and 2.1% respectively in the next two years. The 2% inflation target will be reached at the start of 2017. Sustainable fulfilment of this target is a condition for a return to conventional monetary policy.

The robust growth in the Czech economy observed at the start of this year will continue. Accelerating external demand, low oil prices, easy domestic monetary conditions via the weakened koruna and exceptionally low interest rates and higher government investment will lead to GDP growth of 3.8% this year. Growth will then slow to just below 3% in the next two years. The rising economic activity will manifest itself in the labour market in continued growth in the number of employees converted into full-time equivalents. This will result in a further decrease in unemployment. Average wage growth in the business sector will increase noticeably.

The forecast assumes 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. Consistent with the forecast is an increase in interest rates amid modest appreciation of the koruna in 2017.

The Bank Board assessed the risks to the inflation forecast as being broadly balanced at the monetary policy horizon. A modest downside risk may arise from the decline in oil prices. A need to maintain significantly expansionary monetary conditions therefore persists. In this situation, the Bank Board emphasised that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016. The exchange rate will therefore be at CZK 27 to the euro or weaker at least until mid-2016. The subsequent return to conventional monetary policy will not imply appreciation of the exchange rate at the forecast horizon to the slightly overvalued level recorded before the CNB started intervening, among other things because the weaker exchange rate of the koruna is in the meantime passing through to domestic prices and other nominal variables.

• Full text of the Inflation Report (pdf, 3.4 MB)
• Tables and charts from the Inflation Report (xls)
• Table of key macroeconomic indicators (xls, 70 kB)
• Current CNB forecast

Tomáš Zimmermann
CNB spokesman

Selected macroeconomic indicators