CNB issues Inflation Report IV/2010

The new macroeconomic forecast expects inflation to be close to the 2% target in both 2011 and 2012
Economic growth will slow next year, owing chiefly to fiscal consolidation, and a more robust recovery will return in 2012
The nominal exchange rate of the koruna is gradually appreciating over 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 at the longer end of the forecast

At its meeting on 12 November 2010, the Bank Board of the Czech National Bank approved this year’s fourth Inflation Report. An important part of the quarterly Inflation Report, which is one of the core elements of the central bank’s communication with the public in the inflation-targeting regime, 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 expects annual headline inflation to be close to the inflation target in the rest of 2010 and in 2011 and 2012. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will keep rising over the forecast horizon and will converge to the inflation target in the first half of 2011.

The forecast expects economic growth to strengthen further in the second half of this year but slow in 2011 owing chiefly to fiscal consolidation. This will be due to all domestic demand components, especially household and government consumption in connection with the implementation of government austerity measures. However, an unwinding of the effect of replenishment of inventories and investment in solar power stations will act in the same direction. Nevertheless, all expenditure components of GDP are expected to recover in 2012, above all household consumption thanks to rising growth in wages and exports as a result of a pick-up in external demand. As regards the labour market, the forecast expects the unemployment rate to decline further in the years ahead (only at the beginning of 2011 will unemployment rise due to fiscal austerity measures). The nominal exchange rate of the koruna is gradually appreciating over 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 at the longer end of the forecast. The forecast predicts a significant decrease in the government deficit-to-GDP ratio next year, related to measures adopted in connection with the government’s state budget proposal.

Marek Petruš
CNB spokesman