CNB issues Inflation Report IV/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 2016 Q1.
• According to the forecast, headline inflation will go up owing mainly to rising economic activity and accelerating wage growth. Both headline and monetary-policy relevant inflation will return to the CNB’s 2% target in early 2016.
• GDP will rise by 2.5% this year owing to higher external demand, a marked easing of the domestic monetary conditions and a recovery in government investment. The economy will maintain the same growth rate in 2015 and accelerate slightly in 2016. The growth in economic activity will continue to have a favourable impact on the labour market.
• The Bank Board has assessed the risks to this outlook as being balanced and repeated that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2016. The current weaker level of the exchange rate compared to the announced commitment is helping inflation to return to the 2% target, but also the economy to keep growing at a sustainable pace.

At its meeting on 13 November 2014, the Bank Board of the Czech National Bank approved this year’s fourth 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, both headline and monetary-policy relevant inflation will continue rising gradually, reaching the target in early 2016. They will be slightly above the target thereafter. The inflationary effect of import prices will fade this year owing to the observed fall in producer prices in the euro area amid a stable exchange rate of the koruna. By contrast, the domestic economy will contribute to price growth, mainly as a result of a recovery in wage growth.

Following a contraction over the last two years, GDP will grow by 2.5% this year. Domestic economic growth will be fostered by higher external demand, easy domestic monetary conditions via the weakened koruna and exceptionally low interest rates, and partly also by fiscal policy. GDP will also rise by 2.5% in 2015 and pick up to 2.8% in 2016. The continuing economic growth will manifest itself in the labour market in growth in the number of employees converted into full-time equivalents, a further drop in the unemployment rate and accelerating wage growth in the business sector.

The forecast expects market interest rates to be flat at their current very low level and the koruna exchange rate to be used as a monetary policy instrument until 2016 Q1. The forecast assumes that the exchange rate will remain at around 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 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. Short-term market rates are forecasted to increase by around 0.8 percentage point after the exit from the regime of using the exchange rate as a monetary policy instrument expected in 2016 Q2. Market interest rates will then rise further.

The Bank Board considers the risks to the new forecast to be balanced. The current weaker level of the exchange rate compared to the announced commitment is helping inflation to return to the 2% target, but also the economy to keep growing at a sustainable pace. In this situation, the Bank Board repeated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2016.

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

Tomáš Zimmerman, CNB spokesman

Selected macroeconomic indicators