CNB issues Inflation Report IV/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. Consistent with the forecast is an increase in interest rates amid gradual appreciation of the koruna in 2017.
• Both headline and monetary policy-relevant inflation will increase and hit the 2% target at the monetary policy horizon. In 2017, they will be slightly above the target.
• The Czech economy will grow by 4.7% 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. Economic growth will then slow to just below 3% in the next two years.
• The growth in economic activity will manifest itself in continued growth in the number of employees converted into full-time equivalents, a further drop in unemployment and accelerating wage growth in the business sector.
• The Bank Board assessed the risks to the forecast as being balanced at the monetary policy horizon.
• During 2015, the Bank Board has repeatedly stated that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016. At its meeting in November, it discussed extending the duration of the exchange rate commitment. It agreed that its discontinuation would probably shift to around the end of 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 12 November 2015, 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.

The forecast expects both headline and monetary policy-relevant inflation, which have remained well below the CNB’s target this year, to increase. They will hit the 2% target at the monetary policy horizon and be slightly above it in 2017. According to the forecast, sustainable fulfilment of the CNB’s target, which is a condition for a return to conventional monetary policy, will occur from early 2017. The current anti-inflationary effect of import prices stemming from the annual fall in euro area producer prices, the drop in global prices of most commodities and the recent appreciation of the koruna against the euro will subside in the second half of 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 capital amid continued growth in economic activity. This will lead to higher consumer prices over the entire forecast horizon. Average annual inflation will be 0.5% this year and increase to 1.4% and 2.2% respectively in the next two years.

The Czech economy will continue to show robust growth for the rest of this year. Accelerating external demand, low commodity prices, easy domestic monetary conditions via the weakened koruna and exceptionally low interest rates, and higher government investment will lead to GDP growth of 4.7% this year. A slowdown in economic growth to just below 3% next year will reflect a fall in government investment and the unwinding of the effect of an increase in inventories this year as well as the fall in oil prices. The economy will maintain a similar rate of growth in 2017, with positive contributions from all components of domestic demand. 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 lead to a further drop in unemployment. 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 exchange rate will be used as a monetary policy instrument until the end of 2016. Consistent with the forecast is an increase in market interest rates amid gradual appreciation of the koruna in 2017.

The Bank Board assessed the risks to the forecast at the monetary policy horizon as being balanced. Slowing demand in emerging countries is a downside risk to economic growth and consequently inflation. Materialisation of that risk could contribute, via lower global demand and commodity prices, to continued very subdued producer price inflation in the euro area. An upside risk to domestic inflation is that the assumed decrease in natural gas prices for households may not materialise.

During 2015, the Bank Board has repeatedly stated that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016. According to the Bank Board’s assessment, a need to maintain significantly expansionary monetary conditions therefore persists. The likelihood that it will be necessary to discontinue the exchange rate commitment earlier than assumed in the forecast is decreasing over time. In this situation, at its meeting in November the Bank Board discussed extending the duration of the exchange rate commitment. It agreed that its discontinuation would probably shift to around the end of 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.

• 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

Marek Zeman
Director, Communications Division

Selected macroeconomic indicators