CNB issues Inflation Report IV/2016

• The new 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 mid-2017. Consistent with the forecast is an increase in market interest rates thereafter.
• According to the forecast, inflation will increase further and slightly exceed the 2% target at the monetary policy horizon. During 2018, it will return to the target from above. According to the forecast, sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will occur from mid-2017 onwards.
• The growth of the Czech economy slowed slightly in 2016 Q2. It will reach 2.8% in 2016 as a whole. This slowdown was due mainly to a temporary drop in government and corporate investment co-financed from EU funds. In the next two years, the Czech economy will record similar growth rates as this year.
• The continued economic growth will lead to higher wage growth. The unemployment rate will decrease only slightly.
• The Bank Board assessed the risks to the inflation forecast at the monetary policy horizon as being balanced.
• The Bank Board stated again that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before 2017 Q2. The Bank Board still considers it likely that the commitment will be discontinued in mid-2017.

At its meeting on 10 November 2016, 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.

Domestic inflation is starting to rise owing to a weakening anti-inflationary effect of import prices amid continuing growth in domestic economic activity and rising wages. According to the forecast, inflation will continue to rise and will slightly exceed the 2% target at the monetary policy horizon, i.e. in late 2017/early 2018. During 2018, it will return to the target from above. Sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will occur from mid-2017 onwards.

Monetary policy-relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will deviate only marginally from headline inflation. It, too, will therefore slightly exceed the target at the monetary policy horizon.

The growth of the Czech economy growth eased slightly in 2016 Q2 and will reach 2.8% in 2016 as a whole according to the forecast. This slowdown is due to a temporary drop in government and corporate investment co-financed from EU funds. By contrast, the economy continues to be supported by still easy monetary conditions, low oil prices and rising external demand. In the next two years, the Czech economy will maintain a similar pace as this year. On the one hand, growth in investment will resume, but on the other hand domestic economic growth will be dampened somewhat by a temporary slowdown in external demand and later also less easy monetary conditions following the discontinuation of the CNB’s exchange rate commitment. The continued economic growth will lead to higher wage growth. The unemployment rate will decrease only slightly.

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 mid-2017. Consistent with the forecast is an increase in market interest rates after the exit from the exchange rate commitment.

The Bank Board assessed the risks to the inflation forecast at the monetary policy horizon as being balanced. The uncertainties of the forecast include the speed of return to growth in government and corporate investment, the effect of the election cycle on discretionary government expenditure, the impacts of the outcome of the UK referendum and the future settings of the monetary conditions of the major central banks.

A need to maintain expansionary monetary conditions at least to the current extent persists. The Bank Board therefore stated again that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument before 2017 Q2. The Bank Board still considers it likely that the commitment will be discontinued in mid-2017.

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

Marek Zeman
Director, CNB Communications Division

Selected macroeconomic indicators