The CNB issues Inflation Report II/2010
The Bank Board of the Czech National Bank today published this year’s second Inflation Report, which is one of the core elements of the central bank’s communication with the public in the inflation-targeting regime. An important part of this quarterly document is a forecast for the Czech economy, representing 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 current report is based on information available as of 23 April 2010 and the CNB Bank Board approved it at its meeting on 13 May 2010.
The forecast described in this report expects annual headline inflation to rise gradually during the remainder of this year. Owing to tax changes already implemented, it will temporarily increase slightly above the CNB’s inflation target of 2% at the end of the year. It will then decline and at the monetary policy horizon, i.e. in 2011 Q2 and Q3, it will be just below the inflation target. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, on which interest rate decision-making is based, will approach the target in 2011 against the background of a stronger recovery in economic activity. The effects of the tax changes will no longer be apparent at the monetary policy horizon and monetary-policy relevant inflation will be the same as headline inflation.
The forecast assumes that the external demand recovery will be reflected in a return of domestic GDP to annual growth in 2010 and 2011. Higher growth this year will still be prevented by a decline in household consumption related to labour market developments and austerity measures. A temporary fall in GDP growth will also be fostered by a renewed temporary decline in external demand, which has an asymmetric W shape according to the assumptions of the forecast. Both these effects will fade in 2011 and GDP growth will start to accelerate in a more sustained way. The nominal exchange rate is gradually appreciating over the forecast horizon. Consistent with the forecast is a modest decline in market interest rates initially, followed by stability and a gradual rise in rates as from 2011.
Selected macroeconomic indicators
| 2010 | 2011 | ||
|---|---|---|---|
| GROSS DOMESTIC PRODUCT | |||
| GDP | %, y-o-y, real terms, sa | 1.4 | 1.8 |
| PRICES | |||
| Consumer Price Index | %, y-o-y, fourth quarter | 2.3 | 1.9 |
| Monetary-policy inflation | %, y-o-y, fourth quarter | 1.2 | 1.9 |
| LABOUR MARKET | |||
| Average monthly wages in monitored organizations | %, y-o-y, nominal terms | 3.0 | 3.2 |
| Registered unemployment rate | %, average | 10.0 | 10.2 |
| PUBLIC FINANCE* | |||
| Public finance deficit (ESA95) | bn. CZK, current prices | -196.9 | -223.4 |
| Public finance deficit / GDP | %, nominal terms | -5.5 | -5.9 |
| Public debt / GDP | %, nominal terms | 39.6 | 43.4 |
| EXTERNAL RELATIONS | |||
| Trade balance | bn. CZK, current prices | 175.0 | 190.0 |
| Current account of balance of payments / GDP | % | -1.1 | -1.3 |
| CZK/USD | average | 18.7 | 18.7 |
| CZK/EUR | average | 25.3 | 24.9 |
| INTEREST RATES | |||
| 3M PRIBOR | %, average | 1.1 | 1.9 |
*CNB's estimate
Marek Petruš, CNB Spokesman