Transcript of the introductory statement from the press conference

6th May 2010

GOVERNOR

As you know, the Bank Board decided today to lower our key 2W repo rate by 0.25 percentage point, i.e. to 0.75%, and as you know, we also entered territory where we have to deal somehow with the discount and Lombard rates, especially given that the discount rate is used in a number of laws to calculate various penalties and so on. So, it wouldn’t be sensible to cut it to zero, i.e. to keep the spread at 1 percentage point, so we left it at 0.25%. This means that the spread narrowed further and the Lombard rate remains with a spread of 1 percentage point.

As regards the main reasons that led us to this, of course we look as usual at the outlook for inflation at the monetary policy horizon. Inflation at this horizon is approaching the inflation target, more probably from below, especially as regards monetary policy-relevant inflation. Consistent with our forecast, as we now see the Czech economy, is a slight decline in market rates, with the expected increase being shifted probably to as late as 2011. We see the risks of the forecast as being balanced.

Summing up our new forecast, as I said, monetary policy-relevant inflation remains below our target for the whole period and only approaches our 2% target gradually at the forecast horizon. As for headline inflation, it will reflect the impact of indirect taxes, so it could even exceed 2% for a short time, but next year it should again be very close to the inflation target, and in our opinion even slightly below it. With regard to GDP, we expect it to grow over the entire forecast horizon, but this growth won’t be very robust, particularly to begin with. Especially this year we don’t currently expect a recovery in private consumption, household consumption. External demand will also remain relatively weak, but net exports will stimulate growth, at least slightly. In 2011 we expect both these negative effects to fade and GDP could return to slightly more robust growth. As for the exchange rate of the koruna, of course one can currently see fluctuations in either direction, but at the forecast horizon we expect very moderate appreciation.

Looking at the external environment – what changes have occurred since the previous forecast – we can see that the developments are slightly anti-inflationary. That means a lower outlook for consumer prices, but on the other hand somewhat higher producer prices. There are no significant changes in terms of economic growth. Probably the biggest difference is the outlook for euro interest rates, where a significantly lower level of rates is expected and the expected future increase in interest rates is shifted. This was, in fact, one of the key factors that influenced our own forecast. Furthermore, in the external environment there are slight changes in the outlook for oil prices, but nothing dramatic. More dramatic are the changes in the euro-dollar exchange rate, which we know very well. So, a weakening against the dollar because of the problems in Europe, especially in Greece, and the fiscal problems in Europe generally.

Now the forecast in charts. First the forecast for headline inflation. I already said that it should initially jump slightly above our target of 2%, but then return just below the target. This is due, as I said, mainly to indirect taxes. Adjusted inflation should gradually approach our inflation target from below, and the difference is of course the changes to indirect taxes that were adopted under the state budget deficit reduction package. As for GDP, you can see a shape similar to what we had in the previous forecast. We call it an asymmetric W, i.e. a recovery in the first half of this year, then a slight slowdown in economic growth, and then a return to somewhat more robust growth in 2011. I stress again that the factor that will slow it this year will be household consumption, which we expect to fall by 1.5%. This is related to developments on the labour market together with the impact of the fiscal austerity measures and with their effects on gross disposable income. As for interest rates, that was already obvious from what I said at the beginning. The current forecast is consistent with a slight decline in interest rates and a very gradual return to growth, which will be linked with the recovery above all in 2011. As regards the exchange rate, I also said that we expect very moderate appreciation of the exchange rate in the long run.

To conclude, a comparison with the previous forecast. A slightly lower outlook for inflation, especially if we look at consumer prices. No major changes as regards economic growth measured by GDP. The three-month PRIBOR, that’s a bigger change, similarly to that in the external environment, i.e. lower interest rates and later an increase. Otherwise no dramatic changes as far as the relationship between the koruna and the euro is concerned. Of course, after the depreciation of the last few days, the koruna is now slightly weaker, but no strong conclusions can be drawn from that.

So, to sum up, we regard the risks of the forecast as being balanced. The evolution of the exchange rate is an inflationary risk at the moment. On the other hand, this is being countered by anti-inflationary risks, namely low external demand, especially in relation to Czech exports. Otherwise there is considerable uncertainty in both directions, linked with the current developments on the financial markets. As we know, it’s not just the situation in Greece, but the fiscal situation in Europe in general.