Transcript of the introductory statement from the press conference

22 December 2010

GOVERNOR

You already know the result of the vote. The decision may appear to mimic the decisions of previous similar meetings of the Bank Board, but I’d like to say that although it looked simple, some uncertainties that haven’t turned into risks are relatively strongly reflected and were relatively strongly reflected in the discussion. I will get back to them at the end.

As regards the current decision, the current forecast of the Czech National Bank is of course now more or less being confirmed. Its assessment of the situation is that there will be a gradual recovery, which will be dampened by fiscal consolidation next year, but in any case inflation will be, and is, very near the target. The tangible, clear risks of the forecast are basically balanced. On the other hand, the uncertainties – we probably wouldn’t entirely agree on whether they rose or not, but certainly they were emphasised in the decision and in the discussion.

I joked about inflation last time, so I will not repeat that. I will only say that it is still dramatically close to the inflation target, as we see it. Fuel prices are slightly higher. On the other hand, adjusted inflation is lower. The breakdown is still more or less around the things we expected.

As regards the external environment, it is important to reflect above all the overall message of the chart, which shows an “upward staircase”. In other words, the external environment remains unchanged or is changing only weakly and slowly in a direction indicating higher inflation pressures – be it rates, GDP, or producer prices and consumer prices. The same is true of the second slide, on the external environment. Here it may be worth saying that the “upward staircase”, as I said, is there not only for oil prices, but basically for all commodities, or the overwhelming majority of them – world food prices, metals, energy-producing materials, and so on and so forth.

As for the Czech economy, it is interesting that again most of what the forecast expected is being confirmed, including, for example, the effect of photovoltaic power stations, which is starting to fade in exactly the way the forecast expected. As regards what is probably most important in the confirming picture, there is no substantial hiring – at least globally visible substantial hiring or changes on the labour market – going on. This partly contrasts with the anecdotal evidence on who is launching production and who needs new employees. It can be seen – so far one would probably again formulate the hypothesis of a two-track economy where one part, which is far from being out of the crisis yet and may be getting out of it by way of restructuring – formal or informal – is offsetting the phenomena where businesses have in fact already bottomed out and are starting to expand again.

However, all this combines into a situation that indicates very non-dramatic changes compared to the previous forecast. It is perhaps worth mentioning the relatively low growth in the average wage. Altogether, though, it means above all that we are unable to identify any significant, tangible risks vis-à-vis the forecast in the domestic environment.

Looking at the risks, the main anti-inflationary risk is wages. We can see the main inflationary risks in world commodity prices. We can see them in a slightly, not too substantially, weaker exchange rate of the koruna. I should perhaps use this slide to speak about the uncertainties that might materialise into risks before the next monetary decision, or the one after that, or the one after that. They are certainly significant uncertainties. They are capable of potentially materialising into relatively large risks that will force us to make some changes earlier than we now expect in line with this forecast – upward or downward, I should add. And they are somewhat in the external environment, which is certainly the largest source of uncertainty. It depends on how the combination of the debt crisis in many European countries, including euro area members, including relatively crucial euro area countries, turns out. On the other hand, the German engine – which is evidently being driven, according to the figures from this week, not by Europe, but much more by the new robust markets, principally in East Asia. And against this, of course, stand commodity prices, which are being driven up by this. How all this will come together and what effects it might have, for example, on exchange rates or on the value of debt securities in our country – which is outside the euro area but at the same time is currently regarded as a relatively stable part of Europe, or certainly one of the more stable parts of Europe, to be precise – is simply very hard to predict at the moment. These are definitely uncertainties capable of materialising into something dramatic if they come together in an unexpected way. Or they could also materialise in such a way that they eliminate each other. At the moment it is hard to predict what will happen.

Maybe it is also worth mentioning – touching upon it slightly, without wanting to go into an area that is rather difficult for us, but from the perspective of communication I feel we probably should say that we were close to generating quite a significant uncertainty here in the Czech Republic at a time that was probably the least suitable for it in the almost six years I have been at the central bank. We would have again generated the potential situation of having a government lacking a political mandate. However, this uncertainty has not materialised at this moment.

So, I will end here. I must add that at a time when much bigger pillars of the euro area than us are coming down quite spectacularly, this simply is not a good time to generate uncertainties by our own force. The external forces are enough.