At its meeting today, the Bank Board of the Czech National Bank increased the two-week repo rate (2W repo rate) by 25 basis points to 1.50%. At the same time, it increased the Lombard rate to 2.50% and the discount rate to 0.50%. Six members voted in favour of this decision and one member voted for leaving interest rates unchanged.
This decision is underpinned by the current macroeconomic forecast, presented in August, and by an assessment of information obtained since the current forecast was prepared. According to the current forecast, inflation will be above the Czech National Bank’s 2% target for the rest of this year. It will return to the target at the monetary policy horizon and remain close to the target during 2020. Consistent with this outlook is a continued rise in interest rates towards their long-run neutral level. At its meeting today, the Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being balanced and insignificant.
The changes in the outlook for foreign variables are negligible. The forecast for consumer and producer prices this year is slightly lower, as is the outlook for foreign economic activity. In the longer term, expected foreign developments are virtually unchanged. The market outlook for the Brent crude oil price is almost unchanged as well. The euro-dollar exchange rate is marginally weaker over the entire forecast horizon than expected in the current forecast.
Following a temporary decline in July, domestic annual inflation rose again in August. Overall, it was only slightly below the forecast. Food price inflation was substantially lower than forecasted. Core inflation, by contrast, was higher than predicted. Fuel prices maintained their high growth rate and were only slightly below the forecast. In line with the forecast, growth in administered prices gradually accelerated further.
The growth of the Czech economy slowed in line with the forecast in Q2 and was only marginally lower than forecasted. As expected, fixed investment and household consumption were still the biggest contributors to GDP growth. The contribution of government consumption was also positive, though rather smaller than expected. Conversely, additions to inventories and net exports dampened GDP growth. Their deviations from the forecast largely offset each other.
Monthly indicators suggest continued solid economic growth in Q3. Sustained high consumer confidence and strong growth in household income continue to be reflected in rising retail sales. Industrial production and construction output have also recorded buoyant growth over the last two months.
The labour market is still creating strong inflationary pressures in line with the forecast. Employment continued to go up in Q2. As expected, unemployment dropped only slightly. Labour shortages coupled with strong labour demand led to a further increase in job vacancies. Wage growth remained stable in line with the forecast. While wage growth fell slightly short of the prediction in market sectors, it exceeded it in non-market sectors.
After the August forecast was drawn up, the koruna initially weakened slightly against the euro but later strengthened again in the course of September. Its average level in Q3 so far is only marginally stronger than forecasted. The previous depreciation of the koruna was due to a decrease in financial investors’ confidence in emerging markets and continued growth in US interest rates. By contrast, the increase in domestic interest rates is fostering appreciation of the koruna.
To sum up the important facts about recent developments in the Czech economy, the current macroeconomic forecast is materialising.
The Bank Board assessed the balance of risks to the current inflation forecast at the monetary policy horizon as being balanced and the individual risks as being insignificant. However, there is still general uncertainty stemming from the growth in protectionist measures in global trade and from Brexit-related events.