At its meeting today, the Bank Board of the Czech National Bank decided to keep interest rates unchanged. The two-week repo rate thus remains at 1.75%, the discount rate at 0.75% and the Lombard rate at 2.75%. Five members voted in favour of this decision, and two members voted for increasing rates by 25 basis points.
This decision is underpinned by the current macroeconomic forecast and by an assessment of information obtained since the current forecast was prepared. According to the forecast, inflation will increase at the start of next year. In the subsequent period, however, the inflation pressures will ease owing to renewed appreciation of the koruna and a gradual slowdown in wage growth. Inflation will approach the Czech National Bank’s 2% target from above over the monetary policy horizon, i.e. in late 2019 and early 2020. Consistent with this forecast is broad interest rate stability next year and then a continued rise in interest rates towards their long-run neutral level. At its meeting today, the Bank Board assessed the risks to the inflation forecast at the monetary policy horizon as being broadly balanced.
The outlook for foreign variables has been revised downwards. The producer price forecast has been lowered substantially, especially for next year. The forecast for euro area consumer prices is slightly lower for next year, as is the outlook for foreign economic activity and interest rates.
As a result of the observed fall in world prices, the market outlook for the Brent crude oil price is markedly lower over the next two years. The euro-dollar exchange rate has shifted towards a slightly weaker euro in 2019.
Domestic inflation declined over the last three months, reaching the 2% target in November. It was lower than forecasted, mainly as a result of an unexpected fade-out of food price growth. Growth in administered prices and fuel prices was also somewhat lower than forecasted, whereas core inflation went up and was slightly above the forecast.
The rate of growth of the Czech economy stayed at 2.4% in Q3, although the forecast had expected a slight acceleration. The deviation of economic growth from the forecast was due to a lower contribution of net exports, which was related to a marked pick-up in services imports. Household consumption was also slightly lower than predicted. Faster growth in total investment and government consumption acted in the opposite direction.
Monthly indicators suggest continued solid economic growth at the close of this year. Strong growth in household income continues to be reflected in rising retail sales, except in the automotive segment. Industrial production growth has accelerated again in the last two months and the dynamics of construction output remain high.
The labour market is creating strong inflationary pressures in line with the forecast. As expected, employment growth recorded a slowdown, albeit a rather more pronounced one than predicted. In line with the forecast, the unemployment rate did not decrease significantly further. Labour shortages coupled with still high labour demand led to a further increase in job vacancies. Growth in total wages remained high in Q3, slightly exceeding our expectations. Wage growth was slightly lower than forecasted in market sectors, but significantly above the forecast in non-market sectors.
The koruna-euro exchange rate was almost 1% weaker than forecasted during Q4. It weakened temporarily to CZK 26 to the euro in November and then corrected just below that level. The risk of longer-lasting negative sentiment towards emerging markets persists. This could lead to the koruna being weaker than forecasted in early 2019 as well.
To sum up the important facts about recent developments in the Czech economy, GDP and prices are rising at a slower pace than forecasted, whereas total wages are increasing somewhat faster. The unemployment rate is broadly in line with the forecast.
The Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being broadly balanced. Lower observed inflation and the current external environment outlook, including a marked decline in oil prices, are anti-inflationary risks. On the other hand, the current and future evolution of the koruna exchange rate is an inflationary risk. There is still uncertainty stemming from the growth in protectionist measures in global trade and the manner of exit of the United Kingdom from the European Union.