Statement of the Bank Board for the press conference following the monetary policy meeting

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. Following a temporary increase in inflation in the first half of this year, the current forecast expects inflation to return to the 2% target. Inflation will remain very close to the target at the monetary policy horizon. Consistent with the forecast is broad interest rate stability. At its meeting today, the Bank Board assessed the risks to the inflation forecast at the monetary policy horizon as being broadly balanced.

As regards the external assumptions of the forecast, the outlook for economic activity in the euro area has been lowered slightly. Likewise, the consumer price outlook for this year and the foreign interest rate outlook for next year have been shifted downwards. By contrast, the expected rate of producer price inflation in the euro area has been increased slightly.

The market outlook for the Brent crude oil price is about five dollars a barrel higher. The euro-dollar exchange rate has shifted towards a slightly weaker euro.

Domestic inflation increased into the upper half of the tolerance band around the 2% target in Q1. Its rise was stronger than forecasted. Core inflation was higher than forecasted, reflecting among other factors a jump in the prices of package holidays. To a lesser extent, the higher-than-expected inflation was due to stronger year-on-year growth in food prices and administered prices.

The growth of the Czech economy rose to just below 3% in 2018 Q4, whereas the forecast had expected it to slow slightly. The deviation was due mainly to higher-than-expected growth in goods and services exports. Government consumption also grew faster than forecasted. By contrast, household consumption was lower than expected, its growth slowing markedly at the year-end. The prediction for growth in gross capital formation broadly materialised.

The January data point to continued brisk growth in retail sales excluding the automotive segment. Construction output growth also remains solid. By contrast, industrial production continues to slow, even decreasing year on year in January.

Employment kept rising in 2018 Q4, doing so at a slightly faster pace than forecasted. In line with expectations, the decline in the unemployment rate almost came to a halt. Labour shortages coupled with still high labour demand led to a further increase in job vacancies. Conversely, total wage growth slowed in Q4 and was below the forecast in market and especially non-market sectors.

The koruna-euro exchange rate appreciated slightly to CZK 25.7 to the euro in 2019 Q1, broadly in line with the forecast. The forecast expects both the negative sentiment and the outflow of capital from emerging markets, which has been countering appreciation of the koruna for several quarters now, to fade out gradually.

To sum up the important facts about recent developments in the Czech economy, GDP and prices are rising at a faster pace than forecasted, whereas wages are increasing more slowly. 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. The possibility of slower-than-forecasted appreciation of the koruna in the quarters ahead is an inflationary risk. By contrast, a potential stronger cyclical slowdown of the global economy is an anti-inflationary risk. Faster unwinding of domestic inflation pressures may act in the same direction, as suggested by weaker growth in wages and household consumption at the close of last year. The possibility of a disorderly Brexit and growth in protectionist measures in global trade are still sources of uncertainty.