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 unanimously increased the two-week repo rate (2W repo rate) by 25 basis points to 2%. At the same time, it increased the Lombard rate to 3% and the discount rate to 1%.
The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is a rise in domestic interest rates followed by broad interest rate stability until mid-2020.
According to the external assumptions of the new forecast, economic growth in the euro area will continue to slow until mid-2019 and then accelerate slightly again. Producer price inflation in the euro area will also slow further. Consumer price inflation in the euro area will rise slightly next year but will remain below 2%. The European Central Bank clarified that it will keep its interest rates at the current level at least until the end of this year. According to the market outlook, the 3M EURIBOR will thus remain negative until the end of 2020.
The price of crude oil rose during 2019 Q1 but is expected to fall slightly in the following period. The spread between three-month dollar and euro rates is expected to narrow gradually as a result of an expected decrease in the dollar rate. This should lead to a slight strengthening of the euro against the dollar.
Domestic inflation will stay in the upper half of the tolerance band around the target this year. This is due to persisting domestic inflation pressures, stronger administered price inflation and renewed growth in food prices. However, the inflation pressures are now easing overall. Besides a temporary fade-out of the inflationary effect of import prices, the domestic inflation pressures are also diminishing owing to gradually falling wage growth and slower growth in economic activity. Inflation will thus decrease to the 2% target at the start of next year. This will also be fostered by a further tightening of monetary policy and the fading out of the currently high growth in administered prices.
The Czech economy will grow by 2.5% this year and pick up slightly next year. The increase in economic activity will be driven by all components of domestic demand. Continued solid growth in household consumption will reflect high, albeit gradually slowing, growth in household income. Persisting labour shortages are still motivating domestic firms to invest. Government investment will also grow further, with projects co-financed from EU funds contributing significantly. Fiscal policy will also contribute to domestic demand growth this year via a rise in public sector pay, pensions and social benefits. The labour market is past its peak, but a tight labour market situation persists. Wage growth will therefore fall towards its steady-state level only gradually. The unemployment rate is at a record low, which is preventing it from decreasing further. In this context, total employment will rise more slowly as well.
A markedly positive interest rate differential vis-à-vis the euro area and continued real convergence of the Czech economy will cause the koruna to firm gradually this year. Next year, the exchange rate will appreciate more gradually owing to the start of monetary policy normalisation by the European Central Bank.
Consistent with the forecast is a rise in domestic interest rates followed by broad interest rate stability until mid-2020. The rise in rates at the start of the forecast is a reaction above all to the persisting domestic inflation pressures. The subsequent broad stability of rates until mid-2020 mainly reflects persisting negative interest rates in the euro area.
By comparison with the previous forecast, the inflation outlook for this year has been raised owing to stronger price growth at the start of the year. By contrast, the forecast for growth in domestic economic activity has been lowered, due mainly to a worse external demand outlook. The koruna will appreciate more gradually this year and the next on the basis of an assumption that the global factors that have led to its broad stability since 2018 Q2 will last somewhat longer. In connection with the slower appreciation, interest rates are higher over almost the entire forecast horizon.
The Bank Board assessed the risks to the inflation forecast as being broadly balanced. A more pronounced and potentially more protracted slowdown in economic growth in the euro area is a risk to the forecast. The impacts of protectionist measures in global trade remain a source of external uncertainty. Uncertainty is also associated with the exchange rate of the koruna going forward.