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 2%, the discount rate at 1% and the Lombard rate at 3%. 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 August macroeconomic forecast and by an assessment of information obtained since the current forecast was prepared. The current forecast expects inflation to stay above the 2% target but still within the tolerance band around the target for the rest of this year. It will start to decrease at the start of next year and will approach the target over the monetary policy horizon, i.e. in the second half of next year. Consistent with the forecast is a modest rise in domestic market interest rates in the second half of this year, followed by a decline next year. At its meeting today, the Bank Board assessed the risks to the August inflation forecast at the monetary policy horizon as being rather substantial in both directions and slightly inflationary overall.

As regards the external assumptions of the forecast, the outlook for producer price inflation and GDP growth in the euro area for this year and the next has been lowered slightly. The outlook for euro area consumer price inflation is virtually unchanged. The 3M EURIBOR market outlook has shifted slightly to more negative levels over the longer horizon.

The market outlook for the Brent crude oil price decreased in late August. Following a correction due to the attacks in Saudi Arabia, the market outlook returned roughly to the level assumed by the CNB’s August forecast. The euro-dollar exchange rate has shifted to slightly weaker levels, but the euro is still expected to appreciate slightly.

So far in Q3, domestic inflation has been very close to the upper boundary of the tolerance band around the target. It was slightly above the forecast, mainly because of higher core inflation. Faster-than-expected growth in food prices in August and a smaller decline in fuel prices in both July and August acted in the same direction. The forecast for administered prices materialised.

In Q2, the Czech economy grew at the same pace as in the previous quarter, in line with the forecast. Some demand components deviated from the forecast. Net exports made a higher-than-expected contribution, owing to slightly stronger growth in goods and services exports and more moderate growth in total imports. Growth in real government consumption was also higher than forecasted. By contrast, gross capital formation was significantly below the forecast, mainly as a result of markedly weaker fixed investment growth. Additions to inventories were also slightly lower. Household consumption was broadly in line with the forecast.

Recent economic data signal continued solid economic growth in 2019 Q3. This is suggested by the July retail sales figures and by still favourable construction data. Seasonally adjusted industrial production declined modestly year on year in July, but this was accompanied by growth in new orders in this sector.

The unemployment rate stabilised in line with the projection. Growth in employment slowed more markedly than forecasted. The number of job vacancies remained high due to persisting strong demand for labour. Wage growth in market sectors slowed slightly in Q2, in line with the forecast. However, wages in market sectors continue to rise apace, primarily reflecting continued labour market tightness. Wages in non-market sectors are increasing even faster and their growth in Q2 exceeded the forecast.

The koruna-euro exchange rate has been between CZK 25.50 and CZK 26 to the euro so far in Q3. Its average level of CZK 25.70 to the euro is 30 hellers weaker than the current forecast for Q3. The koruna continues to be strongly affected by global factors. Domestic money market interest rates are slightly below the forecast.

To sum up the important facts about recent developments in the Czech economy, the economic growth forecast is broadly materialising, with prices and wages rising slightly faster and the domestic monetary conditions being slightly easier.

The Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being rather substantial in both directions and slightly inflationary overall. The weaker-than-forecasted koruna exchange rate, which may persist, is fostering higher inflation and interest rates. The inflationary effect of the exchange rate is being partly offset by a decrease in expected industrial producer price inflation in the euro area. In addition, the risk of a more pronounced slowdown of the external and, in turn, domestic economy still persists. The impacts of protectionist measures in global trade and a disorderly Brexit remain sources of uncertainty.

In light of the slightly inflationary overall balance of risks to the forecast, the Bank Board discussed the possibility of raising interest rates. A preference for leaving rates unchanged ultimately prevailed. Nonetheless, the Bank Board expects to return to this debate at the next monetary meeting, when a new forecast will be available.