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.

The Bank Board assessed the new macroeconomic forecast at today’s meeting. Consistent with the forecast is a rise in domestic market interest rates in this quarter and the next, followed by a decline from mid-2020. However, the Bank Board assessed the balance of risks to this forecast as being anti-inflationary.

According to the external assumptions of the new forecast, economic growth in the euro area will remain low over the next two years but will recover gradually. The economic slowdown and decline in oil prices will be reflected in subdued producer and consumer price inflation. Negative 3M EURIBOR interest rates over the entire forecast horizon reflect continued monetary policy easing by the European Central Bank, including the renewed quantitative easing programme.

In the context of the cuts in US interest rates, the market expects a modest appreciation of the euro against the dollar. The price of oil will remain below USD 60 a barrel over the next two years.

Domestic inflation will stay in the upper half of the tolerance band around the inflation target in the coming quarters, due to only gradually abating overall inflation pressures, rapid growth in administered prices and the impacts of changes to indirect taxes. Domestic inflation pressures will gradually ease further over the forecast horizon as a result of slowing wage growth and a renewed acceleration of labour efficiency growth. Import prices will also have a temporary anti-inflationary effect. Inflation will thus gradually decrease during 2020 and converge towards the 2% target over the monetary policy horizon, i.e. in late 2020 and early 2021. This will be due partly to a fading-out of the high administered price inflation and to monetary policy tightening. However, the decrease in inflation will be slowed by the price impacts of changes to indirect taxes.

Monetary policy-relevant inflation will be below headline inflation next year, owing to the positive overall first-round effects of changes to indirect taxes. The forecast assumes that excise duty on cigarettes and alcohol will be increased significantly in January 2020. The third and fourth phases of electronic sales registration will be launched in May 2020. This will be associated with a decline in the VAT rate on certain consumer basket items.

The growth of the domestic economy will slow in the rest of this year due to weakening external demand. GDP growth will not return close to the potential output growth rate of 3% until 2021. Solid growth rates of household and government consumption will contribute to growth in economic activity over the entire forecast horizon. Investment growth will initially stay at the low rates observed in mid-2019. It will be driven mainly by government investment, with projects co-financed from EU funds contributing significantly. Private investment is forecasted to return to growth during next year. The positive contribution of net exports will temporarily disappear during 2020 as a result of a transitory slowdown in external demand growth.

The tightness in the labour market peaked in previous quarters. The unemployment rate is at a record low and will not fall any further. Amid persisting labour shortages on the one hand and gradually weakening demand for labour on the other, total employment growth will remain subdued. Wage growth will decrease gradually, but its slowdown will be dampened by a further increase in the minimum wage and growth in salaries in the non-market part of the economy.

Slight appreciation of the koruna will reflect continued real convergence of the Czech economy and a temporary further widening of the interest rate differential vis-à-vis the euro area. However, the impact of these factors on the koruna exchange rate will be largely offset by deteriorating economic and price developments abroad.

Consistent with the forecast is a rise in domestic market interest rates in this quarter and the next, followed by a decline from mid-2020. The rise in domestic rates at the start of the forecast primarily reflects domestic cost pressures, which are fading only gradually. The subsequent decline in domestic interest rates will be due mainly to persisting negative interest rates in the euro area, accompanied by continued quantitative easing of monetary policy by the European Central Bank.

By comparison with the previous forecast, the outlooks for economic growth and especially inflation in the euro area have been lowered. As a result, expected domestic economic growth in the next two years has also been revised downwards. By contrast, the inflation outlook for next year is higher due to stronger domestic inflation pressures, a weaker exchange rate and greater effects of tax changes. The new forecast implies higher interest rates in 2020. The koruna will appreciate more gradually against the euro than in the previous forecast.

The Bank Board assessed the balance of risks to the inflation forecast at the monetary policy horizon as being anti-inflationary. The risks stem primarily from the situation abroad, which may be negatively reflected in the open Czech economy with a lag.