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 kept interest rates unchanged. The two-week repo rate thus remains at 0.25%, the discount rate at 0.05% and the Lombard rate at 1%.

This decision of the Bank Board is underpinned by the May macroeconomic forecast and by an assessment of information obtained since it was prepared. The latest forecast was prepared in unprecedented conditions of a peaking coronavirus pandemic and related huge uncertainty. Its baseline scenario is largely materialising so far, although the published data may be subject to an increased degree of uncertainty. After the fall in domestic market interest rates in May, consistent with the forecast is broad stability of rates in the following quarters. The Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being broadly balanced.

The decline in GDP in the effective euro area will be somewhat deeper than forecasted this year. Next year, economic activity will recover all the more markedly. The outlook for foreign prices has not been revised significantly compared with the assumptions of the current forecast. The outlook for the 3M EURIBOR is unchanged, even though the European Central Bank further increased the volume of intended securities purchases and extended their time horizon. Foreign interest rates thus remain negative over the entire forecast horizon.

The oil price will be slightly higher this year and the next compared with the assumptions of the current forecast. The outlook for the euro-dollar exchange rate is unchanged.

Domestic inflation was slightly above the forecast in April and May, owing mainly to higher-than-expected core inflation. This was counteracted above all by an unexpectedly sharp drop in fuel prices and also by a somewhat slower pass-through of increased excise duty on tobacco to cigarette prices. Food prices and administered prices were in line with the forecast. The current forecast expects inflation to decline to the 2% target at the end of this year.

As a result of measures adopted against the pandemic, economic activity dropped by 2% year on year (and 3.3% quarter on quarter) in 2020 Q1. The depth of the decline of the Czech economy in Q1 was in line with the CNB’s forecast. The deviations of the individual expenditure items from the forecast offset each other and were relatively slight in the context of the unprecedented situation. Government consumption was higher than forecasted, rising somewhat more markedly than expected. By contrast, year-on-year growth in household consumption halted in line with the forecast as a result of the quarantine measures. The drop in gross capital formation was larger than forecasted. By contrast, net exports decreased less than the CNB had predicted. The decrease in both exports and imports was less pronounced than in the forecast.

Owing to the impacts of the pandemic, industrial production recorded an appreciable year-on-year decline in March, which deepened further in April. In particular, the automotive industry recorded a drop in production. The previous growth in construction output came to a halt in March and turned into a year-on-year decrease in April. A deepening year-on-year decline has also been visible in retail sales since March.

The employment and unemployment forecast is broadly materialising so far. In 2020 Q1, total employment fell slightly and the unemployment rate stayed close to its all-time low. So far in Q2, the labour market is already cooling visibly in connection with the adverse economic effects of the coronavirus pandemic. The slowdown in wage growth in 2020 Q1 was slightly less pronounced than forecasted. This was due to higher-than-expected wage growth in market sectors due to lower drawdown of attendance allowance and less intensive use of obstacles to work on the employer’s part compared with the forecast assumptions.

The koruna-euro exchange rate was close to the forecast on average in Q2. Following a sharp weakening in mid-March, the exchange rate mostly fluctuated between CZK 27 and CZK 27.50 to the euro until mid-May and then appreciated to around CZK 26.70 to the euro. The firming of the koruna reflected improvements in the epidemiological situation, the reopening of economies and improvements in global sentiment.

Overall, economic developments are largely in line with the forecast so far. The GDP figure for 2020 Q1 confirmed the negative impact of the coronavirus pandemic, the related decrease in external demand and the government’s quarantine measures on the domestic economy. Minor upward deviations from the forecast were recorded for wages in the same period and for consumer prices in May. The share of unemployed persons during Q2 is also slightly higher than expected.

The Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being broadly balanced. While the current evolution of the koruna exchange rate may have an anti-inflationary effect relative to the forecast, the stabilising effect of budget policy may on the other hand be stronger. High uncertainty persists regarding the course of the pandemic at home and abroad and the related cyclical and structural impacts on individual economies.