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 November macroeconomic forecast and by an assessment of information obtained since it was prepared. Consistent with the forecast is stability of market interest rates initially, followed by a gradual rise in rates in the course of 2021. The Bank Board assessed the risks and uncertainties of the forecast in the context of the ongoing second wave of the pandemic as remaining very substantial.
As regards developments abroad, the decline in GDP in the effective euro area will be smaller this year compared with the assumptions of the current forecast. However, it will take the economies longer to recover from it. This will result in slower economic growth in 2021. By contrast, GDP growth in 2022 has been revised slightly upwards. The outlook for foreign industrial producer prices has been increased for this year and the next but lowered thereafter. Expectations regarding consumer price inflation abroad are largely unchanged, as is the outlook for 3M EURIBOR interest rates.
The Brent crude oil price rose significantly during November. Its outlook increased above the assumptions of the current forecast for both the rest of this year and the subsequent years. By contrast, the outlook for the euro-dollar exchange rate is almost unchanged.
In line with expectations, domestic inflation fell below the upper boundary of the tolerance band around the inflation target in the autumn. In November, it was slightly below the forecast. Core inflation remained elevated but did not accelerate further. The recent high growth in food prices slowed as expected. The slowdown in November was slightly more pronounced than forecasted. Growth in administered prices slowed further, in fact slightly more than expected, owing to changes in electricity prices. Fuel prices continued to fall year on year, in line with the forecast. According to the current forecast, inflation will decrease further next year and will return close to the 2% target over the monetary policy horizon, i.e. in late 2021 and early 2022.
The easing of the anti-epidemic measures during the summer enabled the Czech economy to partly breathe again. This led to quarter-on-quarter GDP growth of almost 7% and a moderation of the year-on-year GDP decline to -5%. The recovery of the domestic economy in Q3 was stronger than expected by the current forecast. This was due mainly to exports, reflecting above all a stronger recovery in external demand. Imports meanwhile lagged behind exports, owing partly to an unexpectedly deep downturn in domestic private investment, which is highly import-intensive. The household consumption forecast broadly materialised, in an environment of huge uncertainty. By contrast, government consumption growth surprisingly halted. The forecast does not expect the negative economic impacts of the second wave of the pandemic to start subsiding until the first half of next year, when the economy will return to growth amid recovering external demand. However, the output of the Czech economy will not reach the pre-crisis level even by the end of 2022.
So far, the latest monthly indicators do not point to any significant negative impacts of the second wave of the pandemic on domestic industrial production, which returned to year-on-year growth in October. By contrast, construction output, which was hit less severely than industry in the spring, remains in a year-on-year decline during the autumn. The fall in overall retail sales, i.e. including the automotive segment, has moderated in recent months. Retail sales excluding the automotive segment have been broadly flat. The situation can be expected to worsen again in November and December, not only in retail, but also in many other sectors.
As forecasted, the cooling of the labour market temporarily halted in Q3. Unemployment rose only slightly and total employment did not fall further, in line with the forecast. Year-on-year wage growth in Q3 was slightly faster than forecasted. The return to wage growth in Q3 primarily reflected the fade-out of statistical effects connected with the first wave of the pandemic, which had significantly lowered the reported wage growth in Q2.
The koruna appreciated against the euro in November, correcting the previous sharp weakening associated with the onset of the second wave of the pandemic. So far in Q4, the koruna has on average been almost 50 hellers stronger against the euro than forecasted.
Overall, the key domestic variables are not deviating substantially from the forecast. The smaller-than-expected year-on-year decline in economic activity in 2020 Q3 is good news. Inflation was slightly lower than forecasted in November. The same goes for the share of unemployed persons in Q4 so far. By contrast, the average wage rose faster year on year in Q3 than expected by the forecast.
The Bank Board assessed the risks and uncertainties of the current forecast in the context of the ongoing second wave of the pandemic as remaining very substantial. The risk of easier fiscal policy in the years ahead is beginning to materialise, given the tax package currently being debated by parliament. The risk of a worse course of the pandemic, associated with longer-lasting and broader shutdowns of the economies of the Czech Republic’s trading partner countries and of domestic industry, is not materialising fully so far, but a deterioration of the situation cannot be ruled out. The risk of a no-deal Brexit is increasing as the end of the year approaches. The structure of supply and demand factors at home and abroad and their impact on inflation remains a general uncertainty of the forecast.