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%.

The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is stability of market interest rates initially, followed by a gradual rise in rates from roughly the middle of this year onwards. The current economic situation and the economic outlook are still being fundamentally affected by the course of the coronavirus pandemic and the anti-pandemic measures in the Czech Republic and abroad.

The government measures in place in our trading partner countries during the current wave of the pandemic are having milder economic impacts than in spring 2020. The decline in foreign economic activity at the turn of the year is being softened by solid performance of industry. However, the existing restrictions will only be lifted very gradually. Nevertheless, euro area real GDP growth can be expected to resume this year. Foreign industrial prices will also return to growth in 2020. That growth, however, will be dampened by only gradual closure of the output gap and appreciation of the euro against the dollar. Consumer price inflation in the euro area will reflect rising energy prices and increasing indirect taxes this year. Before the end of 2020, the European Central Bank responded to the economic downturn caused by the second wave of the pandemic by easing monetary policy further. The outlook for euro interest rates is therefore negative over the entire forecast horizon.

The price of Brent crude oil rose to more than USD 50 a barrel at the turn of the year. The market outlook expects it to decline slightly again this year and the next. The forecast also assumes further appreciation of the euro against the dollar.

As regards the domestic economy, the deterioration of the epidemic situation in autumn and winter led to repeated shutdowns. According to the assumptions of the forecast, they will be relaxed only gradually during the first half of this year. The restrictions mainly concern wholesale and retail and services. By contrast, export-oriented industry has been hit to only a small extent so far, unlike during the first wave. The forecast assumes that the adverse economic impacts of the pandemic will gradually fade during the year as the epidemic situation improves. Economic growth will therefore resume in the second quarter, aided by gradually improving household and corporate sentiment. The economy will grow by more than 2% overall this year. It will pick up further next year, fostering a gradual return of overall economic activity to the pre-pandemic level.

At the end of last year, inflation returned to the tolerance band around the Czech National Bank’s target. It will fall further close to the 2% target in the first quarter of this year and fluctuate around the target for the rest of this year. The current decline in inflation is due to a slowdown of the previously strong growth in food prices and administered prices. Core inflation will also decline in the first half of the year, reflecting a continued weakening of growth in total costs. The disinflationary effect of the domestic economy will subsequently fade steadily as the economy gradually recovers from the pandemic. However, continued appreciation of the koruna will act in the opposite direction. Headline inflation will get slightly above the inflation target next year, owing mainly to an increase in excise duties.

Monetary policy-relevant inflation, which looks past the first-round effects of changes to indirect taxes, will stabilise at the inflation target over the monetary policy horizon.

The koruna will appreciate gradually further according to the forecast. This will reflect the resilience of Czech export-oriented industry during the second wave of the pandemic, the subsequent reopening of the economy and improved financial market sentiment. A strengthening koruna will also be fostered by a gradually widening positive interest rate differential vis-à-vis the euro area.

Consistent with the forecast is stability of market interest rates initially, followed by a gradual rise in rates from roughly the middle of this year onwards. The initial rate stability reflects the need to keep monetary policy easy in a situation where the pandemic is having negative impacts on the domestic economy. The subsequent gradual rise in rates stems from the expected recovery of the domestic and foreign economy as the pandemic recedes with inflation stabilised close to the target.

By comparison with the previous forecast, the inflation outlook is lower for this year and higher for next year. Economic growth has been revised upwards for 2021 and downwards for 2022. The outlook for domestic interest rates is little changed. The koruna-euro exchange rate is expected to be visibly stronger than in the previous forecast both this year and the next.

The Bank Board assessed the uncertainties and risks of the forecast as being substantial and tilted to a longer-lasting pandemic than assumed by the forecast. Longer lockdowns at home and abroad and an ensuing deterioration in the financial situation and sentiment of businesses and households are the main risk to the forecast. This could lead to a lengthier cyclical downturn of the Czech economy and hence to a need to keep monetary conditions accommodative for longer than in the forecast.

To conclude this statement, I would like to announce that, from this winter forecast onwards, a Monetary Policy Report becomes the Czech National Bank’s flagship publication on monetary policy. It replaces the Inflation Report published since 1998. More information is available on our website.