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 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 pandemic and the anti-pandemic measures in the Czech Republic and abroad.

The economic performance of our trading partners in the first half of this year is being adversely affected by the extension of foreign government measures to combat the pandemic and an initially sluggish pace of vaccination. On the other hand, the decline in economic activity in the euro area is being offset by strong demand for industrial production. Together with a marked rise in commodity prices, this is being reflected in growth in foreign inflation pressures in both the producer and consumer areas. However, these pressures will lessen next year. The anti-pandemic measures abroad will be eased gradually as the pace of vaccination accelerates in the next few months. Buoyant economic growth will thus resume during the year. The monetary policy of the European Central Bank will nonetheless remain very accommodative. The outlook for euro interest rates therefore remains negative.

The Brent crude oil price outlook has shifted considerably higher compared with the previous forecast as a result of reduced extraction. However, oil prices are not expected to rise further. The euro will appreciate slightly against the dollar, broadly in line with the assumptions of the previous forecast.

The Czech economy continues to suffer from the impacts of the coronavirus pandemic. Government shutdowns have been constraining much of wholesale, retail and services with short breaks for over a year now, and the same will apply even after a partial easing in May. Household consumption will thus be subdued in the first half of the year, despite continued government financial support. Besides the shutdowns, economic performance is being adversely affected by supply shortfalls in global production chains. This is having an adverse impact on some domestic industrial sectors. The reopening of the domestic economy in the next few months will be enabled by gradual immunisation of the population. Czech household and corporate sentiment will simultaneously improve. Household spending, deferred during the pandemic, will foster renewed growth in private consumption, which will become a driver of the economic recovery. Domestic industry will also start running smoothly again in the months ahead. Like last year, expansionary fiscal policy will dampen the negative impacts of the pandemic on economic activity this year. However, most government support measures will fade out next year. In 2021 as a whole, the economy will thus grow only slightly, with annual GDP growth being highly volatile over the course of the year. Economic growth will pick up appreciably next year.

Following its recent drop close to the 2% target, inflation will rise back towards the upper boundary of the tolerance band in the quarters ahead. This will be due to a sharp year-on-year increase in fuel prices initially, to buoyant growth in food prices in the second half of the year, and also to renewed growth in administered prices at the end of the year. Core inflation will fall only gradually from its current elevated levels. Its decline will be slowed by significant domestic demand pressures and brisk growth in industrial prices abroad. The overall inflation pressures will start to ease in the autumn as the current elevated growth of import prices subsides. Conversely, domestic price pressures will rise slightly owing to a gradual reopening of the domestic economy and a gradual pick-up in wage growth. Inflation will return close to the target next year, aided by a gradual tightening of the monetary conditions from roughly the middle of this year onwards.

Monetary policy-relevant inflation, which looks past the first-round effects of changes to indirect taxes, will be slightly lower than headline inflation. It will fall towards the inflation target over the monetary policy horizon.

The koruna will appreciate gradually further according to the forecast. This will primarily reflect an improving domestic epidemic situation, which will enable the economy to be gradually reopened. A strengthening koruna will also be fostered by a widening interest rate differential vis-à-vis the euro area due to an expected rise in domestic market rates.

Consistent with the forecast is stability of market interest rates initially, followed by a rise in rates from roughly the middle of this year onwards. The initial rate stability reflects a subsiding need for easy monetary conditions. Sizeable price pressures from the domestic and foreign economy, the resumption of economic life in the rest of this year and a further improvement in economic activity in 2022 will require an increase in market interest rates from roughly the middle of this year onwards.

By comparison with the previous forecast, the inflation outlook is higher for this year and to a lesser extent for next year as well. Economic growth has been revised downwards for this year and upwards for next year. The outlooks for domestic interest rates and the koruna exchange rate are little changed.

The Bank Board assessed the uncertainties and risks of the new forecast as being less substantial than in the previous forecasts and as broadly balanced overall. A more gradual fading of the pandemic, linked with lengthier lockdowns and a cyclical downturn at home and abroad, which could have anti-inflationary impacts, is a risk to the forecast. A risk in the opposite direction stems from the disruption to global production and supply chains and its pass-through to prices.

The Bank Board additionally decided to abolish the three-month repo operations for providing liquidity to credit institutions with immediate effect.