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 increased the two-week repo rate by 25 basis points to 0.50%. At the same time, it increased the Lombard rate to 1.25% and kept the discount rate unchanged at 0.05%. Four members voted in favour of this decision, one member voted for increasing the two-week repo rate by 50 basis points and two members voted for leaving rates unchanged.
This decision of the Bank Board is underpinned by the spring macroeconomic forecast and by an assessment of information obtained since it was prepared. Consistent with the forecast is a rise in market interest rates from roughly the middle of this year onwards. The Bank Board assessed the risks and uncertainties of the forecast as being slightly inflationary overall.
The current outlook for GDP growth in the effective euro area has increased, especially for this year. This is due to the earlier easing of the anti-pandemic measures in the euro area countries than assumed by the current forecast. The outlook for foreign industrial producer prices – especially for this year – has moved upwards significantly. This is due in roughly equal measure to the core and energy components of producer prices. The increase in the energy component is being driven mainly by the continued rise in oil prices. The outlook for growth in the core component of producer prices has been revised upwards due to the overloading of global production and supply chains abating later. The outlooks for consumer price inflation in the effective euro area and foreign interest rates have been revised marginally upwards.
The Brent crude oil price exceeded USD 70 a barrel in June and its outlook shifted appreciably above the assumptions of the current forecast. The expected euro-dollar exchange rate is virtually unchanged compared with the forecast.
In line with the spring forecast, domestic inflation has been close to the upper boundary of the tolerance band in Q2 so far. As expected, core inflation remained elevated in April and slowed slightly in May. Consumer price inflation in this segment continued to be driven by a still solid income situation of households accompanied by strong inflation pressures from abroad. Growth in food prices remained highly volatile. Fuel prices switched to strong growth in Q2, mainly on account of base effects caused by the drop in oil prices during the first wave of the pandemic. According to the spring forecast, inflation will fluctuate around the upper boundary of the tolerance band in the quarters ahead and return close to the CNB’s 2% target next year. This will be aided by an unwinding of the currently elevated growth in import prices and an expected tightening of monetary conditions.
In Q1, the Czech economy faced the most stringent anti-epidemic measures so far. Despite this, GDP fell only slightly in quarter-on-quarter terms and its year-on-year decline was less pronounced than the spring forecast had expected. This was due mainly to a larger-than-forecasted contribution of gross capital formation and, within it, unexpectedly strong additions to inventories in particular. This was counteracted by a surprisingly negative contribution of net exports. A slight year-on-year increase in government consumption and a sharp year-on-year decline in household consumption were broadly as predicted. The spring forecast assumes that the economy started to recover in Q2. The Czech economy will thus return to growth overall this year, but the year-on-year dynamics of GDP will be highly volatile over the course of the year. Economic growth will pick up appreciably next year.
Following a recovery in March, year-on-year growth in industrial production accelerated sharply in April, aided significantly by base effects. By contrast, construction remains in a downturn. In early spring, retail was still restricted by the anti-epidemic measures. As in the case of industry, the faster growth in retail sales in April was due largely to last year’s low base.
Despite the worst pandemic wave so far, the labour market situation did not deteriorate further in Q1. The slight increase in the general unemployment rate was in line with the forecast, and the share of unemployed persons in April and May was slightly lower than forecasted. Wage growth in market sectors was above the spring forecast owing to faster growth in the fundamental component of wages. By contrast, wage growth in non-market sectors lagged significantly behind the forecast. As a result, the expected overall wage growth broadly materialised.
The koruna appreciated swiftly to CZK 25.4 to the euro in the first half of May. This was fostered by an inflow of foreign short-term capital into koruna assets, primarily reflecting a marked improvement in the epidemic situation at home and in most EU countries. The koruna has thus so far been slightly stronger in Q2 compared with the spring forecast. According to the forecast, the koruna will continue to firm gradually.
The spring forecast was drawn up in an environment of elevated risks and uncertainties but has been materialising relatively well so far. The significantly smaller-than-expected year-on-year decline in economic activity in 2021 Q1 is good news. Inflation and average wage growth were in line with the forecast in May. The share of unemployed persons was slightly below the forecast in April and May.
The Bank Board assessed the uncertainties and risks of the spring forecast as being slightly inflationary overall. The more favourable than expected course of the pandemic will contribute to a faster recovery of the domestic real economy. An updated outlook for the external environment, higher-than-expected growth in domestic fundamental market wages at the start of the year and a higher outlook for administered prices next year are acting in the inflationary direction. Conversely, the Bank Board identified the stronger-than-expected exchange rate of the koruna in recent months as an anti-inflationary risk. A renewed deterioration of the epidemic situation during the autumn cannot be ruled out either. Given the swift progress of vaccination, however, this should not lead to across-the-board restrictions being reintroduced in the economy. With the present decision, monetary policy is probably entering a phase of gradual growth in interest rates, which have been very low up to now. Interest rates can therefore be expected to continue rising in the second half of this year.