Transcript of the introductory statement from the press conference - 3 February 2011

GOVERNOR

After discussing the situation report, the CNB Bank Board decided by a majority vote to leave the two-week repo rate unchanged at 0.75%. Four Bank Board members voted in favour of this decision and three members voted for increasing rates by 0.25 percentage point.

So, now I’ve told you what you already know. Now I’d like to move on to the next slide, which contains the well-known phrase: Consistent with the forecast is stability of market interest rates initially, followed by a gradual rise in rates as from the end of 2011. It also says that the risks of the forecast are significant and are related mainly to external developments. They are on both sides. They are balanced overall according to the forecast. Maybe it’s worth mentioning here that the Bank Board regards the upside risks to inflation as increasing.

The summary of the forecast. In principle we could say – and you used it last time when I said that the forecast looked like every bank board’s Christmas wish come true, with inflation around the target – well it looks like we now also have an Orthodox Christmas, because that Christmas gift is still with us. The forecast generally doesn’t differ very much from the previous one. We could say that there is a slight effect of the exchange rate appreciation, an effect of slightly higher growth, a slightly stronger exchange rate, slightly higher inflation pressures in the global economy, but somewhat offset for us by the exchange rate. Of course, there’s also fiscal restriction and solar power plants.

I mentioned growth. Growth is in fact a theme of the external environment generally. Expected prices – both consumer prices and in 2011 also producer prices – are rising. Domestic GDP growth expectations are rising. And this, of course, is also connected with an outlook that rates may be somewhat higher in a year or later than they are now in the global environment. The fundamental source of inflation, and here it is reflected in one dimension of what we broadly call commodities (energy and so on): the oil price is growing, but so are the prices of most commodities. For us this is being offset by the exchange rate, but this is no longer the case for the euro area in terms of the change in the forecast for this year.

So, here we have the Orthodox Christmas again. This is the dream come true of bank boards, in other words headline inflation on target. Of course, it is even more joyful from the perspective of the relevant indicator – monetary-policy relevant inflation is also on target.

The minor revision, of course, also somewhat lifted the slightly asymmetric, weirdly drawn W. It seems, therefore, that growth should record positive figures at least in the central part of the forecast, or probability interval, over the entire period. And we can say this in a slightly louder voice than before Christmas.

I said earlier that we expect the growth in rates to be very gradual. We can see that, according to the forecast, an acceleration should not occur before the end of this year. That is, of course, closely linked with the fact – and again I will try to warn you, as I have done often and always – that none of this is a promise. This is a forecast which in principle also very much reflects the relationship between interest rates and the exchange rate. So all this means that according to the forecast interest rates and the exchange rate should go in the direction and way shown in this slide. So, returning here, this gradual rise in interest rates of course also reflects the assumption that the exchange rate will strengthen gradually at the forecast horizon. At the moment, of course, the exchange rate is somewhat stronger.

Now I get to a chart that I need to correct. Consumer prices in the first column, or the previous forecast, are 1.9. The presentation that we will publish will be correct, but at least you can see that nobody is perfect and even we can slip up slightly when preparing the presentation. I’d like to add to this the more important qualitative picture, which is that like everywhere else, we have also revised inflation – slightly downwards in our case thanks to the strengthening exchange rate. On the other hand, we are of course slightly more optimistic than before as regards GDP. This also implies that rates at the end of the forecast period, or in 2012 as a whole if you like, are rather higher than we expected.

I have already talked about the two risks, or at least the two main ones. They are, of course, commodity prices, which are being offset by a strengthening exchange rate, and on the other hand the strengthening exchange rate itself, driven by otherwise decent foreign trade and other flows.

The other risks are, in a way, reflected in the alternative scenarios. The Bank Board had three of these prepared in addition to the forecast, covering the risks that we view as possible. In other words, when we speak of balanced risks or slightly higher upside risks than last year, the more important thing in fact is the qualitative content of the risks.

One example of the scenarios regarded as risky by the Bank Board is certainly the scenario of higher commodity prices, which assumes roughly one-fifth higher prices of the main commodity groups compared to the baseline scenario. Of course, the ECB would respond to this shock by raising interest rates. There is a downturn in activity. The exchange rate improves. Our weaker exchange rate improves the price competitiveness of exporters, but even so our GDP growth falls, as is usually the case during such shocks. Domestic inflation increases moderately. And of course all this implies an increase in interest rates. So that is one of these scenarios – the red scenario.

The second scenario, or another scenario, is the German one, which we have given the quite cute working name “the German engine”. It basically assumes that growth in the euro area will benefit from German exports, so growth will be roughly 0.5 percentage point higher than in the baseline scenario. Such growth is, of course, accompanied by a policy tightening in the euro area. In the Czech Republic, however, it induces, on the one hand – the monetary policy tightening increases the interest rate differential. On the other hand, we have higher exports. So, on balance the impact on the exchange rate is not very significant. And as a result of all this we have more or less the same rates as before. It is not until 2012 that significant growth forces us to raise interest rates.

The last growth, or the last scenario, is a negative one. It assumes an escalation of the debt crisis in the euro area and says, by contrast – the debt crisis will deepen. That will necessitate fiscal restriction. Activity will fall. Rates will fall of course. GDP growth is lower. From this perspective we have a weaker exchange rate. That, of course, partly offsets our reaction, which will take the form of lower rates – significantly lower rates – roughly from 2012.

The Bank Board of course considered and discussed these scenarios in addition to the baseline forecast, and it decided as I said earlier.