Transcript of the introductory statement from the press conference - 24 March 2011

GOVERNOR

First of all, what you already know: the Bank Board decided by a majority vote to leave the interest rate unchanged. This decision was adopted with a rather high final score of 5:1.

As regards the reasons for the decision, the situation is such that from the perspective of inflation we currently see no reason why we should not say it will be close to the inflation target at the monetary policy horizon (at least most of us). There are of course upside risks to headline inflation, principally as a result of VAT changes. As for the overall risks to monetary-policy relevant inflation, they are still balanced. Of course, we expect, or the forecast expects – there will be a new forecast next time of course – a gradual rise in rates as from the end of 2011.

As regards the changes compared to the forecast, it is clear that the balance of risks has changed: stronger domestic, let’s say, demand-side downside risks to inflation are to a certain extent outweighed, or may be outweighed – we will see, depending on our assessment in the forecast – by upside risks stemming from the supply side and from abroad.

The history looks roughly like this. Current inflation is slightly below the centre of the fan chart.

As for the comparison of the forecast, important changes can be found in the external environment, in the euro area, according to Consensus Forecasts chiefly in the area of prices – consumer as well as producer prices – for this year, but not so much for next year, and then of course in the outlook for interest rates. And that is, we think, what has changed most of all – the outlook for rates, which is no doubt being shaped, among other things, by the communications of our colleagues.

This chart shows what is behind this outlook for rates. Energy prices are rising at a dramatic pace. Until now, of course, other commodities, which are represented here by energy, have also been rising, but I will get back to that. The rise in energy prices and a potential rise in other commodity prices are offset to some extent by appreciation of the exchange rate, partly of course the euro-dollar rate, where the expectations have again been revised in this direction, and partly of course by the expected strengthening of the exchange rate of the koruna.

From the perspective of recent domestic developments, we can say that we were slightly surprised by lower figures than we expected for basically everything that signals growth or inflation pressures. This means the only opposite surprise we experienced to a certain extent was for unemployment. By contrast, commodity prices are passing through to us from abroad via industrial producer prices and agricultural producer prices, so they are increasing faster than we expected.

If we look at the comparison, I will basically repeat what I have already said – the comparison of recent developments with the forecast. We have slightly lower GDP, slightly lower inflation and a significantly lower average wage, and contrasting with that is slightly higher unemployment.

When I say that the risks to the forecast are on the upside for headline inflation and roughly balanced for monetary-policy relevant inflation, it is worth having a look at the factors. As for the upside risks, we are currently living at a time of higher world commodity prices. We can break this down a little, as the developments are not exactly the same across all items. We can basically say that so far energy prices have been rising, or not showing signs of stability, while the other commodities are now more stable and food prices are beginning to fall. This means that the developments are now largely being driven – or the upside risks to inflation are now largely being driven – only by energy. As for the VAT rate and the revisions – or potential revision – to it, besides the fact that of course nothing is definitive as yet, we can say that if this takes place, and it looks like a change will take place, we can say that the need to anchor inflation expectations may play a more significant role in monetary policy decisions for a while. But that remains to be seen to some extent. As regards the downside risks to inflation, we can more or less say that there no signals of demand-pull inflation. This is probably much more important than the deviation of the koruna exchange rate from the centre of the forecast.