Transcript of the introductory statement from the press conference - 4 August 2011

GOVERNOR

I will start with what you already know. Just for the record, I will say that after discussing the situation report, we decided by a majority vote to leave the repo rate unchanged at 0.75%. Two members of the Bank Board voted for increasing rates by 0.25 percentage point.

As for the reasons for the decision, most of us saw the risks to the forecast as being balanced and expect monetary-policy relevant inflation to be relatively close to the inflation target over the entire forecast horizon. Headline inflation, of course, will be temporarily slightly above 3% next year due to the VAT increase, which seems ever closer to becoming reality. Consistent with the forecast, which assumes these inflation developments, is broad stability of market rates at the start of the forecast period and a gradual rise in rates starting in late 2011/early 2012. As in the past, rates of course do not react to the first-round effects of tax changes and hence do not react to the VAT increase either.

If I were to summarise the forecast perhaps even beyond what is in the presentation, the principal source of inflation pressures is still external phenomena – world commodity prices and food prices, which are in turn leading to growth in industrial producer prices, which is being dampened only partly by the strengthening exchange rate. By contrast, in the domestic economy, we are still seeing weak domestic demand due to relatively low, albeit increasing, wage growth. For that reason we expect no surprises. The main message of the forecast has not shifted much since the previous forecast. We expect a slight slowdown in GDP growth this year. The weakening of demand in our economy and abroad has a common denominator, namely fiscal cuts, slowing growth in activity in many centres, and so on and so forth. The stability of our rates is of course a reflection of the demand situation not only at home, but also abroad.

Now for the external environment. The very slightly rising outlook for consumer prices in the effective euro area is perhaps worth noticing. Of course the pressures are the same – producer prices – I mean compared to the previous forecast. On the other hand, there are increasing growth expectations for this year, but then a stable and not very dramatically positive outlook for subsequent years. I think this is an important change. Expectations regarding future interest rates are beginning to decrease. This is of course largely due to the absence of inflation pressures other than those stemming from the price categories I have mentioned, and of course to the euro area debt crisis. As regards commodity prices, the outlook is no longer increasing, or the increase is negligible. The exchange rate of the dollar is of course expected to go in the direction indicated in the chart.

Turning now to the headline inflation forecast, as I said we expect inflation to get slightly above the inflation target because of the tax changes, which we treat as an exemption. This is a phenomenon that does not influence monetary policy, which cannot try to smooth this type of change. Otherwise, it is perhaps worth mentioning that we also expect a moderate increase in the growth rate of administered prices in the third quarter of this year.

As regards the impacts of the tax changes, we quantify them at 1.1 percentage points for 2012. There will also be a harmonisation increase in excise duty on cigarettes. There, the contribution is 0.1 percentage point. In 2013, by contrast, the expected harmonisation will have a slightly negative effect on inflation. In the other important price categories, it might be worth saying that we expect a gradual slowdown in food price inflation as the situation calms. In principle, the situation was caused by bad harvests or non-average phenomena in the main producer areas. That is largely a thing of the past.

The forecast for monetary-policy relevant inflation is again very favourable from the point of view of fulfilment of the inflation target. We expect it to remain very close to the inflation target over the entire horizon – the entire period of the forecast – and it should hit the target almost exactly at the monetary policy horizon.

As for the other forecasts, we expect a slight slowdown in GDP growth next year. In fact, the growth should already be slowing now according to the forecast. On the other hand, more robust growth is expected after all the measures – and hopefully the debt crisis and other things that are worrying investors – unwind, which is basically in 2013.

As regards our forecast, I can only repeat that consistent with the forecast is broad stability of our interest rates at the start of the forecast period and a gradual, not very dramatic rise in rates starting in late 2011/early 2012.

The forecast, as we know, is conditional. Our reactions depend to a large extent on the exchange rate. We assume that the exchange rate will continue to appreciate gradually over the forecast period, and especially from the start of next year and during next year.

If I make a comparison with the previous forecast, what has changed is of course the expectations for consumer prices, but this change is in principle driven by the tax changes. Monetary policy-relevant inflation has not changed much. We expect slightly better growth than before for this year, but on the other hand slightly lower growth next year. This is due basically to fiscal restriction, to a large extent to general uncertainty, and in a way also to the VAT increase, which will slightly weaken consumer demand as such. Our rates are therefore slightly lower. This largely reflects the uncertainty regarding – and the decreasing outlook for – increases in rates everywhere else.

The risks to the forecast are broadly balanced. Lower foreign interest rates are the main downside risk. This forecast is interesting in that it abstracts – compared to, let’s say, the standard process – from the recent decreases in the outlooks for rates in the euro area. And it is complemented with a foreign rate sensitivity scenario, which you will find in it, so you can play around with it if you wish. This is partly because the swings have been dramatic and it is very difficult to find in them the value that could be justified as fundamental-based, as the interest rate outlooks have been fluctuating significantly. Conversely, the strongest upside risk is a weaker-than-expected exchange rate of the koruna, which could, moreover, generate further price pressures stemming from better export results, which could also happen.