Transcript of the introductory statement from the press conference - 22 September 2011

GOVERNOR

In the Bank Board we discussed the sixth situation report and we decided just as you can see here and as you already know, that is, unanimously to leave the interest rate unchanged.

As to why we decided so, the inflation indicator relevant to us, i.e. monetary-policy relevant inflation, is close to the inflation target at the forecast horizon, as you know. Headline inflation will temporarily be slightly above 3% next year due to VAT – at least that’s how it appears to us. It is important to say that from this perspective the forecast we discussed last time assumed interest rate stability. But at present, the risks of the forecast, which are being driven primarily by the external environment, are relatively significantly in the direction of lower interest rates and moderately, or less significantly, in the direction of lower inflation. All this is conditional, of course, on the fact that – as you know, and we try to be very transparent about this – the interest rate path materialises if the exchange rate path materialises. In other words, the exchange rate path can lead to many variants, which will mean that risks going in other directions may start to materialise and we will respond by moving interest rates upwards or downwards. And when I say upwards or downwards, at this moment, as developments are being driven principally by the external environment, I have to say that we can no longer assume so strongly that the future movement will necessarily be upwards. But all this, I repeat, is conditional on exchange rate movements, which either bring us or, on the contrary, eliminate inflation pressures.

As for current expectations, the actual level is slightly below the forecast, but I would not overestimate this result. Maybe it’s worth saying that up to now the reality of these figures, but also of the external environment – if you look at it, you see that a slightly lower outlook for euro area growth, and above all a rather significantly lower outlook for interest rates, which is what is creating the risks to our interest rates, is materialising there. Not that we mimic the euro area, but a lower situation in the euro area and lower rates of course mean that we will achieve the same results with a generally lower level of rates. But I think it is important to say that these figures so far reflect – principally at the level of our economy and principally at the level of the euro area real economy, for example the slightly lower-than-expected growth figures we are now experiencing somewhat reflect our expectations, the expectations of the Bank Board – they essentially reflect the materialisation of our forecast. What we now see abroad, which is something that can be called dramatic turbulence in the euro area, will start showing up in these numbers only later. So far we don’t know with what strength and how, because it follows from the definition of turbulence that the situation is hard to predict, let alone predict its effects. But so far it’s not visible in the figures. By contrast, the figures show what we expected – some moderation of commodity prices. The exchange rate has already started to be affected by the turbulence.

In the Czech economy, it applies even more that what we can see in the figures so far, i.e. a slowdown and, also importantly, decreasing growth in industrial and agricultural producer prices, are things we expected. In qualitative terms, these are things that merely reflect the fact that the forecast is materialising. The figures have yet to show whether we will be hit by the euro area turbulence. I think this is the most important message. At this moment, to return to the forecast risks, which I am beginning and ending with in a way, the upside risk to inflation is now, of course, a weaker-than-expected exchange rate of the koruna, which may force us to react in one way or another. And I repeat that there is a link between the expected exchange rate path and the expected interest rate path. As for downside risks to inflation, we can see two factors from abroad. The first is a generally lower outlook for interest rates abroad – dramatically lower at the forecast horizon and beyond. And of course the other risk that may or may not materialise in a form that will impact on us is the condition of the financial sector and public finances in advanced countries – for us principally in the euro area.