Transcript of the introductory statement from the press conference - 21 December 2011

GOVERNOR

The Bank Board met today and, after discussing the situation report, decided unanimously to leave the two-week repo rate unchanged at 0.75%.

Turning to the reasons for the decision, I will try to move a bit between an assessment of the baseline and of the alternative scenario. According to the current forecast, inflation will be slightly below the target. Headline inflation has risen, but should fall. It will rise in 2012 owing to a VAT increase, but it will return below the target in 2013. From this point of view, consistent with the forecast is a slight decline in market interest rates as foreseen by the forecast discussed at the previous meeting, and stability until late 2012/early 2013. At this moment, we assess the risks to the forecast as being slightly inflationary, or slightly on the upside for interest rates, compared to the baseline scenario. However, we should bear in mind that the Bank Board had already based its previous decision more on a shift into the space between the baseline and the alternative, with the alternative assuming de facto that the exchange rate will be weaker. This will be associated with other phenomena, especially interest rates, which do not need to be reduced at the moment. Of course, the comparison with the alternative is also now based on the fact that the alternative is more inflationary so the comparison of the current situation comes out slightly less inflationary.

If we look at the current figures, current inflation is higher from the point of view of the inflation forecast and the expected outcome. A majority of the Bank Board members were inclined to the view that this is probably a frontloaded effect of the VAT increase, as has happened at similar times in the past. However, the pass-through of prices of principally imported commodities or food was also discussed as a possible cause. From the perspective of the forecast, however, because the forecast was prepared last time and has not changed, it still holds true that inflation should get below the target in 2013.

What is more important is how the external environment has changed. Here we can say that the December Consensus Forecast brought no dramatic changes – slightly higher producer prices from the point of view of the external environment than in the forecast, but for next year the deviation of this year will turn in the opposite direction. The Consensus Forecast clearly expects lower growth next year compared to the forecast, and this implies a slightly lower expected interest rate path going forward. As for commodities, the changes are not dramatic – slightly higher expected oil prices, a slightly weaker euro.

From the perspective of the Czech economy, the information runs basically in two directions. We have slightly lower outputs than we expected almost in all their dimensions. By contrast, we have slightly lower unemployment, we have slightly higher inflation, and, conversely, we have rather lower wage growth in the business sector. In the non-business sector we were surprised by an opposite trend, but the number of employed persons fell, so the wage bill balanced out automatically.

As for the chart, here you can see what I said earlier – lower output, higher inflation, slightly lower wages, slightly lower unemployment. The differences – what is more important than their direction is that they are not large.

So, when we summarised and assessed this, we concluded – taking into account current inflation and assuming that the expectation that the rise is due principally to the frontloaded effect of the VAT increase does not materialise – that the risks to inflation are slightly on the upside. Besides current inflation we also have a weaker koruna exchange rate. On the other hand, on the anti-inflationary side, the development of the economy as such – the fundamental demand-driven or wage-driven inflation pressures – is a clear downside risk to inflation. On top of that, of course, we have the euro area crisis, which is quite clearly continuing.