Transcript of the introductory statement from the press conference - 2 February 2012

GOVERNOR

Just for the record, I will start by telling you what you already know: after discussing the situation report, the Bank Board decided unanimously to leave the repo rate unchanged at 0.75%. Vice-Governor Hampl did not participate in the vote, as he is enjoying the winter weather. No, of course I – none of us envies him and we send him our regards.

As regards the reasons for the decision, the whole situation report, which incidentally could in a very simplified way be said to be in line with, or to be largely a compromise between the previous baseline and its alternative, which seems very probable to us, expects monetary-policy relevant inflation, which is our targeted variable, to be close to the target over the entire forecast horizon. Headline inflation will rise this year to just above 3% due to a VAT increase, which is subject to an escape clause from the point of view of targeting. Conversely, from 2013 it should fall back below the inflation target as the one-off annual effect of the changes unwinds. Consistent with the forecast is stability of market interest rates in the near future. A modest decline follows after the near future, which is of course the most important period for the forecast. And the risks are balanced.

I will talk about this in more detail. Currently the main sources of inflation are food prices, including the fact that the VAT changes probably started to affect them last year, and the gradual pass-through of the depreciated exchange rate to prices. By contrast, domestic factors – domestic demand and low wage growth – are dampening inflation. Perhaps a word on the tax changes: it seems, and at this moment everything is indicating that, importantly, only first-round effects will occur. We consider the second-round effects – in the form of the effect on inflation expectations and wage demands – to be insignificant. This is reflected in anecdotal evidence regarding wage bargaining and of course also in the statistics on inflation expectations. As for the exchange rate path, we expect that it will return to gradual appreciation after a time, but at the moment we see nothing dramatic there. You will see this for yourself in the fan chart. With regard to the external environment, we will of course also be affected by the slowdown in external demand that we are already observing, especially in European countries. So, I wanted to point this out.

Now I come to the assumptions regarding the external environment. These assumptions have not changed much. It is perhaps worth noting the slightly lower expected producer prices, which already reflect the expected slowdown, and possibly even contraction, in some European economies. The same can of course be observed for the GDP indicator. What must be stressed, and what is important for our decisions, is the expected EURIBOR, which remains falling.

In the second group it is worth noticing that both of the external effects that are introducing inflation into our economy through energy prices, or rather oil prices, koruna oil prices, are signalling slightly higher price pressures: a firmer dollar against the euro and a slightly higher outlook for the dollar price of oil.

This brings me to what I said earlier. The headline inflation forecast expects that this year headline inflation will be slightly above the upper boundary of the tolerance band. However, I repeat that headline inflation for this year is affected by the VAT increase, which is a factor to which we apply an escape clause. By contrast, after these effects unwind, it will most probably move into the lower part of the tolerance band, i.e. below the target.

By contrast, monetary-policy relevant inflation, which is our targeted variable, is near the target and moving around the target over the entire forecast, relatively very close to it. At the monetary policy horizon, which is the most relevant period for us, it is slightly below the target.

GDP for this year more or less means stagnation. An increase and recovery in external demand, and also consequently in economic activity in our economy, should start to appear next year, and already from the end of last year – an increase somewhere below 2%. I think you will see the figure shortly.

As for interest rates, as I said, consistent with the forecast is stability of market interest rates in the near future and a modest decline thereafter. I would like to remind you that interest rates are the first of the indicators which are assumptions rather than commitments of the forecast. The other one is the exchange rate. Here you can see that we expect very moderate appreciation from the current weakened level – of course within a very broad range.

Now I will make a comparison with the previous forecast, and perhaps make a comment here and there on the alternative scenario of the previous forecast, which we said had influenced us a lot, as you may remember… So, consumer prices. We were expecting 1.6% in the previous forecast. Now we are expecting 1.5% in 2013 Q1, i.e. in the first half of the period affecting us. In Q2 it is unchanged at 1.5%… GDP, by contrast, we have revised downwards compared to the baseline of the previous forecast, but we are rather more optimistic than the alternative scenario… The stagnation next year really means zero. Zero this year and 1.9% next year. As I said, maybe what is more important here is not that this is an expected decrease from the baseline of the previous forecast, but that we are slightly more optimistic than the alternative scenario of the previous forecast, which influenced us a lot. The 3M PRIBOR: basically a minimal change this year but expectations of lower values next year. As for the exchange rate, this forecast predicts a weaker rate than the previous one did.

This brings me to the last important slide. The risks to the forecast are balanced in our opinion. As for the downside risks to inflation, we may experience stronger fiscal consolidation measures than we are assuming, as our forecast assumes a general government deficit of 3.8%. Let me remind you that a deficit of 3% in 2012 is expected in the update of last spring’s Convergence Programme and other government documents, so it is possible that some fiscal measures will be taken, which would, of course, be anti-inflationary in nature. We see upside risks to inflation primarily in the possibility that food prices will rise faster. We noted an increase in food prices before Christmas last year and we believe that this basically reflected the expected VAT increase, in other words a frontloaded increase. However, if it turns out that the food price increase was caused by fundamental factors, it would certainly force us to think about what to do next. Then we have risks which are large but we do not know in which direction they will act. Developments abroad could of course act in the inflationary direction if the problems principally in the euro area and the advanced nations are solved more quickly than expected. But on the other hand they could of course act in the opposite direction if the problems escalate. And of course there is the sentiment affecting the exchange rate of the koruna in the short term, which is relatively hard to predict.