Transcript of the introductory statement from the press conference - 29 March 2012

GOVERNOR

Here you have the basic facts, which I think you already know, or at least the decision. Rates were left unchanged, with a voting ratio of 6:1. One member voted to increase rates by 0.25 percentage point.

As regards the reasons for the decision, they are quite obvious. According to the forecast, monetary-policy relevant inflation will be close to the inflation target. Headline inflation is currently rising above 3%, but it should fall later on. Monetary-policy relevant inflation, of course, remains near the target for the whole period up to the horizon we influence. Consistent with the model forecast is stability of interest rates in the immediate future, possibly followed by a slight decline. The Bank Board assesses the risks to the forecast as being balanced. I would like to emphasise that it is the usual picture of course – a slowdown in external demand as we expected, fiscal consolidation expected in the Czech Republic and elsewhere, and flat GDP and an increase next year. The sources of inflation currently are either external pressures or things that cannot be influenced very much in the short term. Food prices are elevated because of the VAT increase, which is traditionally something the central bank cannot smooth. Fuel prices and administered prices – we are still seeing some pass-through of the recently weakened exchange rate into prices, although it, of course, has returned, or rather is slowly returning, towards the trend.

As for the current inflation forecast, you can see that we are above it. We are above it principally – or rather almost exclusively – because the VAT increase has been completely reflected in prices. This differs somewhat from our previous experience. However, this does not mean that the whole one-year effect will not disappear at the end of the year. I will leave a detailed discussion of whether such complete pass-through is sustainable until next week.

In the external environment, basically the most important change is visible for the EURIBOR, for which the Consensus Forecast expectations seem to be falling further. Otherwise, the external environment is of course generating mixed pressures. Cost pressures are increasing producer prices. By contrast, GDP expectations are falling. However, the analysts’ consensus assesses all this. So, EURIBOR rates are expected to be lower than before.

The rising pressures are due mainly to commodities, which are represented in this chart by oil prices. By contrast, the exchange rate changes are basically unimportant.

Turning to the evolution of the Czech economy, it is more or less in line with our expectations. Growth is slowing. Overall growth is being driven solely by exports. Industrial production indicators are signalling flat economic activity, although not a depression or a falling trend. Employment is changing to a slight and unimportant extent. The general unemployment rate is again changing negligibly. The average nominal wage is slowing. By contrast, industrial producer price inflation, which is a bit of a leading indicator for other prices, is declining. So, all in all, it is a mixture of insignificant signals.

Here is a comparison of the actual developments with the forecast, which basically just repeats what I said. We can see that headline inflation is slightly higher than we expected. On the other hand, the average wage seems to be slightly lower, which is, after all, in line with the slightly higher unemployment. But overall these deviations correspond roughly to the expected error, so it is nothing important.

This brings me to the end of the presentation, or almost to its climax: the risks to the forecast, which were assessed by the Bank Board as being balanced. On the upside it sees higher observed inflation and a higher inflation outlook, due mainly to prices of food and fuels. On the downside we see a stronger koruna exchange rate compared to the current forecast – some of you may remember that we significantly moderated the possibility of appreciation, or expectations of appreciation, and currently the outcomes are starting to exceed our expectations – and a lower outlook for foreign rates, reflecting a general deterioration of the demand conditions in the world economy.

Going beyond these risks, I would perhaps venture to remark that we also discussed the possibility of a further increase, or change, in VAT exerting pressure on headline inflation, i.e. on consumer prices, next year, and we agreed that a VAT change two years in a row would probably force us to discuss very carefully a new debate on what to do if headline inflation goes up two years in a row in order to maintain inflation expectations, versus the fact that such a VAT change would of course actually weaken consumer demand and would increase the decline in demand and therefore the decline in pressures on monetary-policy relevant inflation, which we are primarily interested in. I also want to say that we currently have no strong opinion on this. It is just a consideration that, in a way, suggests itself given the debates going on with regard to balancing the budget.