Transcript of the introductory statement from the press conference - 3 May 2012

GOVERNOR

As you already know, we left rates unchanged. However, the voting was slightly more diverse, with two members voting for lowering rates by 0.25 percentage point and one member, on the other hand, voting for increasing rates by 0.25 percentage point.

As regards the reasons for the decision, the forecast expects inflation to be close to the current elevated values until the end of this year. By contrast, monetary-policy relevant inflation will be in the upper half of the tolerance band. Next year, both headline and monetary-policy relevant inflation should fall slightly below the target. Consistent with the forecast is a decline in market interest rates in the remainder of this year followed by a rise in rates as from 2013 H2. However, we assessed the risks to the forecast as being on the upside, and I will return to them shortly.

As for the baseline scenario, it hasn’t changed dramatically in qualitative terms since the previous forecast. This means we expect basically minimum domestic demand-side pressures and weak wage growth. By contrast, practically the only sources of inflation will be regulatory and political factors such as the VAT increase or administered prices, or things that pass through to our economy from abroad, potentially through a weaker exchange rate. The Czech economy, on the other hand, will stagnate according to the forecast and will not see a recovery until next year. We expect the exchange rate to appreciate gradually, and I already told you about interest rates.

With regard to the external environment, again, the changes are not dramatic, but consumer prices in the external environment, in the euro area, exert slightly higher pressures this year. The same is true of producer prices, although the changes are not large. By contrast, the euro area recovery next year is also expected to be a bit weaker. The important thing, however, is that expectations respond to all this with a further lowering of expectations of future three-month interest rates in the euro area. Running counter to this is a small increase in the expected price of oil, with a modest downward correction this year, but these are cosmetic changes relative to the oil price movements we have experienced in recent years. The dollar-euro exchange rate again records no dramatic movements – the changes are in the hundredths.

The forecast and what it expects in terms of inflation is not fundamentally different from the previous one at the monetary policy horizon. This year inflation is slightly higher than the previous forecast expected – I will come back to that later – but we expect it to fall below the target as soon as the year-on-year effect of the VAT change subsides. The same goes for monetary-policy relevant inflation, which is on the second slide, or the next slide. Here you can see that it is still in the tolerance band.

As for GDP, as I said, stagnation this year and a rise next year.

Turning to interest rates, the pot-shaped curve, so to speak, is slightly deeper. Again, these are largely shifts in the first, or sometimes even second, decimal place.

Regarding the exchange rate, we expect a very moderate and slow appreciation.

Now for the comparison with the previous forecast. Here you can see it very nicely. It is very difficult to find differences in the comparison from a distance – perhaps just one-tenth higher expected interest rates next year, which is related to the fact that the “pot” has a slightly steeper upward end, and a slightly stronger exchange rate this year, but really only slightly. Next year it will be the same.

However, we also asked for an alternative scenario describing the additional budgetary measures which are currently making their way from the government to Parliament. In other words, we took a look at what a further increase in VAT rates would cause. The alternative scenario is based on the assumption that this would dampen nominal disposable income and reduce household consumption, which would be the primary channel leading to slower GDP growth. Of course, this situation would lead to higher inflation, but the forecast assumes – in line with past experience – no major second-round effects on inflation, which is what the central bank responds to. This means that the central bank, which focuses mainly on monetary policy rates as a reflection of domestic inflation pressures, would respond to this situation with a slightly lower level of interest rates.

Looking at the differences in the figures, you can see here the further drop – I’m sorry, rise – in inflation due to the VAT change, which is the broken line, at the monetary policy horizon. However, in this scenario even headline inflation would be not only in the tolerance band, but also, according to our current knowledge, probably very close to the target or even right on it. Monetary-policy relevant inflation would of course be even lower in the tolerance band. GDP growth and the economic recovery would be postponed slightly and the 3M PRIBOR would therefore have to decline a bit more. The exchange rate would be basically the same.

If I compare the alternative scenario with the baseline scenario and with the previous forecast, we can see that the alternative scenario would differ slightly more in terms of both GDP and consumer prices – of course on the upside for consumer prices and on the downside for GDP – and as the pressures on monetary-policy relevant inflation would be lower in this scenario, the 3M PRIBOR would also be lower, especially in 2013.

This brings me back to what I said before. The Bank Board discussed the forecast and considered its main risks. In its view, the main risk on the downside is the fact that the outturn may be somewhere between the baseline and alternative scenarios. That is quite clear. With regard to the upside risks to inflation, on the other hand, a number of the Bank Board members agreed that they were afraid of a potential rise in inflation expectations, especially because this will be the first time in history, if memory serves me right, that VAT changes will be made in two consecutive years. This means that the one-off effect would not be fully dampened by a stabilisation of VAT the following year. A slightly smaller possible risk is a rather weaker koruna-euro exchange rate than forecasted. Higher prices of commodities, or oil, which we cannot influence but which could exert pressure on inflation expectations, are a sizeable foreign risk. At this juncture, there is the question of to what extent commodity prices are being determined only by supply and demand factors and to what extent also by financial factors or the monetary policy of some of our colleagues from the truly large institutions. By contrast, the Bank Board agreed that economic developments abroad, where the uncertainties are high, especially in the euro area, remain a risk on either side. Those uncertainties may materialise in either direction.