Transcript of the introductory statement from the press conference - 28 June 2012

GOVERNOR

After discussing the situation report, we decided to lower the interest rate, as you already know. Of course, we adjusted to the fact that we are not changing all the rates. We have no room left for changing the discount rate. Four members of the Bank Board voted in favour of the decision to lower the rate by 0.25 percentage point. Three members voted for leaving the rate unchanged. So, to sum up, it was a bit less complicated than last time, when we had three alternatives.

As for the reasons for the decision, they are quite simple. We are convinced that headline inflation will be roughly close to its current elevated level as a result of the VAT increase, but monetary-policy relevant inflation will be significantly lower than headline inflation, and both rates will fall slightly below the target next year in the baseline scenario. Consistent with the forecast is a decline in market interest rates in the remainder of this year and a rise in rates roughly in the second half of next year.

Looking at the risks to the forecast, this is the interplay which is important to us, because it seems that the alternative scenario is gradually nearing materialisation. In this scenario, headline inflation is of course slightly higher owing to further tax changes, but on the other hand, monetary-policy relevant inflation would be considerably lower as a result of everything assumed by the package of changes that should go through Parliament and that is close to going through Parliament.

As regards current inflation, as you can see the most recent figure is slightly below the forecast, but the differences due to lower food prices and fuel prices, which are beginning to shrink, are not very dramatic. Rather, I would say that it shows how the forecast is more or less materialising. I’d perhaps like to add that monetary-policy relevant inflation was exactly 2% in May.

Turning to what influences this – or what influences our forecast – in the external environment we can see moderate pressures on consumer prices. By contrast, producer prices as a leading indicator are beginning to go down next year. Slightly higher GDP this year is offset by slightly lower GDP next year. In other words, these three groups of indicators together are not showing us any major changes. Importantly, expectations that euro area rates will be lower than originally expected are intensifying. And of course we are starting to experience a commodity price decline, demonstrated here using the oil price decline, which is relatively sizeable. The movements in the dollar exchange rate are also too pronounced for us to ignore.

As regards the domestic economy, I don’t want to recapitulate what we have here. The only surprise in the inflationary direction is slightly higher wage growth, but we can identify many one-off pressures, such as payment of bonuses, the de facto replacement of sick leave with holiday, and other factors that may influence this. Otherwise, we can say that more or less the rest of the economy is pointing downwards. We had a quite large deviation of GDP from the expected figures, so the overall picture certainly does not suggest any major inflation pressures from the economy.

Looking at the comparison of recent developments with the forecast, I already mentioned the unpleasant surprise for many as regards GDP. Inflation is rather lower than expected. The average wage is slightly higher. Unemployment is slightly higher. None of this indicates, above all, any significant deviation from the forecast, which, in turn, of course implies that if the alternative scenario is realised, the developments will hardly differ from how we imagine them, i.e. the alternative scenario, in the sense of the approval of further fiscal consolidation measures.

In this sense, we also assessed the risks to the forecast (because this is the “smaller” situation report, in which we mainly assess the risks to the “big” forecasts) and we found four downside risks to inflation. I mentioned the first one – fiscal consolidation. External developments are the second one. Domestic activity is probably weaker than forecasted, and price developments and their lower near-term outlook also mostly indicate risks in the anti-inflationary direction. The only thing counterbalancing this is the exchange rate of the koruna, which is weaker, which of course means the import of some inflation pressures. But this is something I have spoken about here many times – it is not weaker exchange rate per se, it is a weaker exchange rate because a number of risks to demand are materialising, whether in the Czech Republic or abroad. This balances the effect to some extent. To four of us, this balance seemed sufficient to vote in favour of lowering rates by 0.25 percentage point at the close of the board meeting.