Transcript of the introductory statement from the press conference - 27 September 2012

GOVERNOR

After discussing the situation report, we decided to lower the interest rate on the two-week repo, i.e. our main policy rate, by 0.25 percentage point to 0.25%. We also decided to cut the Lombard rate by 0.75 percentage point to 0.75% and reduce the discount rate by 0.15 percentage point to 0.10%. As regards the latter, from a purely technical perspective, we are taking stock of whether rates must technically or legally stay in very low positive figures or can go as far as zero. From the practical point of view, it is of no major importance whether the rate is 0.01% or 0%, but even so it seems that there are not as many obstacles as we thought to rates moving to zero. There would probably be obstacles in the case of negative levels. In this sense, do not regard the discount rate at 0.1% as a floor for rates.

Another thing which is not here but which I feel the need to communicate as a decision or agreement of the Bank Board is that although the Bank Board does not agree on when other instruments, standard or non-standard, would be used (we had a very interesting semantic debate on whether exchange rate operations are in our standard or other toolbox), we definitely agreed that if we felt the need to use instruments other than the interest rate, among other things because we had reached zero, it would most likely, given our present knowledge, be the exchange rate channel that we would try to work with. Incidentally, I think we agreed on this regardless of whether this time is coming, whether it will ever come – which we have never discussed among ourselves, or rather which we did not discuss just now – or when it will come. We certainly agreed that exchange rate is the right word.

Turning to the reasons for the decision, headline inflation will of course be slightly above the target at the horizon, but monetary policy-relevant inflation will be in the lower half of the tolerance band of the target, and of course, consistent with the forecast is a decline in market interest rates over the next few quarters, which from the practical perspective may also mean that a different type of monetary policy easing will be connected with the forecast. The risks to the forecast are on the downside. This chart merely summarises what I just said.

As for the external environment, it is worth mentioning that the external environment is moving away from the current forecast for consumer prices slightly in the upward direction, but not significantly. By contrast, producer prices are falling, as are expectations regarding the external environment and its growth. And interest rate expectations are of course connected with this.

The oil price has increased slightly, but from the point of view of expectations it is still on a slightly downward curve over time. The exchange rate levels saw no major changes.

As for the evolution of the economy, as you know the Czech economy contracted. The only positive contribution came from net exports, which by contrast are recording figures that are lower than expected by the forecast but extraordinarily good in historical terms. Industrial production in July indicates a downturn in economic activity. The labour market is flat. The upside effects of external costs strengthened somewhat due to higher energy prices, but energy prices remain very volatile and it is difficult to draw any conclusions from this.

As for the comparison, you can see for yourselves that GDP fell slightly against the forecast, which again means that it is signalling fewer demand-pull pressures from the economy. Inflation is basically slightly lower than we expected, as is the average wage. Unemployment is slightly higher.

In other words, the overall risks to the forecast are on the downside. The main downside risks are a stronger koruna exchange rate, weaker domestic activity, slower wage growth and domestic price developments. By that, I do not mean that prices are not above the tolerance band, but they are not signalling any pressures. After all, even headline inflation is in line with, or slightly below, the forecast. As usual, the only upside risk comes from abroad in the shape of higher prices of energy and agricultural commodities.