Transcript of the introductory statement from the press conference - 1 November 2012

GOVERNOR

First, the decision. You already know the gist. In particular, the Bank Board decided to lower our policy rate – the 2W repo rate – by 0.2 percentage point to 0.05%. At the same time we decided to lower the Lombard rate from 0.75% to 0.25%, i.e. to narrow the spread, and to lower the discount rate by 0.05 percentage point also to 0.05%. As you know, five Bank Board members voted in favour of this decision, and two members voted for leaving interest rates unchanged. A perhaps less usual point on this slide is that most of the Bank Board members agreed that rates would be kept at this level in the longer term until inflation pressures rise significantly. The threshold I am talking about of course means something that could very easily be called technical zero.

As regards the reasons for the decision, they are of course based on price stability. Headline inflation will be slightly above the target owing to planned tax changes, but monetary-policy relevant inflation will be in the lower half of the tolerance band around the target over the entire outlook, i.e. including the monetary policy horizon. That said, consistent with the forecast is an even further decline in market interest rates, and a rise in rates in 2014. When I say even further, of course that is not possible in practice. The risks to the forecast given such interest rates developments are balanced.

Turning to the baseline scenario, first of all I must say that the sources of current inflation are things which have nothing to do with demand. They are tax changes and fading growth in import and food prices. By contrast, the domestic economy is curbing inflation. It is also worth mentioning that our economy and hence also demand-pull inflation pressures – their non-existence is also reflected in the fact that according to the forecast the Czech economy will fall by almost 1% this year owing to a marked slowdown in external demand. Next year, a gradual recovery in external demand will act in the opposite direction, but this will be counteracted by restrictive impacts of domestic fiscal consolidation. More noticeable growth will not occur until 2014. The forecast expects a basically stable exchange rate.

Now to the external environment and the assumptions of the forecast. First of all, it must be said that the changes are not dramatic. A slight increase in consumer prices. On the other hand a decline in producer prices, a decrease in expected GDP growth and a fall in expected interest rates in the external environment. Again, all this suggests a sizeable dampening of the economy not only in our country, but also abroad.

As for the price of oil, or energy in general, there is a slight increase, but it is far from dramatic. There are almost no movements in the dollar-euro exchange rate, especially at the forecast horizon.

The headline inflation forecast basically just repeats what I said: owing mainly to tax changes, inflation will be slightly above the target roughly until the middle of our monetary policy horizon. After that, by contrast, it will fall below the target as the effect of the planned measures unwinds.

Monetary-policy relevant inflation is also below the target over the entire horizon and before it. I should repeat that this picture assumes that we will be able to carry out easing, which is in fact assumed by the shift of interest rates below zero.

I have already spoken about GDP growth. I repeat that it will not generate inflation pressures until the forecast horizon and beyond.

I also commented on interest rates. What you see is not a shift of the centre below zero, but the centre is the 3M PRIBOR, which is now about 0.5 percentage point higher than our policy rates. This means that the forecast basically assumes that we will ease, or will somehow substitute for an easing of interest rates, which would have to turn negative, which of course is impossible in practice.

We expect the exchange rate, as I said, to be stable.

Perhaps a comparison with the previous forecast, which shows how our perception of the future has shifted. A slight decrease in consumer prices, but I repeat again that it is conditional on our being able to ease policy in other ways. On the other hand, a decline in expected GDP growth for next year and the year after. Related to this are lower interest rates, or more generally monetary policy easing. And the koruna is stable against the euro.

As regards the risks to the forecast, we assessed them as being balanced overall. Of course, a high degree of uncertainty currently surrounds the shape of the fiscal consolidation measures for next year and their impacts.

The Bank Board wants to communicate one more thing. Although this is not part of monetary policy measures, we have been selling the income on reserves more or less automatically for several, many years. We have now decided to suspend this programme. This decision is motivated by the fact that we cannot rule out such sales of monetary reserves getting into conflict with monetary policy implementation at a time when monetary policy interest rates are at technical zero. Or they could get into conflict if we potentially decide to make interventions.