Transcript of the introductory statement from the press conference - 6 February 2013

GOVERNOR

I will start with what you already know: the Bank Board decided unanimously to leave the two-week repo rate unchanged at technical zero.

As regards the reasons for this decision, we see them of course mainly in how we currently view the evolution of inflation. Inflation should be close to the target of 2%. After the effect of the VAT increase drops out, it should fall slightly below the target. By contrast, we expect monetary-policy relevant inflation to be in the lower half of the tolerance band. The forecast expects a slight decline in market interest rates, followed by a rise in rates as from the second half of 2014. One significant change, perhaps, is that we see the risks to the forecast as being balanced. In general, although they are sizeable, we would probably agree that we feel they are slightly lower in both directions. In other words, the possibility of the greatest shocks seems to be slightly reduced.

Turning to the baseline scenario of the forecast, above all, the domestic economy is still dampening inflation. By contrast, the sources of inflation are imported – partly within food prices or import prices in general – or, conversely, lie in the current tax changes. We expect GDP to drop by 0.3% this year, i.e. we have revised the forecast downwards by a not very significant amount – about 0.5 percentage point. In conditions of relatively significant fiscal restriction at the moment, our economy will be driven solely by a recovery in external demand. Next year, by contrast, we expect a rise of about 2%. As for the exchange rate of the koruna, we expect a very slight appreciation from the current level, really very slight. I have already spoken about interest rates, so I will move on to the external environment.

The external environment changes slightly at the level of consumer prices. You can see that in the euro area the internal inflation pressures, which lead directly to consumer prices, have a slightly lower outlook for 2014. This is basically connected with everything that is going on in the euro area: a drop in demand, fiscal cuts even in countries that thought they would not have to make them, and so on. By contrast, producer prices are rising slightly. GDP remains more or less the same at the forecast horizon. It is slightly more pessimistic for this year, owing to fiscal cuts and the confidence of investors and consumers in the euro area in general. For perhaps the first time I can remember, we can see a consistent upward adjustment in the EURIBOR, which in a way – although it should not be overestimated quantitatively – reflects the fact that expectations are at least stabilising if not changing in the positive direction, at least in the more distant future.

As regards the other components of the external environment, for commodities the main message from these images is minimal change, not a quantitative shift. If you look at the figures above the columns, you will see that the outlooks are essentially the same, only with a slightly different result due to rounding. As for the exchange rate, there is again a very small adjustment. At the moment, the external environment forecasts, which we of course take in principle from Consensus Forecasts, expect the exchange rate to be slightly weaker than it is now.

This brings me to the forecasts. I have basically already spoken about the headline inflation forecast. At the start of 2014 it should fall slightly below the target at our monetary policy horizon, although not very significantly, because other effects – the increase in both VAT rates, which is pushing it slightly upwards this year – will drop out. Towards the end of the period a recovery, plus of course pressures, should start to emerge. Pressures is too strong a word – simply stabilisation and more sensible developments in the domestic economy and the external economy.

Monetary-policy relevant inflation will be in the lower half of the tolerance band around the target over the entire outlook.

I have already spoken about GDP. We are not too optimistic for this year, but we believe that the recovery in external demand and the fact that we are close to the trough of the business cycle should cause the situation to start improving.

Now for the crucial forecast for interest rates. Again, very simply, consistent with the forecast is a slight decline in interest rates, followed potentially by a rise in rates to levels expected now by the forecast after mid-2014.

I have already stressed the very slight exchange rate appreciation. This is how it looks. At the moment the exchange rate is in fact weaker than expected by the forecast.

As for the comparison with the previous forecast, I dare say that we expect slightly lower economic growth this year, but slightly higher growth next year. Consumer prices remain basically at the current level, or the currently forecasted level, even though optically the forecast revises them upwards by 0.1 percentage point. Perhaps it is worth mentioning that the PRIBOR may be slightly higher on average this year – although, as I said, still at a level predicting a monetary easing – and slightly lower next year. The changes in the exchange rate are not dramatic either. They are in the order of less than 1%, but the forecast expects a somewhat weaker exchange rate this year and a slightly stronger one next year.

Looking at the risks to the forecast, this is an unusual slide by recent standards. The risks to the forecast are balanced. That is their main message, and that is why we have emphasised it like this. By contrast, uncertainty prevails about the extent and impacts of further fiscal consolidation – at the moment we are observing additional plans which cannot be reflected in the forecast – and especially about the consumption and saving behaviour of households, where the two main risks I would like to emphasise are that on the one hand households have changed their behaviour in the longer term towards permanently higher saving, and on the other hand the data, which are subject to relatively sizeable revisions and which suggest this, do not necessarily reflect general economic developments and may even be a statistical artefact, as sometimes unfortunately happens with GDP data. So, those are the two risks in consumer behaviour, which are acting in opposite directions.