Transcript of the introductory statement from the press conference - 17 December 2013

GOVERNOR

At our meeting today we decided unanimously to leave interest rates unchanged, as you already know. We also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions, and we thereby confirmed the Czech National Bank’s commitment to intervene on the foreign exchange market to weaken the koruna so as to keep the exchange rate of the koruna against the euro close to CZK 27 to the euro. In addition, we repeat that we regard the exchange rate commitment as one-sided, which means we will prevent excessive appreciation of the koruna exchange rate below CZK 27/EUR by using foreign exchange market interventions, i.e. by selling koruna and buying foreign currency. By contrast, on the weaker side of this level we are allowing the exchange rate to float.

You heard the reasons for the decision last time, because the situation is in fact unchanged. Consistent with the baseline scenario was a significant decline in market interest rates very clearly below zero, which of course we were unable to deliver in practice. Therefore, the alternative scenario assuming the use of the exchange rate as an additional monetary policy instrument became the most likely outlook. And this alternative scenario showed that amid zero interest rates a sustained weakening of the exchange rate against the euro to around CZK 27/EUR is needed to eliminate the threat of longer-term deflation and accelerate the return of inflation towards the target. Our exchange rate commitment is consistent with this. It is important to say that we still regard the level of the exchange rate commitment close to CZK 27/EUR as an appropriate choice after today’s Bank Board meeting. Newly available information confirms the message we already had last time that the CNB will keep the exchange rate close to CZK 27/EUR at least until early 2015. In other words, the commitment is long-term and applies until we become certain that the risk of undershooting the inflation target of 2% has fallen significantly. Of course, the point of the commitment is also to provide corporations with longer-term significant certainty at the level of CZK 27/EUR. Theoretically, as we discussed last time, a change in this level is possible, but in practice it would require truly fundamental and dramatic changes in the Czech economy, which certainly have not occurred.

Now for the figures. It may be worth summarising the qualitative message of the whole block of new data we have received from the economy. This is quite clear-cut: the easing of the monetary conditions through a weakening of the exchange rate after the November meeting was appropriate. The very subdued economic activity and the labour market downturn are visible in deflationary tendencies not only in consumer prices, but across the entire economy. Of course, the short-term outlook for administered prices has also shifted down slightly. More specifically, inflation is roughly where we expected it to be, give or take a tenth of a percentage point or so for some components or for the headline figure, which is slightly lower.

As for the GDP forecast, it is clear that the Czech economy has been operating considerably below its potential for several years now – we can speculate by about 2% to 4% depending on the estimation method used. So, the weakening of the koruna is certainly supporting economic growth, which will accelerate next year by more than 1%. Overall, the weakening of the koruna should generate higher production, a rise in GDP of somewhere between CZK 60 and 70 billion in total, and around 35,000 jobs, which is simply a transposition of the higher GDP into demand for labour.

Turning to the external environment, what we were largely afraid of has been confirmed here. This is clear from the first two charts in this group – deflationary or at least disinflationary tendencies are also visible in the countries around us, in the euro area of course. The debate on deflation in the euro area is clearly intensifying, as we have seen over the past six weeks. We can see in the first two charts – for consumer prices in 2013 and 2014 and for producer prices in 2014 and 2015 – that the forecasts have moved significantly downwards. By contrast, nothing else changes dramatically, except, of course, that expectations regarding interest rates, or perhaps more generally regarding the tightness of euro area monetary policy, are also going down as a result of the falling forecasts. The market is beginning to expect an easing, be it through interest rates or using other instruments. This means that what we expected has broadly materialised.

Oil prices have not changed significantly – a marginal rise over the next two years. Likewise, the shift for the euro-dollar rate is by no means dramatic. Moreover, I would say this is a constant property of the forecasts – they have recently expected depreciation of the euro which has then failed to materialise.

Looking at the domestic economy, you can see that the most recent figures suggest a further decrease. Both figures are less favourable than what we expected last time. On the other hand, I must point out that the most recent data indicate a recovery in some industrial branches in line with our expectations, but a persisting downturn in construction. The labour market remains weak and no major differences compared to the forecast can be found there. By contrast, we can and should point out that a further drop in agricultural producer prices will counteract food price inflation. Perhaps the last thing here – industrial producer price inflation, which I think we saw yesterday, is more or less in line with the forecast, which means that the effect of the exchange rate weakening is already passing through as we expected and basically to the extent we expected.

If we look at recent developments by comparison with our scenario we see very modest anti-inflationary tendencies for GDP, which is slightly lower than we expected, and for inflation. By contrast, the average wage is marginally higher and the share of unemployed persons in total employment is marginally lower. Overall, the message is slightly – but really very slightly – anti-inflationary, and as I said, it certainly does not justify any change in our opinion as to the appropriate level to keep the exchange rate, let alone the time for which we will do so.