Statement of the Bank Board for the press conference following the monetary policy meeting

At its meeting today, the Bank Board of the Czech National Bank decided unanimously to keep interest rates unchanged, i.e. at technical zero. The Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna so that the exchange rate of the koruna against the euro is kept close to CZK 27 to the euro. The nature of this exchange rate commitment is unchanged.

This decision is underpinned by a new forecast, which is based on an assumption of stable market interest rates at their current very low level and a flat exchange rate of the koruna close to CZK 27 to the euro until the start of next year. The message of the forecast confirms that the decision made in November to start using the exchange rate as an additional monetary policy instrument significantly contributed to averting the threat of deflation. The weakening of the koruna will accelerate the return of inflation to the target, which according to the forecast will occur in late 2014, and support the recovery in the economy and the labour market. The Bank Board considers the risks to the new forecast to be balanced. The Bank Board continues to view the level of the exchange rate commitment as appropriate, as it delivers the necessary easing of the monetary conditions. The Bank Board foresees this exchange rate commitment being maintained at least until the start of 2015.

Turning to the assumptions of the forecast regarding developments abroad, economic growth in the euro area will accelerate this year and the next. Producer prices in the euro area are falling year on year, and in some countries the same goes for consumer prices. The forecast assumes that price growth will resume gradually in the euro area, but with less intensity than in the previous forecast. A low outlook for foreign interest rates reflects expectations of accommodative European Central Bank monetary policy in the face of subdued price developments. Compared to the previous forecast, the interest rate outlook has shifted to lower levels, especially in 2015. Overall, the outlook for the euro area has therefore shifted towards weaker inflationary impulses and easier monetary policy, the only exception being slightly higher assumed economic growth in the euro area in 2015.

The outlook for the dollar price of Brent crude oil continues to assume a slight decline. At the same time, the euro is expected to weaken gradually against the dollar. The general modest decline in commodity and energy prices combined with the evolution of the exchange rate of the euro against the dollar does not imply significant cost-push inflation pressures.

As regards developments in the Czech economy, the forecast expects a sizeable decrease in headline inflation to low positive levels at the start of this year. This will be partly due to still subdued domestic economic activity and slow wage growth, coupled with a fall in administered prices and an unwinding of the effects of the VAT changes made last year. Inflation will then pick up pace, returning towards the Czech National Bank’s target of 2% at the end of this year. This will initially reflect rising import prices connected with the weakening of the koruna. Starting in the second half of this year, consumer price inflation will also be strongly affected by an economic recovery and faster wage growth. Inflation will increase further at the start of next year amid renewed growth in administered prices. It will reach the upper half of the tolerance band at the monetary policy horizon and then return from above to the 2% target, where it should stabilise. On average we expect inflation to reach 1.2% this year and 1.9% overall for this year and the next. This is 0.1 percentage point lower than in the previous forecast in both cases. Even after the November weakening of the koruna, we continue to expect the second-lowest average price growth in ten years in 2014.

Unlike in previous years, this year’s inflation will not be significantly affected by tax changes. The forecast assumes only a further harmonisation increase in excise duty on cigarettes. Monetary-policy relevant inflation, i.e. inflation adjusted for the direct effects of changes to indirect taxes, will thus move in parallel with headline inflation, only at a slightly lower level.

Following a decline in the previous two years, the economy will grow by more than 2% this year according to the forecast. The domestic economy will be supported by growth in external demand and the monetary policy easing executed via the weakening of the koruna. The weaker currency will boost the price competitiveness of domestic production and, via a decrease in real interest rates, support private consumption and investment expenditure. Unlike in previous years, fiscal policy will have a broadly neutral effect on economic growth. Next year the growth rate of the domestic economy will rise to 2.8%. In 2015 the economy will thus grow 0.3 percentage point faster than we previously expected. The recovery of the domestic economy will be reflected on the labour market in 2014 initially in lower use of forced part-time work and in 2015 also in a drop in the unemployment rate. Wage growth in the business sector will increase from the current record lows.

The forecast expects market interest rates to be flat at their current very low level until the start of next year. According to the forecast, the easier monetary conditions will lead to an economic recovery and wage growth sufficient to allow monetary policy potentially to return to the conventional regime, in which interest rates will again play the main role, at the start of next year.

By comparison with the alternative scenario of the previous forecast, which assumed the use of the exchange rate as an additional instrument for easing monetary policy, i.e. the scenario on which the Czech National Bank acted, both headline inflation and monetary-policy relevant inflation have shifted downwards slightly at the monetary policy horizon. GDP growth has been revised slightly upwards this year and considerably upwards next year. After the discontinuation of the use of the exchange rate as a monetary policy instrument, interest rates will probably be slightly lower in 2015 by comparison with the previous forecast, mainly because of a lower outlook for foreign interest rates.