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 against the euro so that the exchange rate of the koruna is kept close to CZK 27 to the euro. The nature of this exchange rate commitment is unchanged.

This decision is based on the message of the current forecast and on an assessment of newly available information obtained since the current forecast was prepared. The forecast expects market interest rates to be flat at their current very low level and the exchange rate to stay close to CZK 27 to the euro until the start of next year. The Bank Board assessed the risks to the forecast as being slightly anti-inflationary. The Bank Board continues to view the level of the exchange rate commitment at CZK 27 to the euro as appropriate and expects the exchange rate to be kept close to this level at least – with the emphasis on “at least” – until the start of 2015. According to the Bank Board, this ensures that the monetary conditions will be eased to the necessary extent.

At the start of this year, annual headline inflation dropped sharply in line with the forecast, reaching very low – albeit positive – levels, with prices increasing by just 0.2% year on year in both January and February. The slight downward deviation from the forecast was due chiefly to a deeper decline in administered prices. It can be said that the weakened exchange rate has so far been feeding through to prices in line with the forecast, and without this effect inflation would have been strongly negative. This again confirms that the decision made by the Bank Board of the Czech National Bank in November has significantly contributed to averting the threat of deflation.

In line with the forecast, economic activity recovered in 2013 Q4 and even recorded a noticeably stronger rate of growth. This was due mainly to an increase in fixed investment which had not been expected by the forecast. Fixed investment does not usually have any immediate inflationary effects, and this time was no exception. Overall, the domestic economy bottomed out in the second half of last year. However, the output gap remained significantly negative and the domestic economy thus remained anti-inflationary in line with the forecast.

New information on developments abroad obtained from market outlooks and the March Consensus Forecasts survey does not change the economic growth outlook for the effective euro area for 2014 and 2015. However, consumer price outlook has shifted slightly further downwards, as has the producer price outlook for this year. The market outlook for foreign rates has declined only negligibly at the longer horizon, still reflecting expectations of continued accommodative monetary policy of the European Central Bank.

Expected oil prices have moved roughly two dollars a barrel higher this year and the next, although a shift in the path of the outlook for the euro-dollar exchange rate towards a weaker dollar is acting in the opposite direction in terms of euro and koruna prices of oil.

In line with the forecast, wages in the business sector fell year on year in 2013 Q4. However, data adjusted for the expected effect of tax optimisation in late 2012 and early 2013 also point to a decline, while the forecast had expected a slight increase. This indicates that the previous long-running economic decline has led to even stronger anti-inflationary – or even deflationary – wage tendencies than expected in the forecast. At the same time, however, signs of a positive turnaround are emerging on the labour market in line with our expectations. This is evidenced by an observed halt in the rise in the share of unemployed persons and a rise in wages in industry and construction in January.

Indicators from the real economy are signalling a continued economic recovery at the start of this year. Industrial production is still recording noticeable year-on-year growth, and construction output also recovered in January after a long decline. Retail sales continued to grow in late 2013 and early 2014, especially in the automotive segment. However, sales of other goods are rising moderately as well. This suggests that the increase in household consumption at the end of last year may be of a longer-lasting nature.

Producer price inflation remains subdued but returned to slightly positive annual figures in manufacturing following the weakening of the koruna. In industry as a whole, by contrast, slightly negative figures were recorded as a result of a decrease in electricity prices. New data also suggest a gradual moderation of the year-on-year declines in prices of construction work and market services. On the other hand, agricultural producer prices are still declining year on year, dampening upward cost pressures on food prices in line with the assumptions of our forecast.

To sum up, annual GDP growth returned to positive figures in line with the forecast in 2013 Q4, but was considerably stronger than forecasted. In line with the forecast, inflation fell to low positive levels in the first two months of this year. The average wage in the whole economy saw an even sharper year-on-year decrease in 2013 Q4 compared to the forecast. As expected in the forecast, growth in the seasonally adjusted share of unemployed persons halted close to 8% in January and February.

The Bank Board assessed the risks to the current forecast as being slightly anti-inflationary. The very subdued wage growth in the business sector at the close of last year is the main risk in this direction. However, this downward tilt in the balance of risks is certainly not strong enough to lead the Bank Board to consider changing the nature of the exchange rate commitment. As the CNB announced last November, a change in the level of the commitment is possible in principle, but would require a truly fundamental and dramatic change in the economic conditions. The Bank Board’s current assessment of the risks to the current forecast does not indicate such a fundamental and dramatic change in the economic conditions. As in February, the Bank Board stated at its meeting today that it expects the exchange rate to stay close to CZK 27 to the euro at least until early 2015. If the future economic outlook requires a further easing of monetary policy to the extent indicated by the current assessment of risks, the Bank Board will prefer to keep the exchange rate commitment at CZK 27 to the euro for a longer period of time rather than change that level.