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 at technical zero. The Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions. It also 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 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. At the forecast horizon, the return to conventional monetary policy will not imply appreciation of the exchange rate to the level recorded before the CNB started intervening. This is because the weaker exchange rate of the koruna will in the meantime pass through to the price level and other nominal variables. The Bank Board considers the risks to the new forecast to be 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 until the start of 2015.

In a debate of the new forecast, however, the Bank Board stated that the probability of a later exit from the exchange rate commitment was increasing. The forecast lowers the inflation outlook, and in line with the CNB’s previous communications, it holds true that if economic developments require a further easing of monetary policy, the Bank Board will prefer to maintain the exchange rate commitment for a longer time. The same time the Bank Board concluded that domestic interest rates will not necessarily rise as fast as indicated by the forecast in 2015.

Turning to the assumptions of the forecast regarding developments abroad, economic growth in the euro area will gradually pick up pace this year and the next. Euro area producer prices are currently falling as a result of the long-running economic downturn, a continuing decline in energy prices and a strong euro. A return to positive, albeit subdued, growth in producer prices in the euro area is expected at the forecast horizon. Consumer prices in the euro area will also rise only slightly owing to the recovering demand. The subdued price developments are reflected in the currently easy monetary policy of the ECB and in the 3M EURIBOR rate outlook. These rates remain very low over the entire forecast horizon. Overall, the outlook for the euro area has shifted towards lower inflation and easier monetary policy. The assumption for euro area economic growth has been increased only slightly for this year.

The outlook for the Brent crude oil price continues to expect a gradual decline. However, there has been an upward revision of about 3 dollars a barrel over the entire outlook horizon compared to the previous forecast. The euro should depreciate gradually against the US dollar from its current relatively strong level. The euro exchange rate is expected to be about 2% stronger than in the previous forecast over the entire forecast horizon. The modest decline in world prices of commodities and energy combined with the evolution of the exchange rate of the euro against the dollar still does not imply significant cost-push inflation pressures.

As regards developments in the Czech economy, the forecast expects headline inflation to increase this year from its current low but positive level. The weaker koruna, without which inflation would have been deep in negative territory at the start of this year, will continue to affect inflation through import prices. However, this effect will gradually fade from the second quarter of this year onwards. Starting in the second half of this year, consumer price inflation will also be strongly affected by continuing growth of the domestic economy and a recovery in wages. A moderation of the annual decline in administered prices, which will fade out in early 2015, will also foster higher inflation in the course of this year. At the same time, food price inflation will accelerate slightly following the recent increase in world prices of agricultural commodities. Headline inflation will get just above the target at the start of next year. In the second half of 2015 it will return to the 2% target, where it will stabilise. Average inflation will be 0.8% in 2014. Next year it will increase to 2.2%. Both levels are 0.4 percentage point lower than in the previous forecast.

Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, will return towards the target at the end of this year and stay very close to the target next year.

Following a decline in the previous two years, the economy will grow by 2.6% this year according to the forecast. Economic growth will be fostered by accelerating external demand, the easing of the domestic monetary conditions via the exchange rate of the koruna and, to a lesser extent, also fiscal policy. Economic growth will pick up further to 3.3% in 2015, boosted by a further slight increase in growth abroad and relatively robust growth in domestic demand in an environment of significantly expansionary fiscal policy. The economic recovery will also start to have a favourable effect on the labour market. Total employment will increase further in year-on-year terms and average hours worked per employee will also start increasing. The seasonally adjusted general unemployment rate and the share of unemployed persons as determined by the Ministry of Labour and Social Affairs will decrease gradually. Wage growth in the business sector will recover from the very subdued levels recorded at the close of last year.

The forecast expects market interest rates to be flat at their current very low level until the start of next year, followed by a gradual rise in market rates into 2015 by about 0.6 percentage point.

Both headline and monetary-policy relevant inflation are lower than in the previous forecast owing to a lower outlook for administered price and a lower prediction for net inflation. The latter mainly reflects the more subdued wage growth recorded at the end of last year. So far the weaker exchange rate has been passing through to prices in line with the CNB’s expectations. Expected GDP growth has been revised upwards in both 2014 and 2015, mainly as a result of expected higher investment activity in both the private and government sectors and more expansionary fiscal policy overall. After the discontinuation of the use of the exchange rate as a monetary policy instrument the interest rate path in the prediction is lower, mainly reflecting a lower outlook for foreign interest rates and prices in 2015, as well as a lower outlook for domestic administered prices and net inflation.

The Bank Board assessed the risks to the new forecast as being slightly anti-inflationary. In this regard, the Bank Board repeats that the probability of a later exit from the exchange rate commitment is increasing. The same time the Bank Board concluded that domestic interest rates will not necessarily rise as fast as indicated by the forecast in 2015 either.