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 Bank 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 is kept close to CZK 27 to the euro. The asymmetric nature of this exchange rate commitment, i.e. the willingness only to intervene against appreciation of the koruna, 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. According to the forecast, however, the return to conventional monetary policy will not imply appreciation of the exchange rate to the level recorded before the CNB started intervening, because the weaker exchange rate of the koruna is in the meantime passing through to the price level and other nominal variables. New data point to a slightly anti-inflationary balance of risks to the current forecast and, overall, they further increase the need for a later exit from the use of the exchange rate as a monetary policy instrument. In line with this, the Bank Board stated at its meeting today that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2015 Q2, and it did not rule out a further shift of the exit from this regime.

At the start of this year, annual headline inflation dropped sharply in line with the forecast, reaching very low – albeit positive – levels and then remaining almost unchanged until April. Thereafter, inflation increased in May in line with expectations. The slight downward deviation from the forecast so far in Q2 is due chiefly to lower-than-expected food price inflation. It still holds true that the weakened exchange rate is passing through into inflation in line with expectations. Adjusted for this effect, inflation would be deep in negative territory. Core inflation, also called adjusted inflation excluding fuels, has been in positive territory in line with the forecast since April 2014 following many years of decline. In May it was slightly higher than expected. In the months ahead, however, headline inflation will probably still be lower than expected by the forecast. This will be due to significantly more subdued inflation abroad coupled with mostly non-fundamental factors leading to lower-than-forecasted food prices. Near-zero annual inflation can be expected in the next few months, with slightly negative figures even being possible. At the same time, the outlook for administrative inflation factors in 2015 has been reduced, mainly because of the government’s decision to abolish most of the remaining fees in health care and possibly to make other changes in this area. Even so, we expect inflation in 2015 to be close to the 2% target after the aforementioned short-term effects fade out.

In line with the message of the forecast, annual growth in economic activity picked up pace significantly, reaching 2.5%. All components of GDP except changes in inventories grew slightly faster than forecasted. The new data thus confirm that the anti-inflationary effect of the domestic economy is weakening.

New information on developments abroad obtained from market outlooks and the June Consensus Forecasts survey shifts the outlook for consumer prices and especially producer prices in the euro area slightly downwards. The outlook for economic growth abroad is unchanged. The market outlook for foreign rates has shifted slightly downwards in response to the decrease in key European Central Bank interest rates and additional measures taken by the ECB.

Expected oil prices have been revised moderately upwards in both 2014 and 2015. As regards euro and koruna prices of oil, however, the increase in the dollar price of oil is roughly offset by a shift in the path of the outlook for the exchange rate of the euro against the dollar towards a stronger euro compared to the assumptions of the forecast.

Domestic wage growth accelerated significantly in Q1 in both the business and non-business sectors. In the business sector, the pick-up in annual wage growth in line with the forecast was partly due to the wage optimisation effect observed in late 2012 and early 2013. At the same time, the unexpected drop in wages at the close of 2013 was offset to a greater extent than forecasted. Thus, wage growth in the business sector was stronger overall compared to the forecast. Clear signs of a positive turnaround are visible in the labour market, broadly in line with expectations and in the context of a growing economy. In addition to wage growth, this is evidenced by continuing growth in employment, a decline in both the seasonally adjusted share of unemployed persons and the general unemployment rate, and an earlier-than-forecasted halt in the decrease in the average length of employment.

Newly available monthly indicators from the real economy are signalling a continued economic recovery in Q2. Industrial production and construction output are rising noticeably, as are retail sales. This indicates that the increase in consumption and investment seen in the last two quarters will be of a longer-lasting nature. In the rest of 2014, the evolution of the domestic economy and the labour market will thus probably lead to fulfilment of the current forecast, which may even be slightly exceeded by some indicators.

Producer prices are recovering gradually, influenced by the weakening of the koruna. Prices in manufacturing returned to slightly positive levels back in December 2013 and their growth is accelerating slowly. However, the year-on-year change in prices in industry as a whole is still slightly negative owing to a sizeable decrease in energy prices. Prices of construction work returned to modest growth in April and prices of market services did the same in May. The year-on-year decline in agricultural producer prices is moderating gradually, so its continued dampening effect on food price inflation is weakening gradually.

To sum up, annual GDP growth was only slightly below the forecast in Q1. By contrast, quarterly economic growth slightly exceeded our expectations. Inflation went up in May, but less markedly than forecasted. On the other hand, average wage growth in Q1 was stronger than expected. As expected in the forecast, the seasonally adjusted share of unemployed persons fell slightly below 8% in Q2.

The Bank Board again confirmed that it assesses the risks to the current forecast as being slightly anti-inflationary overall. The main downside risks are lower prices abroad and the observed evolution of domestic food prices and their short-term outlook. A lower outlook for administered prices and probably slightly less expansionary fiscal policy next year are acting in the same direction. Running counter to this is a somewhat faster unwinding of the anti-inflationary effect of the domestic economy and the labour market than expected by the forecast. Given the slightly anti-inflationary balance of risks, the Bank Board stated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2015 Q2, and it did not rule out a further shift of the exit from this regime. However, the Bank Board would have to find a much more pronounced increase in anti-inflationary risks before moving the exchange rate commitment to a weaker level.