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 below the announced level, is unchanged.

This decision is underpinned by a new macroeconomic forecast. The forecast is based on the assumption of flat market interest rates at their current very low level and the use of the koruna exchange rate as a monetary policy instrument until 2015 Q3. The subsequent return to conventional monetary policy will not imply appreciation of the exchange rate to the level recorded before the CNB started intervening, as the weaker exchange rate of the koruna is in the meantime passing through to prices and other nominal variables. According to the forecast, inflation will gradually increase from its current very low levels and return to the 2% target in 2015 H2. The Bank Board assesses the risks to this outlook as being slightly anti-inflationary and states that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2016.

Turning to the assumptions of the forecast regarding developments abroad, external economic activity should gradually pick up pace this year and the next. By contrast, a modest slowdown is assumed for 2016. Prices of foreign industrial producers are falling markedly this year, reflecting an observed decline in world prices of energy and agricultural commodities coupled with the impacts of the previous lengthy economic downturn and appreciation of the euro against the dollar. Producer prices in the euro area will show weak growth in the longer term only. Consumer prices will also rise only slightly owing to the slowly recovering demand. The very subdued inflation in the euro area and the resulting recent monetary policy easing by the European Central Bank are reflected in a low outlook for three-month euro area interbank interest rates, which should rise slightly in 2016. Overall, the outlook for the euro area has shifted noticeably towards lower inflation and easier monetary policy.

The price of Brent crude oil rose temporarily in the previous quarter, shifting the entire outlook upwards. Even according to this outlook, however, oil prices will start falling gradually. The euro is expected to depreciate gradually against the US dollar from its current relatively strong level. The expected modest decline in world prices of 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 regard developments in the Czech economy, the current exceptionally low inflation reflects the very subdued inflation in the euro area, a continuing decline in administered prices and slowing food price growth. Core inflation, by contrast, turned positive for the first time in many years and is accelerating further. This is a result of the weakening of the koruna, which supported rapid growth in domestic economic activity and a positive change in the labour market. According to the forecast, headline inflation will start rising gradually in 2014 Q3 and return to the 2% target in 2015 H2. It will then stay close to the target in 2016. The inflationary effect of import prices will fade this year owing to subdued inflation abroad amid a stable exchange rate of the koruna. In the second half of this year, by contrast, the domestic economy will start to contribute to inflation, chiefly as a result of accelerating wage growth. Average inflation will be 0.4% this year and increase to 1.8% next year. 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 follow a similar path to headline inflation, but at a slightly lower level. It will thus stay just below the CNB’s target at the monetary policy horizon.

Following a decline in the previous two years, the Czech economy will grow by almost 3% this year according to the forecast. Economic growth will be fostered by recovering external demand, the easing of the domestic monetary conditions via the weakened exchange rate, and higher government investment. In the following two years, the economy will record similar growth rates as this year, with investment financed from EU funds making a significantly positive contribution in 2015 and a slightly negative contribution in 2016. The economic recovery is already manifesting itself in the labour market in renewed growth in the number of employees converted into full-time equivalents. This growth will rise further. The share of unemployed persons will decline gradually over the entire forecast horizon. Wage growth in the business sector should start to pick up pace significantly in 2014 H2.

The forecast expects market interest rates to be flat at their current very low level until 2015 Q3, reflecting the 2W repo rate being left at technical zero and an unchanged money market premium. Market rates are forecasted to increase by around 0.5 percentage point at the end of next year after the exit from the regime of using the exchange rate as a monetary policy instrument. Interest rates will then rise further.

The forecasts for headline and monetary-policy relevant inflation are lower than in the previous prediction owing to lower outlooks for administered price inflation and net inflation. GDP growth has been revised upwards in 2014, mainly as a result of a faster expected recovery in private investment and stronger household consumption. In 2015, by contrast, GDP growth will be slightly slower compared to the previous forecast on account of less expansionary fiscal policy. The expected growth rate of nominal wages in the business sector this year has shifted higher, reflecting higher wage growth at the start of the year and stronger growth in economic activity. The interest rate path is lower, mainly reflecting a stronger anti-inflationary effect of the external environment and administered prices and a related postponement of the expected exit from the use of the exchange rate as a monetary policy instrument.

The Bank Board assesses the risks to the new forecast as being slightly anti-inflationary. It considers longer-lasting very subdued inflation in the euro area to be the main risk. It therefore decided to continue using the exchange rate as a monetary policy instrument at least until 2016. The Bank Board would have to find a further noticeable increase in anti-inflationary factors before moving the exchange rate commitment to a weaker level.