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 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 that the exchange rate will continue to be used as a monetary policy instrument until 2015 Q3. According to the forecast, 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. The new information indicates a slightly anti-inflationary balance of risks to the current forecast. In this situation, the Bank Board repeated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2016.

As expected, annual headline inflation accelerated in Q3, reaching 0.6% in August. This figure was slightly higher than forecasted. This was due to a stronger recovery in food price inflation and a smaller decline in administered prices, owing chiefly to prices of natural gas for households. The weakened exchange rate continues to affect inflation in line with the Czech National Bank’s assumptions. Adjusted for the weakened koruna, inflation would be negative. Core inflation, also called adjusted inflation excluding fuels, continued to edge up, reaching 0.9% in August in line with the forecast. According to the forecast, headline inflation can be expected to accelerate further in the period ahead and return to the 2% inflation target in the second half of next year.

As expected, annual growth in economic activity slowed slightly in 2014 Q2. Real GDP rose by 2.7% compared to the same period a year earlier. This figure is negligibly – just 0.1 percentage point – lower than forecasted. In line with expectations, all components of demand except net exports contributed to the year-on-year increase in GDP. Exports continued to rise at a strong pace exceeding external demand growth, significantly aided by the weakened koruna. At the same time, however, imports rose even more strongly owing to a continued recovery in domestic demand driven by both consumption and investment. In quarter-on-quarter terms the output of the economy was unchanged.

New information on developments abroad obtained from market outlooks and the September Consensus Forecasts survey shifts the outlook for consumer prices and foreign economic growth slightly lower this year and the next, but leads to no change in 2016. The producer price outlook has also been revised significantly downwards for this year, but there are no major changes for the following two years. This means the Czech economy faces stronger anti-inflationary pressures from the euro area this year than assumed by the current CNB forecast. The market outlook for foreign interest rates is unchanged for this year but has shifted slightly downwards for the following two years in response to a further monetary policy easing by the European Central Bank this month.

The market outlook for oil prices is falling over the entire forecast horizon. However, as regards oil prices in euro terms and, in turn, koruna terms, the impact of lower dollar prices of oil is partly offset by a stronger outlook for the exchange rate of the dollar against the euro over the entire forecast horizon.

As expected, annual wage growth in the business sector slowed in Q2 as the effect of wage optimisation in late 2013 and early 2013 faded out. However, wage growth was still higher than forecasted, implying the possibility of a faster labour market response to the switch to the growth phase of the business cycle, supported among other things by the weakening of the koruna. A positive turnaround on the labour market is also indicated by a rising number of vacancies, which is the highest in more than five years in seasonally adjusted terms. Average hours worked also started increasing as expected. At the same time, the seasonally adjusted general unemployment rate and the number of registered unemployed persons are continuing to fall at a steady, albeit gradual, pace broadly in line with expectations.

Indicators from the real economy at the start of 2014 Q3 point to continued robust annual growth in industrial production supported by double-digit growth in orders from abroad and the domestic economy. Retail sales are also increasing noticeably in both the automotive segment and the sale of other non-food products. The fall in construction output in July, representing a departure from the solid data observed in previous months, can be attributed to a high comparison base in July 2013 due to intensive reconstruction work after floods. Overall, these indicators suggest that the rise in consumption and investment seen in the last two or three quarters is of a longer-lasting nature. Relatively rapid economic growth can therefore be expected to continue in line with the forecast.

Producer prices are still recovering gradually, influenced by the weakening of the koruna. Prices in manufacturing returned to slightly positive year-on-year figures back in December 2013 and their growth has been accelerating slowly since then. The year-on-year decline in prices in industry as a whole, influenced by a marked drop in energy prices, has gradually unwound and industrial prices were unchanged year on year in August. 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 moderated, but the forecast had expected a slight annual increase. This downward deviation from the forecast is due partly to a fall in prices of some key agricultural commodities on global markets.

To sum up the important facts from the Czech economy, annual GDP growth was slightly below the forecast in 2014 Q2. By contrast, inflation went up rather more than forecasted in July and August. The average wage rose considerably faster than expected in Q2. The seasonally adjusted share of unemployed persons was slightly higher than forecasted.

As at its previous monetary policy meeting, the Bank Board assessed the risks to the current forecast as being slightly anti-inflationary. Risks in the anti-inflationary direction stem from developments abroad, more specifically from lower economic growth and more subdued inflation in the euro area and from a lower outlook for world prices of food and oil. By contrast, data from the domestic economy, especially observed inflation and wage growth, are having a slightly inflationary effect. In this situation, the Bank Board repeated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2016.