The inflation target is the CNB’s main monetary policy anchor. It helps in maintaining price stability, steers inflation expectations and is a condition for sound economic growth.
Since 2010 (pdf, 29 kB), the CNB’s inflation target has been 2% year-on-year growth in the consumer price index. This target is in line with the practice of the central banks of advanced economies. The CNB regularly assesses the fulfilment of the inflation target on the basis of the statistical data published by the Czech Statistical Office, an institution independent of the central bank. This arrangement enhances the credibility of inflation targeting.
Although the CNB endeavours to keep inflation at 2%, the actual inflation figures deviate from the target, mainly as a result of the unpredictable shocks that continuously hit the economy. The central bank reacts to the impacts of such shocks, but it cannot return inflation to the target immediately, nor is meaningful for it to do so from the macroeconomic point of view. A tolerance band of one percentage point in either direction around the target reflects the natural volatility of inflation.
Escape clauses – exemptions from fulfilling the inflation target – need to be applied because it is not economically optimal to react to the direct impacts of one-off changes in factors that lie beyond the central bank’s control. These often involve administrative or regulatory measures or supply-side shocks that are completely or largely beyond the reach of monetary policy measures. In such circumstances, efforts by the central bank to keep inflation on target would lead to undesirable swings in economic growth and employment. The CNB therefore does not react to the first-round effects of such shocks and applies escape clauses to them. The first-round effects of changes to indirect taxes are a systematic escape clause applied by the CNB. Inflation adjusted for these tax effects is called monetary policy-relevant inflation.