The CNB comments on the November 2013 inflation figures
Inflation comes in slightly below the CNB’s expectations in November 2013
According to figures released today, the price level rose by 1.1% year on year in November 2013. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, was 0.3%. This means it was still well below the lower boundary of the tolerance band around the CNB’s target.
Annual headline inflation was 0.1 percentage point lower in November than in the scenario of using the exchange rate as additional instrument for easing monetary policy. This deviation was due to lower-than-expected annual food price inflation. A somewhat sharper decrease in fuel prices acted in the same direction. Conversely, the annual decline in prices in the adjusted inflation excluding fuels segment was slightly more moderate than expected by the CNB. However, prices in this category of goods and services have long been falling, reflecting the persisting sharp downturn in the domestic economy, including slow wage growth in the business sector. The impacts of indirect tax changes and, to a large extent, also administered prices were in line with the CNB’s expectations in November.
The released data confirm the CNB’s view that, in addition to tax changes, food prices and administered prices remain sources of inflation, although their growth is very moderate. The domestic economy remains strongly anti-inflationary. The CNB’s short-term outlook had suggested that headline inflation would decrease to zero at the start of 2014, after the effect of the VAT change had unwound and amid falling administered prices, while monetary-policy relevant inflation would switch to slightly negative figures. In the event of monetary policy inaction, this might result in longer-term deflation with very adverse consequences for economic growth. After the easing of the monetary conditions through the koruna’s exchange rate, however, the risk of deflation has been averted and headline inflation is expected to be slightly positive at the start of next year.
At its meeting in November, the CNB Bank Board decided to start using the exchange rate to further ease the monetary conditions given that the lower bound on interest rates had been reached. Accordingly, the Bank Board assessed the alternative scenario of the forecast, which quantifies the impacts of the koruna exchange rate weakening to close to CZK 27/EUR, as being the most likely future scenario. According to this scenario, both headline and monetary-policy relevant inflation will return towards the CNB’s target in the second half of 2014 and, at 1.3% on average for the whole of 2014, headline inflation will be the second lowest in ten years. At the same time, due to the weaker exchange rate, economic activity will show a stronger recovery at a pace of 2.1% next year, with positive impacts on the labour market.
Tomáš Holub, Executive Director, Monetary and Statistics Department
The CNB comments on the November 2013 inflation figures
Inflation comes in slightly below the CNB’s expectations in November 2013
According to figures released today, the price level rose by 1.1% year on year in November 2013. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, was 0.3%. This means it was still well below the lower boundary of the tolerance band around the CNB’s target.
Annual headline inflation was 0.1 percentage point lower in November than in the scenario of using the exchange rate as additional instrument for easing monetary policy. This deviation was due to lower-than-expected annual food price inflation. A somewhat sharper decrease in fuel prices acted in the same direction. Conversely, the annual decline in prices in the adjusted inflation excluding fuels segment was slightly more moderate than expected by the CNB. However, prices in this category of goods and services have long been falling, reflecting the persisting sharp downturn in the domestic economy, including slow wage growth in the business sector. The impacts of indirect tax changes and, to a large extent, also administered prices were in line with the CNB’s expectations in November.
The released data confirm the CNB’s view that, in addition to tax changes, food prices and administered prices remain sources of inflation, although their growth is very moderate. The domestic economy remains strongly anti-inflationary. The CNB’s short-term outlook had suggested that headline inflation would decrease to zero at the start of 2014, after the effect of the VAT change had unwound and amid falling administered prices, while monetary-policy relevant inflation would switch to slightly negative figures. In the event of monetary policy inaction, this might result in longer-term deflation with very adverse consequences for economic growth. After the easing of the monetary conditions through the koruna’s exchange rate, however, the risk of deflation has been averted and headline inflation is expected to be slightly positive at the start of next year.
At its meeting in November, the CNB Bank Board decided to start using the exchange rate to further ease the monetary conditions given that the lower bound on interest rates had been reached. Accordingly, the Bank Board assessed the alternative scenario of the forecast, which quantifies the impacts of the koruna exchange rate weakening to close to CZK 27/EUR, as being the most likely future scenario. According to this scenario, both headline and monetary-policy relevant inflation will return towards the CNB’s target in the second half of 2014 and, at 1.3% on average for the whole of 2014, headline inflation will be the second lowest in ten years. At the same time, due to the weaker exchange rate, economic activity will show a stronger recovery at a pace of 2.1% next year, with positive impacts on the labour market.
Tomáš Holub, Executive Director, Monetary and Statistics Department