At its meeting on 12 February, the Bank Board of the Czech National Bank (CNB) approved this year’s first Inflation Report. An important part of the Inflation Report is a description of the CNB’s quarterly macroeconomic forecast. The forecast provides key information for monetary policy decision-making. The CNB submits the Inflation Report to the Chamber of Deputies of the Czech Parliament twice a year for review.
The forecast expects both headline and monetary policy-relevant inflation to be at zero or slightly negative levels in 2015 and then rise to the 2% target in 2016. The overall upward pressures on consumer prices will almost disappear in the near term, as a decline in producer prices in the euro area coupled with a fall in global prices of energy commodities will result in a substantial decrease in costs stemming from import prices. The anti-inflationary effect of import prices will subside at the start of 2016. Continued growth in domestic economic activity and gradually accelerating wage growth will foster higher prices this year and the next.
Accelerating external demand, low oil prices, easy domestic monetary conditions via the weakened koruna and exceptionally low interest rates, and expansionary fiscal policy will lead to GDP growth of 2.6% this year. Output growth will accelerate to 3% in 2016 despite falling government investment, thanks mainly to a pick-up in external demand growth. The labour market situation will improve thanks to the continuing growth in economic activity, which will be reflected in growth in employment, a gradual decline in the unemployment rate and a rise in wage growth in the business sector.
The exchange rate of the koruna against the euro is expected to be stable in the next few quarters at a similar level to that observed last year, slightly weaker than the announced asymmetric exchange rate commitment of CZK 27 to the euro. The forecast expects the exchange rate to be used as a monetary policy instrument over the entire forecast horizon. The return to conventional monetary policy should not imply appreciation of the exchange rate to the level recorded before the CNB started intervening, as domestic inflationary pressures should be sufficiently restored in the meantime owing to a recovery in domestic economic activity and wage growth. The forecast also expects market interest rates to be flat at their current very low level until the end of 2016, reflecting an assumption that the 2W repo rate will be left at technical zero and the money market premium will be kept unchanged in the same period.
The Bank Board considers the risks to the new forecast to be balanced, although the degree of uncertainty has increased. Uncertainty is associated above all with the effects of the measures adopted by the European Central Bank and with the future evolution of domestic wages in an environment of very low inflation and a positive cost shock in the shape of the slump in oil prices. This slump is a positive supply shock which will boost Czech economic growth in 2015. The CNB will not respond to the first-round effects of this shock on the price level. This means it is prepared to tolerate inflation moving temporarily close to, or even slightly below, zero this year. Next year, however, the first-round effects of this shock will unwind, and it remains the CNB’s intention to ensure that inflation returns towards the 2% target. Therefore, it will be important to prevent any second-round effects of the current slump in energy commodity prices, which would be reflected in inflation in the longer run. In this situation, the Bank Board stated that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument before the second half of 2016. The Czech National Bank stands ready to move the level of the exchange rate commitment if there were to be a long-term increase in deflation pressures capable of causing a slump in domestic demand, renewed risks of deflation in the Czech economy and a systematic decrease in inflation expectations.
Contact:
Jana Bašeová
Relationship Manager, Global Securities Services Czech Republic
Tel:+420 955 960 541
jana.baseova@unicreditgroup.cz