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 unanimously kept interest rates unchanged. The two-week repo rate thus remains at 0.25%, the discount rate at 0.05% and the Lombard rate at 1%.

The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is stability of domestic market interest rates until mid-2021, followed by a gradual rise in rates. In the context of the ongoing coronavirus pandemic, it must be stressed that the uncertainty regarding the external and domestic assumptions of the new forecast and the way they are captured by the forecasting system is again high.

The world economy is gradually recovering from the quarantine restrictions, although the epidemiological situation is not entirely under control everywhere. Most euro area countries bottomed out in Q2. Fiscal and monetary policy measures are supporting renewed economic growth in the euro area, which is expected from the middle of this year onwards. However, euro area GDP will decline markedly overall this year. Producer prices in the euro area will drop this year owing to low oil prices and weak demand pressures in the production sector. These anti-inflationary effects will fade out next year. Consumer price inflation in euro area countries can also be expected to be subdued this year. The European Central Bank is keeping its monetary policy extremely easy, and short-term euro rates remain negative over the entire forecast horizon.

The expected trend of the Brent crude oil price is slightly rising. The euro will appreciate slightly against the dollar. The single European currency should benefit mainly from the massive volumes of fiscal measures aimed at supporting the economy and from a better epidemiological situation compared with the USA.

Part of the Czech economy was shut down during the spring months due to measures to combat the coronavirus pandemic. Although the quarantine measures have been almost fully lifted, reduced external demand, a marked rise in unemployment and worse overall perceptions of the economic situation among Czech firms and households will have an adverse effect on the economy in the months ahead. This will lead to a decline in GDP of around 8% overall this year. The economy will return to growth next year, but it will not reach the pre-pandemic level until the end of 2022. The decline in economic activity this year will be due mainly to a drop in private investment. The recovery in investment will be hindered by a deep downturn in external demand reflecting significantly worse global economic sentiment. At the same time, the exports of Czech corporations will decrease. This will be reflected in a negative contribution of net exports. By contrast, the negative impacts of the coronavirus pandemic are being softened by faster growth in government consumption coupled with stabilising budgetary measures, which are supporting household consumption above all. 

Inflation will stay above the upper boundary of the tolerance band for the rest of this year. The elevated growth in consumer prices is due mainly to buoyant core inflation and rapid growth in food prices. The latter is due, among other things, to still solid consumer demand, international transport restrictions due to the coronavirus pandemic, and also to labour shortages in agriculture. The continued price growth in the months ahead will reflect efforts by firms to make up the loss of revenues they suffered during the coronavirus pandemic and for growth in their costs. Over the monetary policy horizon, i.e. in the second half of next year, however, the deep decline in demand and overall economic activity will prevail and inflation will return close to the 2% target. This will be fostered by lower growth in domestic costs, a slightly appreciating koruna and a cooling of the labour market. Consumer price inflation will stay close to the target in 2022.

Monetary policy-relevant inflation will be slightly lower than headline inflation, as the first-round effects of changes to indirect taxes will be slightly positive overall. Monetary policy-relevant inflation will be at the 2% target over the monetary policy horizon.

The koruna appreciated in late May owing to a change in global sentiment fostered by the easing of the quarantine measures. A relatively moderate course of the pandemic in the domestic economy and in Europe will allow the exchange rate to appreciate gradually further over the forecast horizon. This will be due to renewed growth in external demand and, in turn, domestic economic activity.

Consistent with the forecast is stability of domestic market interest rates until mid-2021, followed by a gradual rise in rates. Following a sizeable decrease in market interest rates in the first half of this year, which reflected the Czech National Bank’s response to the negative impacts of the coronavirus pandemic, rates will remain stable for a few quarters according to the forecast. The forecast indicates a gradual increase in market interest rates from the second half of next year onwards as domestic economic activity recovers, amid stabilisation of inflation close to the target.

The inflation outlook for the next four quarters is higher than in the previous forecast. Over the monetary policy horizon (i.e. in the second half of next year), however, the inflation forecast is virtually unchanged. The outlook for domestic economic activity and interest rates is slightly lower this year and the next. The exchange rate of the koruna against the euro is stronger in both years than in the previous forecast.

The Bank Board assessed the risks to the forecast as being significant but not tilted in either direction overall. The course of the pandemic and the possible reintroduction of quarantine measures remain a risk. However, the uncertainties of the forecast also include the speed of recovery of the European and domestic economies now that the quarantine restrictions imposed during the first wave of the pandemic have been lifted. The current evolution of the exchange rate may be a downside risk to inflation. By contrast, fiscal policy support for the domestic economy may be stronger than assumed by the forecast in the years ahead. A specific domestic uncertainty is the structure of the supply and demand factors underlying the surprisingly rapid growth in consumer prices in recent months.