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%.
This decision of the Bank Board is underpinned by the August macroeconomic forecast and by an assessment of information obtained since it was prepared. The baseline scenario of the forecast is materialising fairly well so far. Consistent with the forecast is stability of domestic market interest rates until mid-2021, followed by a gradual rise in rates. The Bank Board assessed the risks to the forecast as remaining substantial overall, with the current epidemiological situation increasing the uncertainty regarding future economic developments.
An update of the foreign outlooks signals that the decline in GDP in the effective euro area will be somewhat smaller than forecasted this year. However, the expected pace of recovery in economic growth in the following two years is broadly unchanged. The outlook for foreign producer prices has been revised towards a rather smaller decrease this year and, conversely, slower growth next year. Expected consumer price inflation is virtually unchanged. The outlook for the 3M EURIBOR rate is also unchanged. Foreign interest rates thus remain negative over the entire forecast horizon.
The oil price will be slightly higher for the rest of this year and in the following two years compared with the assumptions of the current forecast. The euro-dollar exchange rate has shifted to stronger levels over the entire forecast horizon.
Growth in domestic consumer prices has been broadly in line with the forecast so far in Q3, but most of the main components of inflation deviated from the forecast to a greater or smaller extent. Core inflation was markedly above the forecast. By contrast, slightly weaker food price inflation and a smaller price impact of the March increase in excise duty on cigarettes fostered lower inflation compared with the forecast. In August, these factors were joined by a somewhat bigger-than-expected drop in fuel prices. By contrast, the forecast for administered prices materialised. The current forecast expects inflation to approach the 2% target at the monetary policy horizon, i.e. in the second half of next year.
As a result of the coronavirus pandemic, economic activity dropped by 11% year on year and almost 9% quarter on quarter in Q2. This decline was 1 percentage point smaller than forecasted. This deviation can nonetheless be considered insignificant given the unprecedented situation the Czech economy was in during the spring months. Household consumption was approximately in line with the forecast. The contribution of net exports was roughly as expected, amid a smaller decline in both exports and imports. The year-on-year drop in gross capital formation deepened but was weaker than forecasted owing to fixed investment. By contrast, government consumption, which slackened surprisingly, increased more slowly than forecasted.
The year-on-year decline in industrial production and total retail sales has been weakening since May. Retail sales excluding the automotive segment even rose slightly in July. Construction was hit by the downturn with a lag, so its recovery is only gradual so far according to the latest data.
In Q2, the labour market started to cool in line with the forecast amid the unprecedented drop in economic activity. Growth in unemployment during the spring months was broadly in line with expectations. Total employment declined more markedly than forecasted, but on the other hand wage growth in market and non-market sectors was slightly above the forecast in Q2. The wage bill was thus roughly as predicted. According to Q3 data, the unemployment rate is surprisingly not increasing further so far.
Following the approval of a joint stabilisation fund in the EU, the koruna appreciated to almost CZK 26 to the euro during the summer holidays. At the start of September, however, it started to depreciate. This was probably due to a visible deterioration of the epidemiological situation in the Czech Republic as well as in other European countries. Its exchange rate against the euro is now weaker than the forecast expected for Q3. However, the average koruna exchange rate in Q3 is slightly stronger than forecasted.
The current forecast is materialising fairly well so far, in an environment of high uncertainty. Inflation was only marginally higher in August compared with the forecast. The depth of the year-on-year decline in GDP in 2020 Q2 was broadly in line with expectations. The share of unemployed persons has remained somewhat below the forecast in Q3 so far. Growth in the average wage halted in Q2, in line with expectations.
The Bank Board assessed the risks to the current forecast as remaining substantial. The current epidemiological situation is increasing the uncertainty regarding future economic developments. Owing to the high economic costs of the across-the-board restrictive measures introduced in the spring phase of the pandemic, governments of individual countries are now trying to stabilise the current situation using targeted restrictions with only small economic impacts so far. However, given the current situation, the possibility of the re-introduction of more extensive quarantine measures cannot be ruled out completely. A resurgence of the pandemic thus poses the biggest risk to the current forecast, mainly in the direction of lower domestic economic activity. Conversely, the additional budgetary measures currently being considered by the Czech government may have the opposite effect on the domestic economy next year. The composition of the supply and demand factors underlying the evolution of domestic inflation remains an uncertainty.