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 market interest rates initially, followed by a gradual rise in rates in 2021. The current economic situation and the economic outlook are being fundamentally affected by the ongoing coronavirus pandemic and the anti-pandemic measures gradually being adopted in the Czech Republic and abroad. The new forecast, including the said interest rate path, is therefore strongly conditional on the fulfilment of the assumptions made about the course of the epidemic situation and the anti-pandemic measures.

The global economy is recording an unprecedented contraction this year owing to the coronavirus pandemic. Most euro area countries bottomed out in Q2. During the summer, their economies were gradually recovering from the anti-pandemic restrictions and lockdowns with fiscal and monetary policy support. However, the second wave of the pandemic in late 2020 and early 2021 will hold back the recovery in many countries and have adverse effects on consumer demand and firms’ willingness to invest. The forecast expects growth abroad to recover next year after the second wave subsides. Growth abroad will be supported by still accommodative fiscal policy and the gradual start of drawdown from the EU Recovery and Resilience Facility. The previous drop in oil prices and weak demand pressures will cause euro area producer prices to decrease in 2020 as a whole. As a result of the low demand, consumer prices also started falling in most euro area countries in Q3, owing in part to the euro appreciating against the dollar. Euro area inflation will increase only slowly in the years ahead. The European Central Bank is keeping monetary conditions very easy. Short-term euro rates thus remain negative over the entire forecast outlook.

The Brent crude oil price increased in 2020 Q3 and its outlook is slightly rising. The euro will continue to appreciate slightly against the dollar.

Domestic economic activity is suffering a sharp contraction this year caused by the coronavirus pandemic. The Czech economy partly began to breathe again in the summer after most of the anti-epidemic measures from the first wave of the pandemic were lifted. However, the strong impact of the second wave of the pandemic and the reintroduced measures to counter the pandemic are leading to a repeated decline in economic output in the final quarter of this year. The downturn is particularly visible in services and retail and wholesale trade, which have been hit much harder by the government’s anti-epidemic measures than industry. The latter is being affected less than in the spring given the so far limited economic impacts of targeted anti-epidemic measures abroad, the functioning global supply chains and the fully passable borders. However, the worse overall perceptions of the economic situation among Czech firms will continue to be reflected in a decline in private investment. By contrast, the negative impacts of the coronavirus pandemic are being softened by faster growth in government consumption coupled with stabilising fiscal measures. The latter are partly slowing the drop in household consumption. The negative economic impacts of the second wave of the pandemic are expected to subside during the first half of next year, when the economy will return to growth amid recovering external demand. However, the output of the Czech economy will not reach the pre-crisis level even by the end of 2022.

Inflation will decrease into the tolerance band in late 2020 and early 2021. Administered price inflation will moderate, mainly due to slower growth in electricity prices. The decline in headline inflation will meanwhile be due in part to the anti-inflationary demand effects of the second wave of the coronavirus pandemic amid subdued external and above all domestic economic activity. However, the cost pressures will remain elevated for some time. A cooling labour market and slower wage growth will dampen growth in domestic costs, but this will be offset by the recent significant depreciation of the koruna. Inflation will fall next year, mainly due to a moderation of total cost growth. This will be linked partly with expected renewed appreciation of the koruna. The currently subdued domestic price pressures will increase again next year. This will be caused by the impacts of the pandemic subsiding and fostering a gradual recovery in domestic economic activity and related stabilisation of the labour market. Inflation will be close to the 2% target over the monetary policy horizon, i.e. in late 2021 and early 2022.

Monetary policy-relevant inflation will merge with headline inflation in mid-2021, when the currently only marginal first-round effects of changes to indirect taxes will fade out fully.

The koruna has depreciated markedly in recent weeks due to the reversal in global sentiment resulting from the start of the second wave of the coronavirus pandemic in the Czech Republic and other European countries. The expected gradual calming of the epidemic situation in Europe and the Czech Republic next year will foster renewed gradual appreciation. This will be caused by a widening interest rate differential amid a recovery in external demand and, in turn, domestic economic activity.

Consistent with the forecast is stability of market interest rates initially, followed by a gradual rise in rates in 2021. The until recently strong inflationary effect of the domestic economy is being dampened significantly at the end of this year by the worse epidemic situation, which will negatively affect the domestic economy in the coming quarters. The expected subsequent fading of the negative effects of the second wave of the pandemic, the related renewed return of domestic and external economic activity towards pre-crisis levels, and inflation stabilising close to the target will allow a gradual shift away from the pronounced easing of the monetary conditions to start next year.

The inflation outlook for the next few quarters has been lowered by comparison with the previous forecast. However, its expected level over the monetary policy horizon is virtually unchanged. The forecast for growth in domestic economic activity has been revised towards a smaller decline this year, owing to better-than-forecasted developments during the spring and summer. These will outweigh the negative impacts of the second wave of the pandemic at the year-end. By contrast, the outlook for next year has shifted towards markedly lower GDP growth as a result of the second wave. Domestic interest rates are slightly higher in the next two years. The koruna is rather weaker against the euro both this year and the next.

The Bank Board assessed the risks and uncertainties of the baseline scenario of the new forecast as being substantial. A possible further worsening of the course of the second wave of the pandemic in the Czech Republic and especially abroad poses a considerable anti-inflationary risk going beyond the baseline scenario. A further escalation of the pandemic could lead in many European countries to even more intensive implementation of strict epidemiological measures with significant economic impacts. These could include broad-based and long-lasting shutdowns of economies, which would further worsen business and household sentiment. An opposite risk to some extent is associated with domestic fiscal policy next year. The structure of the supply and demand factors underlying the observed and expected domestic and foreign inflation remains an uncertainty. The uncertainty associated with the internal political situation in the USA and the risk of a no-deal Brexit have also been increasing recently. In light of these significant uncertainties, the Bank Board considers it likely that interest rates will be left at a low level for longer than assumed in the baseline scenario of the forecast.