But the Czech National Bank (CNB), which has been using the exchange rate as an additional tool to ease monetary conditions since November 2013, also said it would consider "moving the exchange rate commitment to a weaker level" if there were a renewed risk of deflation and a systematic decrease in inflation expectations that were capable of causing a slump in domestic demand due to deflationary pressures from abroad.
The Czech headline inflation rate eased to 0.6 percent in November from 0.7 percent in October, 0.2 percentage points lower than the CNB's forecast, mainly because this year's rise in excise duties will feed into cigarette prices lower than expected while food and fuel prices were also lower.
The CNB said the data confirms that its decision to use the exchange rate as a monetary policy tool helped to avert the threat of deflation and it currently forecasts that headline and monetary-policy relevant inflation will return to the 2.0 percent target in early 2016.
The Czech economy expanded by 0.2 percentage points less than expected by the CNB in the third quarter of this year, with Gross Domestic Product up by an annual 2.4 percent, down from 2.5 percent in the second quarter. On quarterly terms GDP rose by 0.4 percent, up from 0.3 percent in the second quarter.
The Czech National Bank issued the following statement:
"At its meeting today, the Bank Board of the Czech National Bank decided unanimously to keep interest rates unchanged at technical zero. The Bank Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna so that the exchange rate of the koruna is kept close to CZK 27 to the euro. The asymmetric nature of this exchange rate commitment, i.e. the willingness only to intervene against appreciation of the koruna below the announced level, is unchanged.
This decision is based on the message of the current forecast and on an assessment of newly available information obtained since the current forecast was prepared. The forecast assumes that market interest rates will be flat at their current very low level and the exchange rate will be used as a monetary policy instrument until 2016 Q1. According to the forecast, the return to conventional monetary policy will not imply appreciation of the exchange rate to the level recorded before the CNB started intervening, as the weaker exchange rate of the koruna is in the meantime passing through to prices and other nominal variables. In the light of the newly available information, the balance of risks to the current forecast is assessed as being anti-inflationary, mainly reflecting developments abroad. In this situation, the Bank Board repeated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2016. At the same time, the Bank Board stated that the deflationary pressures from abroad were currently associated largely with a positive supply shock, in particular a fall in energy commodity prices. Only 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, would it be necessary to consider moving the exchange rate commitment to a weaker level.
After accelerating during the second and third quarters of this year, annual headline inflation edged down to 0.6% in November. This level was 0.2 percentage point lower than forecasted. This deviation was due chiefly to the fact that this year’s increase in excise duties will feed into cigarette prices later than expected. In addition, slightly lower annual food price inflation, fuel price inflation and core inflation were recorded in November. The published data continue to confirm the CNB‘s opinion that the decision made last year to start using the exchange rate as an additional monetary policy instrument contributed significantly to averting the threat of deflation linked with a drop in demand. According to the forecast, headline inflation will go up owing mainly to rising economic activity and accelerating wage growth. According to the forecast, both headline and monetary-policy relevant inflation will return to the CNB’s 2% target in early 2016, i.e. at the monetary policy horizon. They will then be slightly above the target.
Real GDP rose by 2.4% year on year in 2014 Q3. This figure was 0.2 percentage point lower than forecasted. In quarter-on-quarter terms, economic activity increased by 0.4% as expected. In line with the forecast, all components of domestic demand contributed to the year-on-year growth in GDP. By contrast, net exports made a slightly negative contribution as a result of rising imports, reflecting, as expected, the recovery in investment activity and household consumption. The CNB’s forecast that – after contracting in the previous two years – the domestic economy will grow noticeably for this year as a whole owing to higher external demand, a recovery in government investment and last but not least to easy domestic monetary conditions, is thus being fulfilled. Next year the economy is forecasted to record the same growth rate as this year.
According to new information on developments abroad obtained from the December Consensus Forecasts survey and current market outlooks, the outlook for consumer price inflation and especially producer price inflation in the euro area has been lowered over the entire forecast horizon. The outlook for external demand and three-month market interest rates in the euro area have shifted in the same direction, albeit only marginally.
Oil prices have fallen by almost one-quarter over the entire outlook compared to the assumptions of the current forecast. The price of Brent crude oil is currently well below USD 65 a barrel. As regards oil prices in euro terms and, in turn, koruna terms, the impact of the significantly lower dollar prices of oil is only partly offset by a stronger outlook for the exchange rate of the dollar against the euro. Although the decline in oil prices should be viewed as a positive supply shock, one which will contribute to faster growth in the economic performance of many countries, its short-term downward effects on prices do not come at an appropriate time from the perspective of inflation expectations. It cannot be ruled out, therefore, that growth in economic activity in the euro area will remain very subdued. In such an environment, a sharp drop in commodity prices may lead to a decrease in both producer and consumer prices. Overall, developments abroad represent a significant anti-inflationary risk for the Czech economy.
By contrast, the ongoing domestic economic growth continues to have a favourable effect on the labour market situation to a degree which exceeds our expectations overall. This is evidenced by faster-than-expected growth in total employment, continuing growth in the number of employees converted into full-time equivalents and – last but not least – a still rising number of vacancies. At the same time, the seasonally adjusted general unemployment rate fell faster than expected and the number of registered unemployed persons also continued to decline. On the other hand, wage growth in the business sector slowed unexpectedly, falling slightly below 2%. Wage growth in the non-business sector was also lower than forecasted.
A slightly rising trend in industrial production, accompanied by a sizeable year-on-year increase in export sales, remains in place. Continuing growth in external and domestic demand is also reflected in a persisting rise in new industrial orders, driven by domestic and foreign orders in equal measure in October. Retail sales are also rising noticeably in both the automotive segment and the sale of other non-food products. Construction output is increasing mainly on account of a recovery in government investment. Overall, these indicators suggest that the economy will continue to grow roughly at the current pace at the close of this year.
The gradual recovery in producer prices, driven largely by the weakening of the koruna since the start of this year, has come to a halt. Prices in manufacturing in fact saw a marginal year-on-year decrease in November, owing partly to a price drop in oil processing. By contrast, the forecast had expected slowing but still positive price growth in manufacturing. The annual decline in agricultural producer prices deepened and was slightly more pronounced than forecasted. Conversely, prices in construction and services continued to rise moderately.
To sum up the important facts about recent developments in the Czech economy, annual GDP growth was slightly below the forecast in 2014 Q3. Inflation has also been slightly lower so far in Q4. The average wage rose considerably more slowly than expected in Q3. The seasonally adjusted share of unemployed persons declined slightly faster than forecasted.
The Bank Board assessed the balance of risks to the current forecast as being anti-inflationary. This assessment reflects less favourable economic and price developments abroad coupled with an observed sharp fall in oil prices and lower wage growth in the Czech economy. In this situation, the Bank Board repeated that the Czech National Bank would not discontinue the use of the exchange rate as a monetary policy instrument before 2016. At the same time, the Bank Board stated that the deflationary pressures from abroad were currently associated largely with a positive supply shock, in particular a fall in energy commodity prices. Only 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, would it be necessary to consider moving the exchange rate commitment to a weaker level."