IMF/WB Annual Meetings 17 Czech Monetary Policy and Economic Outlook Vladimir TOMSIK Vice-Governor Czech National Bank Bank of America Merril Lynch Symposium and JPMorgan Investor Seminar 13 1 October 17, Washington, DC
Exit from the FX Commitment The CNB s one-sided exchange rate commitment was introduced in November 13 to avoid deflation or long-term undershooting of the inflation target. The FX commitment was abandoned on April 17 as conditions for sustainable fulfilment of the % inflation target in the future had been met. The exit from the commitment has been smooth. The Czech koruna has appreciated gradually and moderately since then. The exit was the first step towards normalizing the monetary conditions and was followed by an increase in the CNB s interest rates in August. % CZK /EUR 3 5 3 1 Lombard rate W repo rate Discount rate CZK/EUR (rhs) Exchange rate commitment (7 CZK/EUR) 8 1/8 1/9 1/1 1/11 1/1 1/13 1/1 1/15 1/1 1/17
Inflation 3 Structure of inflation (annual percentage changes; contributions in p.p.) 1-1 1/15 7 1 1/1 7 1 1/17 7 Indirect taxes in non-administered prices Fuel prices Food prices (incl. alcohol and tobacco) Administered prices Core inflation Headline inflation (in per cent) Inflation returned back to the % inflation target in December 1 after being below it for four years. It has picked up further this year (.5% in August). Core inflation has increased further this year (to.7% in August), reflecting accelerated GDP and nominal wage growth (plus some one-off effects). Food prices are also growing visibly in annual terms. 3
Economic Activity - - GDP growth and its structure (annual percentage changes; contributions in p.p., s.a.) I/1 I/13 I/1 I/15 I/1 I/17 NPISH expenditure Change in inventories Government consumption Gross fixed capital formation Net exports Household consumption Gross domestic product 8 - - Output gap (in % of potential output) - I/8 I/9 I/1 I/11 I/1 I/13 I/1 I/15 I/1 I/17 I/18 I/19 Small structural model Production function Domestic economic activity has been growing since late 13, driven by robust growth in household consumption. The slowdown observed last year was caused mainly by a fall in investment due to the EU funds cycle. GDP growth picked up in 17Q1 and accelerated further (more than expected) in 17Q, mainly due to household consumption and investment growth. The previous economic slack has been fully eliminated, the Czech economy is now operating somewhat above its potential.
Labour Market Continued economic growth is evident in the strong labour market: growing employment and declining unemployment accelerated nominal wage growth in both market and non-market sectors The Czech Republic currently has the lowest general unemployment rate among all the EU countries. Unemployment as % of active population, s.a. 5 15 1 5.9 3.8..3.3.9 5. 5. 5.3 5.7 General unemployment rate (in %, June 17) 5.9..3.5. 7. 7.1 7. 7. 7.7 8.7 8.9 9.1 9. 1. 17.1 1.8 11. 1.7 Belgium data from March 5
Latest Macroeconomic Forecast Inflation 5 3 Inflation (y/y, in %) Monetary policy horizon Inflation target 1-1 III/15 IV I/1 II III IV I/17 II III IV I/18 II III IV I/19 9% 7% 5% 3% confidence interval Inflation will stay in the upper half of the tolerance band throughout the rest of this year and decrease towards the % target at the beginning of next year. Monetary policy-relevant inflation, i.e. inflation adjusted for the firstround effects of changes to indirect taxes, will be very close to headline inflation.
Latest Macroeconomic Forecast Major Inflation Components In the near term core inflation will accelerate further as a result of the currently strong cost pressures and then slow down to % owing to a decline in import prices. The acceleration in price growth will be particularly visible in the case of non-tradables due to inflation pressures from the domestic economy. Food price growth will temporarily rise further owing to growth in agricultural commodity prices. Annual food price inflation will thus exceed % in 17 H. The forecast expects it to go down gradually from early 18 onwards. In August 17, food price growth was below the CNB s forecast. 7
Latest Macroeconomic Forecast Economic Activity 1 8 GDP (y/y, in %) Labour market (y/y, in %) 8 - III/15 IV I/1 II III IV I/17 II III IV I/18 II III IV I/19 9% 7% 5% 3% confidence interval - - I/13 I/1 I/15 I/1 I/17 I/18 I/19 Employment General unemployment rate Nominal wages in market sectors GDP will grow visibly above 3% this year (the increase of.7% in 17Q was well above the forecast). Growth will stay slightly above 3% in 18 19. Growth will be driven mainly by booming household consumption. Investment will recover, especially in the government sector as a result of higher drawdown of EU funds (17Q was strong in terms of private investment). The GDP growth will manifest itself in rising tightness in the labour market. This will result in a further acceleration in wage growth (wage growth was well above the forecast in 17Q, reaching 7.7% in market sectors and 7.% in total). 8
Latest Macroeconomic Forecast Aggregate Demand The strong household consumption growth will reflect a further rise in wages and salaries and other income. Growth in investment will recover thanks to renewed drawdown of EU funds and faster growth in private investment (low real rates, high foreign demand). Net exports will make a positive contribution to GDP growth this year and a negative one in 18 due to a recovery in investment and koruna appreciation. 9
Latest Macroeconomic Forecast Interest Rates and Exch. Rate 3 Interest rate (3M PRIBOR) 1 III/15 IV I/1 II III IV I/17 II III IV I/18 II III IV I/19 9% 7% 5% 3% confidence interval Following the August increase in interest rates, a further increase in rates over the next two years is consistent with the current forecast. According to the forecast, the koruna will appreciate further against the euro. The appreciation will be fostered by: real convergence of the Czech economy to the EA countries ( 1.5% a year), positive interest rate differential vis-à-vis the euro area, ongoing asset purchases by the ECB. However, the appreciation may still be strongly dampened by market overboughtness. 1
Monetary Policy At its September monetary-policy meeting, the CNB Bank Board decided to keep interest rates unchanged. The two-week repo rate thus remains at.5%, the discount rate at.5% and the Lombard rate at.5%. Four members voted in favour of this decision, and three members voted for raising the two-week repo rate to.5% and the Lombard rate to 1.%. The Bank Board assessed the risks to the current forecast as being slightly inflationary. Risks on the upside: faster growth in domestic wages and economic activity weaker-than-forecasted koruna exchange rate in the quarters ahead Risks on the downside: lowered outlook for industrial producer prices in the euro area lower food prices 11
Thank you for your attention. Vladimir TOMSIK Vice-Governor Czech National Bank Vladimir.Tomsik@cnb.cz 1