Current macroeconomic developments in the Czech Republic
in the context of using the exchange rate as a monetary policy instrument
Jiří Rusnok
FIMMDA – PDAI 16th Annual Conference 2015 Prague, 17 August, 2015
Czech Republic
o Population: 10.3 mil. o Area: 78 866 km2 o Capital: Prague (1.3 mil.) o Currency: Koruna (CZK)
Modern history: o 1989 Velvet revolution o 1993 Separation of
Czechoslovakia o 2004 Member of the EU
Economic characteristics: o Small open economy o Export oriented (exports
more than 80% of GDP) o Close trade relations
with the euro area o Strong industrial base 2
Czech Monetary Policy
o The CNB‘s primary objective is to maintain price stability. o The CNB shall also support the general economic policies of the Gov‘t leading to
sustainable economic growth without prejudice to its primary objective. o The CNB enjoys full independence in its conduct of monetary policy. o Since 1998, the CNB has operated within an inflation targeting regime. o Nominal interest rates are the main monetary policy instrument. o However, since November 2012 the interest rates have been at technically zero
level, and the CNB has started to use the exchange rate as a further monetary policy instrument since November 2013. 3
0%
1%
2%
3%
4%
5%
1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15
CNB's key policy rates
Discount rate 2W repo rate Lombard rate
24,0
24,5
25,0
25,5
26,0
26,5
27,0
27,5
28,0
1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15
CZK/EUR exchange rate and CNB's commitment
CZK/EUR CNB's commitment at 27 CZK/EUR
External Environment Outlook
o Euro area GDP growth will pick up this year and stay close to 2% afterwards. o The slump in energy commodity prices coupled with only moderate economic
growth is reflected in currently falling PPI in the euro area, which will start rising as from the beginning of the next year.
o 3M EURIBOR and EUR/USD reflect the ECB‘s easing measures. 4
Czech Economic Activity: GDP Growth
o Annual real GDP growth picked up significantly to 4% in 2015 Q1. o Inventories and household consumption contributed the most to the pick-up
in GDP growth in 2015 Q1. o On the supply side, gross value added growth accelerated further, with industry
and services having the main contributions to its growth. o Automotive industry has been contributing significantly to the GVA growth
in 2014-15. 5
Czech Economic Activity: GDP Growth Forecast
o GDP growth forecast: 3.8% in 2015; 2.8% in 2016, 2.8% in 2017. o The economy will be boosted by a pickup in external demand, easy monetary
conditions, low oil prices and in 2015 and 2017 by expansionary fiscal policy. o Economic growth will slow down just below 3% in 2016 (unwinding of the effect
of an extraordinary jump in inventories in 2015 Q1 and of the fall in oil prices, decline in government investment, recent appreciation of the koruna). 6
Labor Market: Employment
o High demand for labour has led to a swift growth in the number of employees
converted into FTE, which rose to 2% in 2015 Q1. o The growth in the number of employees converted into FTE will continue,
although at a slower pace than in 2015. o The general unemployment rate will fall in the period ahead, due mainly to
growth in employment associated with rising economic activity. o The forecast of the general unemployment rate is not reflecting the recent
downward data revision by the CZSO. 7
Labor Market: Wage Growth
o Wage growth in the business sector will increase to 2.8% for 2015 as a whole and will further accelerate to 4.6% and 4.7% in 2016 and 2017 respectively.
o Annual wage growth in the non-business sector will be stable overall in 2015–2017 at around 2.8%.
8
Structure of Inflation
o Headline inflation reached 0.5% in July 2015. This growth was mainly given by a continuing growth of and indirect tax changes.
o Core inflation (i.e. adjusted inflation excluding fuels and food) has remained distinctly positive, reflecting a continuing growth of both tradable- and non-tradable goods prices.
o Compared with the beginning of the year, the fall of fuel prices was less pronounced.
o The y-o-y change in administered prices has been close to zero this year. 9
Headline Inflation Forecast
o According to the forecast headline inflation will continue to rise until the start of 2016. However, it will then dip temporarily and will thus still be below the 2% target at the monetary policy horizon.
o It will reach the 2% target at the start of 2017. 10
Interest Rate Path
o The forecast expects market interest rates to be flat at their current very low level until the end of 2016.
o This reflects an assumption that the 2W repo rate will be left at technical zero and the money market premium will remain unchanged in the same period.
o Consistent with the forecast is an increase in interest rates in 2017. 11
Monetary Policy and the Exchange Rate
o The forecast assumes the exchange rate to be used as a monetary policy instrument until the end of 2016.
o The short-term forecast for the exchange rate of the koruna against the euro takes into account its appreciation in July. It is expected to remain stable in the following quarters at a level that is slightly weaker than the announced asymmetric exchange rate commitment (i.e. CZK 27 to the euro).
o After the exit from the exchange rate commitment the koruna will moderately appreciate due to the positive interest rate differential and renewed – though compared with the pre-crises period less pronounced – real convergence of the Czech economy to its advanced counterparts in the euro area.
o The CNB‘s Board views the risks of the forecast as broadly balanced. A modest downside risk may arise from the decline in oil prices, which recently decreased to USD 50 a barrel.
o The Board has emphasised that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument before 2016 H2.
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