At its meeting today, the Bank Board of the Czech National Bank increased the two-week repo rate by 75 basis points to 1.50%. At the same time, it increased the discount rate to 0.50% and the Lombard rate to 2.50%. Five members voted in favour of this decision and two members voted for leaving rates unchanged.

This decision of the Bank Board is underpinned by the summer macroeconomic forecast and by an assessment of information obtained since it was prepared. Consistent with the forecast is a rise in market interest rates from the middle of this year onwards. The Bank Board assessed the risks and uncertainties of the summer forecast as being markedly inflationary and hence requiring a faster rise in interest rates compared with the current forecast. The pace of further tightening of monetary policy will be conditional on future developments and on the message of the autumn forecast.

The current outlook for foreign industrial producer price inflation has been revised markedly upwards, especially for the near future. This is due to persisting disruptions to material and component supplies and high global demand for the production of the industrial sector. Along with rising prices of electricity and gas on commodity exchanges, this will also lead to an increase in the outlook for consumer price inflation this year and the next. Expected GDP growth in the effective euro area is slightly higher this year. The outlook for still low foreign interest rates is unchanged.

The outlooks for the Brent crude oil price and the euro-dollar exchange rate also remain almost unchanged from the assumptions of the current forecast.

So far in Q3, domestic inflation has been visibly above the 3% upper boundary of the tolerance band around the CNB’s inflation target. Annual consumer price inflation was higher than forecasted in July and accelerated significantly further in August, exceeding the forecast by one percentage point. The main factor underlying this was a further unexpected strong rise in core inflation. It was due primarily to increasing growth in the cost of owner-occupied housing and rising prices in the reopened services sector. However, goods prices, including food prices, also accelerated. Fuel prices continued to rise apace year on year, in line with the forecast. Administered price inflation remained subdued, but the current forecast expects it to rise sharply in the autumn on the back of increasing prices of electricity and natural gas for households. According to the summer forecast, inflation will return towards the 2% target next year, aided by this year’s tightening of monetary conditions. However, there are significant upside risks to this inflation outlook, especially for the next few quarters, as newly available information points to unexpectedly strong inflation pressures from the domestic and foreign economy.

The Czech economy returned to growth in Q2. This was due mainly to an easing of most pandemic measures. The pace of economic recovery lagged only slightly behind the CNB’s forecast. The deviation was due almost exclusively to a smaller contribution of net exports. The worse export performance stems from the overloading of global production and supply chains, which led to forced restrictions of the output of Czech industry. Government consumption was also slightly lower than forecasted, despite still recording solid growth. By contrast, household consumption was well above the forecast. Gross capital formation was also slightly higher, due almost exclusively to higher additions to inventories. According to the current forecast, the Czech economy will grow by 3.5% this year and pick up slightly further next year.

Industrial production growth slowed further in July. This was due to labour shortages and the above disruptions to material and component supplies, which are also fostering a rapid rise in prices of industrial production inputs and outputs. Growth in retail sales also slowed in July, but it remains high despite a slight decrease in sales in the automotive segment. Growth in construction output remains muted.

The labour market, which did not cool too much during the pandemic, has started to show clear signs of renewed overheating in recent months. Unemployment has been falling faster than forecasted in recent months, and the reopened services sector has been facing frequent shortages of skilled employees. Wage growth lagged slightly behind the forecast in Q2, owing to somewhat lower wage growth in market sectors. However, this was partly offset by slightly higher-than-expected wage growth in non-market sectors.

The koruna-euro exchange rate was almost as forecasted on average in July–September. The koruna started to appreciate gradually in early September on market expectations that the interest rate differential would widen more significantly than previously expected. According to the current forecast, the koruna will continue to firm gradually, strengthening beyond CZK 25 to the euro in late 2021 and early 2022.

The summer forecast was drawn up in an environment of still elevated risks and uncertainties. To sum up its materialisation, economic growth and average wage growth lagged only slightly behind the forecast in Q2. The share of unemployed persons was somewhat lower during the summer months than in the current forecast. By contrast, inflation was markedly higher in August. In this context, we can already state now that our autumn forecast will contain a sizeable increase in the inflation outlook, especially in the short run.