By CentralBankNews.info
The Czech National Bank (CNB) kept its benchmark 2-week repo rate steady at 0.75 percent but downgraded the risks to its forecast as “slightly anti-inflationary” from balanced so “a further rise in rates at the close of this year at the earliest and especially next year is consistent with the forecast.”
The central bank of the Czech Republic said inflation in January and February was “markedly” below its forecast from the star of this year though it is still expected to remain above its 2.0 percent target this year and return to the target in 2019.
Overall economic growth and wage growth in the fourth quarter of 2017 were slightly below its forecast so the risks to the inflation forecast were now seen as slightly anti-inflationary though a more gradual appreciation of the exchange rate of the koruna may act in the opposite direction, CNB said.
In February, when the CNB last raised its rate, it saw the risks to inflation as balanced.
The CNB has raised its rates three times and by a total of 70 basis points since August 2017 when it became the first central bank in Europe to start tightening its policy after the global financial crises to curb accelerating inflation from a booming economy that was driving up wages.
But inflation has been decelerating since hitting 2.9 percent in October last year and fell to 2.2 percent in January and then to 1.8 percent in February.
CNB had forecast that inflation in February would be 2.2 percent but food prices were lower than expected and core inflation was also “somewhat” below expectations.
The Czech economy grew by an annual rate of 5.2 percent in the fourth quarter of 2017, below the bank’s forecast of 5.4 percent, while average wages grew 8.0 percent, below CNB’s forecast of 8.1 percent.
But CNB added the pace of overall economic growth was only slightly below its forecast, due to slower-than-expected growth in household consumption, and the overall dynamics remain robust due to a strong labour market and rapid growth in household income.
Data for industrial production and retail sales remained strong in January, construction output had accelerated again after slowing in December, and economic sentiment remains favorable, indicating that growth remained robust at the start of the year.
Confirming its confidence about the outlook, the CNB said economic growth in the effective euro area – the share of those countries in the euro area that import Czech goods – in 2018 is currently forecast at 2.5 percent as compared with its past forecast of 2.3 percent, and 2019 growth is seen at 2.1 percent compared with its forecast at the start of the year of 2.0 percent.
The same measure shows consumer prices rising an unchanged 1.7 percent in 2018 and 1.8 percent in 2019.
Prior to its rate hike in August 2017, the CNB in April removed its cap on the exchange rate of its koruna against the euro, with the result the koruna rose sharply.
But since February the koruna has depreciated against the euro and was trading at 25.4 today, up 0.5 percent since Jan. 1, 2018. But compared with the upper limit of 27 to the euro, which CNB imposed from November 2013 to April 2017, the koruna is still 6.3 percent higher.
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. The two-week repo rate thus remains at 0.75%, the discount rate at 0.05% and the Lombard rate at 1.50%.
According to the current forecast, inflation will be above the Czech National Bank’s 2% target for the rest of this year and return to it at the start of next year. Following the interest rate increase in February, a further rise in rates at the close of this year at the earliest and especially next year is consistent with the forecast. The Bank Board assessed the risks to the current forecast as being slightly anti-inflationary.
Compared to the assumptions of the current forecast, the outlook for growth in foreign economic activity this year and the next has shifted slightly higher. The outlook for euro area producer prices this year has likewise increased. In 2019, by contrast, the producer price outlook is lower. Expectations regarding consumer prices and euro interest rates remain unchanged.
The market outlook for oil prices is little changed. The euro-dollar exchange rate is currently expected to remain stable at the present level, which has shifted towards a stronger euro compared to the assumptions of the forecast.
Domestic inflation fell further at the start of this year. The fall was only modest in January but more pronounced in February, when inflation dropped slightly below the Czech National Bank’s 2% target for the first time in more than a year. In February, inflation was markedly below the central bank’s forecast. This was due mainly to lower-than-expected food price inflation. However, core inflation also fell somewhat short of the Czech National Bank’s expectations.
The growth of the Czech economy accelerated further in 2017 Q4. Its pace was only slightly below the central bank’s forecast. This was linked with slightly slower-than-expected growth in household consumption. Nevertheless, its dynamics remain robust due to a strong labour market and ensuing rapid growth in household income. The deviations of the other demand components from the Czech National Bank’s forecast were generally insignificant and, moreover, offset each other to a large extent.
According to monthly indicators, industrial production and retail sales continued to rise at roughly the same pace in January. Following a slowdown in December, growth in construction output accelerated again. The economic sentiment of both households and corporations remains favourable. These indicators suggest continued robust economic growth at the start of this year.
The labour market situation reflects the exceptionally good performance of the Czech economy over the last few years. Employment continued to increase year on year at the close of last year, although its growth moderated in line with the forecast. The long-running decrease in unemployment also continued into early 2018, albeit only to a small degree according to the monthly indicators. This was also in line with the forecast. A shortage of available labour force coupled with high labour demand led to a further sizeable increase in job vacancies to new historical highs. As expected, wage growth accelerated again in late 2017, although its pace in the private sector was slightly lower than the central bank had predicted.
To sum up the important facts about recent developments in the Czech economy, GDP growth and wage growth in Q4 were only slightly below the forecast. Inflation was markedly below the Czech National Bank’s forecast at the start of this year. The share of unemployed persons has been in line with the forecast so far in Q1.
The Bank Board assessed the risks to the inflation forecast at the monetary policy horizon as being slightly anti-inflationary. Risks in this direction stem mainly from inflation, which decreased faster at the start of this year than the Czech National Bank had expected. However, more gradual appreciation of the koruna compared to the forecast may act in the opposite direction in the quarters ahead.”
