Czech Republic Central Bank Statement

Author: | Published: 19 Oct 2018
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

A rather important monetary policy step was made in April 2017 when the Czech National Bank (CNB) exited the exchange rate commitment adopted in November 2013. The exit decision was preceded by a robust economic recovery and a gradual rise in inflation from 2014–16. Inflation further accelerated in late 2016/early 2017, creating conditions to meet the inflation target on a sustainable basis.

The exit from the commitment was quite smooth in terms of exchange rate volatility. The initial somewhat higher volatility of the koruna vis-à-vis the euro diminished after a few weeks and the koruna started to follow an appreciation trend. In May 2018, the koruna was about 5% stronger than the commitment level of CZK27 to the euro. Although the koruna was among the best performers worldwide, the fact that it was approaching the pre-commitment level hardly presented any threat to the competitiveness of exporters.

The exit from the commitment was the first step towards normalising monetary policy, i.e. towards using interest rates as the main instrument again. The second half of 2017 witnessed a double repo rate increase (of 0.25pp each time), specifically at the beginning of August and November. A third repo rate hike to 0.75% followed in February 2018. Financial market interest rates responded to the increase in the CNB's policy rates by rising at all maturities.

The Czech economy is currently doing very well, possibly too well. The economy recorded growth of 4.5% in 2017 and again in 2018 Q1. The economic growth (driven by manufacturing output) was outpacing potential growth, implying an overheating of some segments, in particular the labour market. Unemployment has been breaking one historical record after another in recent months, reaching the lowest level in Europe. The tight labour market is stimulating wage growth (2018 Q1: 8.6% nominal and 6.6% real). This is fuelling positive consumer sentiment, resulting in rising household consumption. Public finances remain in a good shape, having recorded only modest deficits or small surpluses in recent years. While the government debt-to-GDP ratio was 27.5% in 2007 and peaked at 45% in 2013, it is projected to fall to 30% in 2019. This is a substantially better performance than in the majority of euro area countries. Also, the trade balance and current account remain in surplus. Headline inflation reached 2.2% in May 2018, quite close to our inflation target (2%).

My overall assessment of the current economic situation is positive on all fronts. The Czech economy is prospering, the CNB monetary policy has embarked on a path towards normality and inflation is under control. I find it very useful that our macro-prudential policy started to tighten several years before the monetary policy tightening occurred. This enabled us to mitigate the risk of overheating in particular financial market segments at a time when monetary policy was preoccupied with dealing with overly low inflation. Our policies are thus quite consistent and are not only acting counter-cyclically, but also safeguarding financial stability.