In mid-2019, the Czech economy grew in year-on-year terms
for the twenty-third consecutive quarter. Although growth has
slowed to 2–3% from 4.5% in 2017, the economy is still
showing signs of overheating.
This is most pronounced in the labour market, which has been
facing acute skilled and unskilled labour shortages for two
years now. The number of unemployed is currently much lower
than at the peak of the previous business cycle in 2008.
Persisting demand for labour is the main reason for rapid wage
growth. In 2018, average nominal wages rose by an extraordinary
8.1% and real wages by 6.5%. Although wage growth will slow in
the future, it will continue to provide a significant stimulus
to household consumption growth, which has been the main
driving force behind economic growth in recent years together
with corporate investment.
The rapid wage growth is the most important cause of
demand-pull inflation. So far in 2019, headline inflation has
been below the upper boundary of the tolerance band of our
inflation target, which is 2% ± 1 percentage point.
However, the slightly higher inflation is due partly to
relatively brisk growth in food prices.
The CNB's monetary policy has undergone remarkable
development in recent years. As a result of strengthening
disinflationary pressures following the financial crisis, the
CNB decided in November 2013 to weaken the exchange rate of the
koruna and prevent it from appreciating below CZK27 to the
euro. It used the exchange rate as an unconventional instrument
within the inflation targeting regime, joining other central
banks applying unconventional policies.
The need to rely on the exchange rate as a tool to counter
disinflation subsided in late 2016. The CNB ended its exchange
rate commitment in April 2017, leaving the exchange rate to
move freely according to demand and supply on the forex market.
As the intervention regime had stimulated the opening of
massive speculative positions by foreign investors and
financial asset purchases in the domestic currency, the
evolution of the koruna exchange rate after the exit from the
intervention regime was subject to uncertainty. In line with
our expectations, the koruna started to appreciate following
the end of the exchange rate commitment, but the appreciation
came to a halt in late 2017, contrary to expectations. Since
then, the koruna has been fluctuating within a relatively
narrow range of CZK25.50 and CZK26 to the euro.
Whether the halt in koruna appreciation is due to the
'missing counterparty' effect for the closing of forex
positions or the recent deterioration in forex market sentiment
(fostering an outflow of capital into assets regarded as less
risky), it opened up room for the CNB to normalise monetary
policy: to return to the use of interest rates as the main
monetary policy instrument.
The CNB started to increase its rates in summer 2017,
raising its two-week repo rate in eight steps to 2% in May
2019. It thus embarked on a path towards a neutral interest
rate level that neither stimulates nor slows the economy. Owing
to significant risks and uncertainties in the external
environment, monetary policy is now in wait-and-see mode. As we
have room for moving interest rates in either direction, this
is a comfortable situation.