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Czech Economy and the CNB ‘s forecast Vladimír Tomšík Vice-Governor, Czech National Bank

Discover the economic landscape of the Czech Republic, CNB's monetary policy, and current forecasts by Vice-Governor Vladimír Tomšík. Learn about the country's industrial strengths, trade relationships, inflation targeting policies, and FDI landscape.

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Czech Economy and the CNB ‘s forecast Vladimír Tomšík Vice-Governor, Czech National Bank

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  1. Czech Economy and the CNB‘s forecast Vladimír Tomšík Vice-Governor, Czech National Bank www.cnb.cz Embassy of the Czech Republic, Beijing, 29 September2014

  2. Outline of the presentation • Czech Republic and its economy • CNB, its legal mandate and monetary policy regime • The current economic situation and CNB‘s forecast • Conclusions

  3. Outline of the presentation • Czech Republic and its economy • CNB, its legal mandate and monetary policy regime • The current economic situation and CNB‘s forecast • Conclusions

  4. Czech Republic Population: 10.3 mil. Area: 78 866 km2 Capital: Prague (1.3 mil.) Currency: Koruna (CZK) 1989 Velvet revolution 1993 Separation of Czechoslovakia 2004 Member of the EU Small open economy Export oriented (automotive industry, etc.) Close trade relations with the euro area

  5. Level of economic development • GDP per capita in PPP reaches 75 % of euro area average. • Catching-up process has bee temporarily interrupted by the global crisis. • Wage level in euro is slightly below 40 % of the euro area average.

  6. Structure of the economy • The Czech economy is highly industrialized. • The automobile sector is particularly strong in the Czech Republic.

  7. Economic openness • Openness of the Czech economy to foreign trade is high andincreasing. • Exports reach almost 80% of Czech GDP. • In the last decade, Czech foreign trade is in a surplus.

  8. Commodity structure of Czech exports • Machinery and transport equipment constitutes 50% of Czech exports.

  9. Territorial structure of Czech exports • European Union accounts for 85% of Czech exports. • Germany is by far the main trading partner, followed by Slovakia.

  10. Czech tradewithChina • Czech exports to China have been increasing, but the balance of trade with China remains in a significant deficit.

  11. FDI stock in the Czech Republic • The stock of FDI in the Czech Republic reaches 70% of GDP. • It is the second largest in the CEEC region (after Hungary).

  12. Outline of the presentation • Czech Republic and its economy • CNB, its legal mandate and monetary policy regime • The current economic situation and CNB‘s forecast • Conclusions

  13. Legal mandate • Monetary policy objective set forth • in the Constitution of the Czech Republic • in the Act on the Czech National Bank • In particular, the CNB is required to maintain price stability • The CNB shall support the general economic policies of the Government leading to sustainable economic growth • without prejudice to its primary objective • full independence of the CNB in its conduct of monetary policy

  14. Monetary policy regimes • MP regime: inflation targeting (IT) since 1998 • Before 1998 • mix of monetary targeting and exchange rate peg (1991 – May1997) • ER peg abolished in May ‘97 and monetary targeting applied till the end of 1997 • Reasons for introducing IT • Inability of previous regime to anchor inflation and inflation expectations • Involuntary (market forced) abandonment of fixed exchange rate regime in May 1997 • Experience of IT central banks (RBNZ, BoC, BoE, SR, BoA etc.)

  15. Inflation targeting: main principles • Publicly explicitly announced commitment to provide an anchor for inflation and inflation expectations • Main monetary policy tool: 2W repo rate (but currently at „technically“ zero level) • Managed floating exchange rate regime (but currently an exchange rate commitment as a further instrument at the ZLB) • Key role for macroeconomic forecast • High degree of monetary policy transparency

  16. Inflation targets π • A 2% target since January 2010.

  17. Inflation rate Annual average (in %) • The disinflation process was only very gradual in 1994-97. • It was temporarily reversed in 1997-98 (CZK depreciation, deregulations). • Inflationhas been very low since 1999 (0.6% y-o-y in August 2014).

  18. Outline of the presentation • Czech Republic and its economy • CNB, its legal mandate and monetary policy regime • The current economic situation and CNB‘s forecast • Conclusions

  19. International comparison: economic growth Real GDP growth(in %) • Until last year, the Czech Republic lagged behind the other countries in the region in terms of GDP dynamics (protracted recession). • The revival of economic growth occurred at the end of last year. • This year's GDP growth is due to a recovery in foreign demand, the unwinding of fiscal tightening and weakening of the koruna.

  20. Fiscal policy • Fiscal policy was strongly restrictive in 2009-2013. • The public budget deficit has declined to 1.5% of GDP in 2013, while the structural deficit has almost disappeared, implying an end of the EDP. • The new government may pursue an expansionary fiscal policy for 2015.

  21. Main policy interest rates • In November 2012, the CNB has hit the zero lower bound (ZLB). • Since then, the policy rates have been set at “technically” zero level: 0.05 % for the 2W repo rate and O/N deposit (i.e. discount) rate, and 0.25% for the O/N lending (i.e. Lombard) rate

  22. CNB‘s November 2013 decision • The Board decided to start using the exchange rate as an additional instrument for easing the monetary conditions, stating that: ”The CNB will intervene on the FX market to weaken the koruna so that the exchange rate is close to CZK 27/EUR.“ • The exchange rate level was chosen to avoid deflation or long-term undershooting of the inflation target and to speed up the return to the situation in which the CNB will be able to use its standard instrument, i.e. interest rates. • The exchange rate commitment is one-sided. This means that the CNB will prevent excessive appreciation of the koruna exchange rate below CZK 27/EUR. On the weaker side of the CZK 27/EUR level, the CNB is allowing the exchange rate to move according to supply and demand on the FX market.

  23. The exchange rate after the decision • After the CNB‘s policy announcement, the exchange rate reached 27 CZK/EUR quickly, and has been moving at somewhat weaker levels since then. • The exchange rate volatility has decreased significantly (both the actual one, and implied by the market pricing of the futures).

  24. Structure of GDP growth Contributions of aggregate demand components to the y/y GDP dynamics (in p.p.) • An economic recovery (2.7 % in 2.Q) is taking place, supported byinvestment and household consumption. • The weaker exchange rate supported household consumption in 4.Q 2013. In 1.H 2014, the consumption growth continued. • Net exports worsened due to imports and inventory investment for future production. This was in line with the expectations.

  25. Structure of gross value added growth Contributions to the y/y dynamics of gross value added (in p.p.) • The recovery has been driven by export-oriented manufacturing sector, in line with the expectations. • But other sectors have started to contribute positively, too.

  26. Industrial production and construction The industrial production has started to grow, pulled mainly by foreign orders supported by a recovery in the euro area, as well as by the weaker exchange rate. But the domestic orders have been growing, too. Construction output has started recovering from a long recession. Industrial production (constant prices, y/y, in %) Construction output (constant prices, y/y, in %)

  27. Confidence indicators Consumer and business confidence (2005 = 100) Business confidence by sectors (2005 = 100) • Consumer confidence has been growing. • The business confidence has improved mainly in the industrial sector and trade, pessimistic expectations still prevail in the construction.

  28. Labour market Unemployment rate (in %) Number od employees (full-time equivalent, in % a and in p.p.) • Unemployment is gradually reduced following the recovery of the. • Enterprises responded to the reduced demand by shortening the length of working time during the recession` now the opposite is taking place. • Unemployment rate has been declining.

  29. Labour market Nominal wages (yoy, in %) Labour productivity (yoy, in %) • Nominal wage growth last year even moved into negative territory, partly due to one-off effects of changes in the taxation of wages in the end of 2012.This year, wages revive roughly in line with expectations. • Labourproductivity grows mainly due to the recovery in the manufacturing sector.

  30. The property market Pricesof apartments (yoy in %) Apartment pricesustainabilityindicators(2000–2007 average= 100) • Developments in the property market in 2014 H1 confirmgrowth in real estate prices in Prague; prices are also startingto recover in the rest of the Czech Republic. • Property price sustainability indicators suggest no financial stability risks coming from the housing market.

  31. Inflationforecast (y/y in %) • Inflation remained at a very low level in the 2.Q 2014. It will gradually move up starting the third quarter of this year. • In summer of 2015, headline inflation will reach the target and will remain there throughout the rest of the forecasting horizon. • Monetary policy-relevant inflation will follow the same profile as headline inflation and will be just below the inflation target at the MP horizon.

  32. Interest rate path (3M PRIBOR in %) • The forecast assumes that the exchange rate will be used as a monetary policy instrument until 2015 Q3. • The risks to the forecast are assessed as being slightly anti-inflationary. Against this background, the Bank Board stated that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument before 2016.

  33. GDP GrowthForecast (yoy in %) • GDP growth forecast: roughly 3% a year over 2014-2016. • Swift economic growth will be supported by growing foreign demand, relaxed domestic monetary conditions and increased government investment. • 2.7% growth in Q2 2014 was only slightly below the forecast.

  34. Outline of the presentation • Czech Republic and its economy • CNB, its legal mandate and monetary policy regime • The current economic situation and CNB‘s forecast • Conclusions

  35. Conclusions • The Czech GDP reaches 75% of the euro area average. • The Czech economy is very open and export-oriented, with a strong industrial tradition and a lot of FDI. • The CNB‘s monetary policy is focused on maintaining price stability within the inflation targeting framework. • Currently, interest rates are at the zero lower bound, and the CNB has started to use the exchange rate as a further instrument. • The fiscal situation of Czech Republic has improved in recent years. • The economy is recovering from the previous recession, supported by growing foreign demand, the end of fiscal austerity and by monetary policy easing.

  36. Thank you for your attention www.cnb.cz Vladimír Tomšík vladimir.tomsik@cnb.cz

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