Current Developments in the Czech Economy and Future Exit from the Exchange Rate Commitment

Transcription

1 CFA Society Forecasting Dinner 2017 Current Developments in the Czech Economy and Future Exit from the Exchange Rate Commitment Jiří Rusnok Governor, Czech National Bank Prague, 2 March 2017

2 Contents Current developments in the Czech economy CNB forecast (February 2017) Future exit from the exchange rate commitment 2

3 GDP (q-o-q and y-o-y changes in % at constant prices; seasonally adjusted) Source: CZSO Annual GDP growth slowed during 2016: 3% in Q1, 2.6% in Q2, 1.9% in Q3 and 1.7% in Q4 (preliminary CZSO estimate of 14 February); the growth was due mainly to household consumption 3

4 Potential output (annual percentage changes) Source: CNB The rate of growth of potential output (i.e. output produced at full capacity utilisation) is around 2.5% 4

5 Output gap (as % of potential output) Source: CNB The Czech economy is close to its potential output level, where it will stay over the next two years 5

6 Industrial production (y-o-y changes in %) Source: CZSO Seasonally adjusted industrial production fluctuated at relatively low year-on-year growth rates in recent months: 2.7% in September, 0.8% in October, 4.3% in November and 2.9% in December 6

7 Barriers to growth in industry (percentages) The significance of labour shortages as a barrier to growth for industrial firms is increasing Source: CZSO 7

8 Retail sales (y-o-y changes in %) Source: CZSO Growth in seasonally adjusted retail sales is slowing somewhat (4.8% in October, 4.6% in November and 4.3% in December) but remains relatively high; sales reflect favourable consumer sentiment 8

9 Unemployment (in %, seasonally adjusted) Source: MLSA, CZSO Unemployment is falling steadily; general unemployment rate: 3.7% in Q4; share of unemployed persons: 5.1% in Q4 and 4.9% in January

10 Beveridge curve (numbers in thousands; seasonally adjusted data; annual percentage changes for adjusted inflation) Source: MLSA, CZSO The number of unemployed persons declined steadily, while the number of vacancies increased slightly further; the labour market neared its 2008 peak 10

11 Unemployment in EU in Dec 2016 (as % of active population, seasonally adjusted) Note: Data for November 2016 for countries marked with an asterisk Source: Eurostat The Czech Republic currently has the lowest unemployment in the EU 11

12 Average wage (y-o-y change in %) Source: CZSO Given the low inflation rate, average real wage growth has been only marginally lower than average nominal wage growth since 2014; the real wage rose by 4% in 2016 Q3 12

13 Inflation (y-o-y changes in %) Source: CZSO Consumer price inflation rose from 1.5% in November to 2% in December and 2.2% in January (monetary policy-relevant inflation was also 2.2% in January) 13

14 Structure of inflation (annual percentage changes; contributions in percentage points) Source: CZSO Inflation accelerated in the last three months owing mainly to fast growth in food prices; contributions of food prices to headline inflation: 0.6 pp in November and 0.8 pp in December and January 14

15 Industrial producer prices (annual percentage changes; contributions in percentage points) Source: CZSO The decline in industrial producer prices moderated markedly during 2016 H2; producer prices increased by 2.1% in January; the recent developments were driven mainly by energy prices 15

16 Change in annual inflation in the EU (change between October and December 2016 in pp) Rapid acceleration in inflation was not limited to the Czech Republic; from October to December 2016, inflation rose by 1 pp or more in seven EU countries Source: Eurostat 16

17 CNB forecast (February 2017) 17

18 GDP forecast (annual percentage changes; seasonally adjusted) Source: CNB The economy will grow at an average rate of just under 3% 18

19 Headline inflation forecast (annual percentage changes) Headline inflation will increase further and converge to the 2% target from above at the monetary policy horizon Source: CNB 19

20 CNB forecast other variables (f) 2017f 2018f PPI (y-o-y in %) Real wages (y-o-y in %) Employment (%) Unemployment (ILO) (%) Gov. deficit (as % of GDP) Gov. debt (as % of GDP) Trade balance (as % of GDP) Current account (as % of GDP) The evolution of the koruna exchange rate following the exit from the exchange rate commitment is a bidirectional uncertainty The Bank Board assessed the risks to the forecast as being balanced 20

21 Future exit from the exchange rate commitment 21

22 Future exit from the exchange rate commitment The exit will mean that the CNB will return to the managed float regime under inflation targeting The exit will take place after conditions are created for sustainable fulfilment of the 2% inflation target even after the exit and there is no risk of a return to the use of unconventional measures (the CNB does not want to destabilise the economic environment: stop and go policy) The period of exceptional exchange rate stability, i.e. hedging for free provided by the CNB (macro-hedge), will end after the exit The execution of the exit will depend on the situation prevailing on the forex market As soon as the exit takes place, it will be communicated clearly The meeting on 2 February 2017: A majority of the board members consider it likely that the commitment will be discontinued around the middle of

23 Forex interventions (Jan 2013 Dec 2016) Source: CNB, Eurostat The intervention in November 2013 reached EUR 7.5 bn; cumulative interventions to defend the commitment from July 2015 to December 2016 totalled EUR 25.8 bn 23

24 Why the koruna need not appreciate markedly after the exit The koruna was slightly overvalued before the introduction of the exchange rate commitment The weaker koruna exchange rate following its weakening is in the meantime passing through to prices and other nominal variables Real equilibrium appreciation is slower than before the crisis Missing counterparty: exporters will be hedged and there will be no counterparty on the market closing long koruna positions The CNB will intervene if needed to mitigate potential excessive exchange rate fluctuations Expectations of a sharper appreciation of the koruna after the exit are not justified 24

25 Is the koruna misaligned? Source: CNB BEER = Behavioral Equilibrium Exchange Rate FEER = Fundamental Equilibrium Exchange Rate According to different models, the current koruna exchange rate is close to its equilibrium 25

26 ER commitment EXIT Hypothetic koruna movements after exit M A N A G E D rather MANAGED F L O A T rather FLOAT CZK 27/EUR depreciation appreciation excessive fundamentally unjustified ER weakening CNB ready to intervene exchange rate pass-through to prices and wages; missing counterparty CNB ready to intervene excessive fundamentally unjustified ER strengthening enhanced ER volatility period Ongoing long-term real and nominal koruna appreciation normal ER volatility period; ER will be determined predominantly by economic fundamentals; CNB does not intervene or only under exceptional circumstances The period of enhanced volatility will be limited; the exchange rate will then be determined mainly by economic fundamentals 26

27 Summary The Czech economy is now fully utilising its production capacity The growth is driven by household consumption and net exports Unemployment is very low and the labour market is exerting upward pressure on wages Inflation accelerated in November January owing to: a) food price growth, b) strengthening domestic demand pressures and c) weakening external disinflationary pressures Headline inflation will increase further and converge to the 2% target from above at the monetary policy horizon The Bank Board considers it likely that the exchange rate commitment will be discontinued around the middle of 2017 After the exit, the koruna will probably be rather volatile for some time; it should then start to follow an appreciating trend, although more slowly than before the crisis The exit from the exchange rate commitment will be a key event for the CNB; for the economy, it will mean a return to the exchange rate uncertainties experienced before the introduction of the commitment 27

28 Thank you for your attention Jiří Rusnok Governor Czech National Bank Na Příkopě Praha 1 jiri.rusnok@cnb.cz Tel: