Public Presentation of the EEAG Report Recent Developments in the Czech Economy and CNB s New Forecast Kamil Galuščák Czech National Bank CERGE-EI, Prague, 4 February 16
Motivation and Outline Reflections on the EEAG Report on the European Economy, Chapter 1: Macroeconomic Conditions and Outlook Based on CNB s Inflation Report I/16 Recent developments in the Czech economy New CNB s forecast The monetary policy decision on 4 February 16 and the stance of the CNB
Recent developments in the Czech Economy 3
Inflation Inflation (annual percentage changes) 4 Structure of inflation (annual percentage changes; contributions in percentage points) 3 1 1-1 1/11 1/1 1/13 1/14 1/15 Monetary policy-relevant inflation Consumer price inflation -1 1/14 4 7 1 1/15 4 7 1 Adjusted inflation excluding fuels and food Administered prices Indirect taxes in non-administered prices Food prices (including alcoholic beverages and tobacco) Fuel prices Annual consumer price inflation (in per cent) Both headline and monetary policy-relevant inflation fell towards zero in 15 Q4 The decline in fuel prices and administered prices was outweighed by adjusted inflation excluding fuels and by tax changes; food prices had a neutral effect on average In January 16, the inflation was.6%, slightly lower than forecasted. 4
Import and Producer Prices Import prices (annual percentage changes; contributions in percentage points) 6 5 4 3 1-1 - -3-4 -5 1/14 3 5 7 9 11 1/15 3 5 7 9 11 Food and live animals Semi-finished products Mineral fuels, lubricants and related materials Non-energy commodities Commodities with a high degree of processing Import prices, total (annual percentage changes) Industrial producer prices (annual percentage changes; contributions in percentage points) 1-1 - -3-4 -5 1/14 4 7 1 1/15 4 7 1 Manufacture of food, beverages and tobacco Manufacture of basic metals and fabricated metal products Mining and quarrying and power generation, petroleum products Other branches of manufacturing Total PPI (annual percentage changes) The decline in import prices was due most of all to falling prices of energy commodities The decline in industrial producer prices gradually moderated in 15 Q4 owing to a slower year-on-year decline in the price of oil The decline in industrial producer prices accelerated in 15 Q4 and was below the forecast 5
Demand and Output I Gross domestic product (annual and quarterly percentage changes at constant prices; seasonally adjusted data) 6 4 - -4 I/11 I/1 I/13 I/14 I/15 q-o-q GDP growth (right-hand scale) y-o-y GDP growth 3 1-1 - Structure of annual GDP growth (contributions in percentage points to annual percentage change; seasonally adjusted data) 5 4 3 1-1 - -3-4 I/11 I/1 I/13 I/14 I/15 NPISH expenditure Government consumption Net exports Gross domestic product Change in inventories Gross fixed capital formation Household consumption Annual GDP growth picked up slightly further in 15 Q3 Gross fixed capital formation again contributed the most to GDP growth in 15 Q3 Flash estimate of GDP growth in 15 Q4 was lower than forecasted 6
Demand and Output II Confidence indicators (5 average = 1) 1 11 1 9 8 Industrial production (basic index; year 1 = 1) 13 1 11 1 1 9 8 7 6 1/11 1/1 1/13 1/14 1/15 1/16 Composite confidence indicator Consumer confidence indicator Business confidence indicator 9 1/11 1/1 1/13 1/14 1/15 Industrial production Seasonally adjusted data Trend (CZSO) Production capacity utilisation in industry (in %, right-hand scale) 7 Consumer confidence increased to historical highs Industrial production continued to rise rapidly year on year, and production capacity utilisation remained high Industrial production growth slowed down in December 15 7
Demand and Output III New orders in industry (annual percentage changes) 3 1-1 - 1/11 1/1 1/13 1/14 1/15 New orders in industry, total New orders in industry from abroad Domestic new industrial orders Barriers to growth in industry (percentages) 1 8 6 4 1/11 1/1 1/13 1/14 1/15 1/16 None Other Financial constraints Material and/or equipment shortages Labour shortages Insufficient demand Growth in new orders in industry was driven by orders from abroad The effect of insufficient demand as the main barrier to growth decreased slightly further, but labour shortages simultaneously grew in significance 8
Labour Market Beveridge curve (seasonally adjusted numbers in thousands; source: MLSA) Number of vacancies 17 15 13 11 9 1/8 1/7 1/15 7 1/ 1/9 1/5 5 1/14 1/13 1/1 3 3 35 4 45 5 55 6 Number of unemployed persons Average wage and whole-economy labour productivity (annual percentage changes) 5 4 3 1-1 - -3-4 I/11 I/1 I/13 I/14 I/15 Average nominal wage Average real wage Whole-economy labour productivity The number of vacancies has been rising steadily and the number of unemployed persons falling since the start of 14 Average wage growth increased in 15 Q3, while productivity growth was broadly flat 9
Financial and Monetary Developments I Loans to the private sector (contributions in percentage points; annual percentage rates of growth) 1 8 6 4 Investment loans to non-financial corporations (contributions in percentage points; annual percentage rates of growth; annual percentage changes) 15 1 5-1/14 3 5 7 9 11 1/15 3 5 7 9 11 Non-monetary financial institutions Households Non-financial corporations Loans to private sector (annual perc. rates of growth) -5 1/14 3 5 7 9 11 1/15 3 5 7 9 11 Manufacturing Real estate activities Energy Wholesale Construction Agriculture Other Investment loans to NFCs, total (annual percentage changes) Loans to NFCs, total (annual percentage rates of growth) The high growth in loans to the private sector slowed slightly as a result of lower growth in corporate loans Growth in investment loans went up further in the case of manufacturing and real estate activities, but slowed in most other sectors 1
Financial and Monetary Developments II Loans to households (annual percentage rates of growth) 1 8 New mortgages (horizontal axis volumes of new mortgages in CZK billions; vertical axis interest rates on new mortgages in %) 6 6 4 1/11 1/1 1/13 1/14 1/15 Loans to households, total Loans for house purchase (mortgages and building society loans) Mortgages Consumer credit Interest rates on new mortgages 5 4 3 7 1 17 7 Volumes of mortgages 4 9 1 13 14 15 Growth in loans to households rose further as a result of accelerating growth in loans for house purchase and a recovery in consumer credit Volumes of new mortgages are at an 11-year high so far in 15 in an environment of record-low interest rates 11
Financial and Monetary Developments III Interest rates on loans to corporations (new business; percentages) 5 4 3 1 1/11 1/1 1/13 1/14 1/15 Interest rate on loans to NFCs in CZK (excluding overdrafts and others) Loans up to CZK 3m Loans over CZK 3m Overdrafts in CZK Domestic loans in EUR (excluding overdrafts and others) 3M PRIBOR Interest rates on loans to households (new business; percentages) 6 5 4 3 1 1/11 1/1 1/13 1/14 1/15 Housing loans with floating rate and initial rate fixation up to 1 year Housing loans with initial rate fixation over 1 and up to 5 years Housing loans with initial rate fixation over 5 and up to 1 years Housing loans with initial rate fixation over 1 years 3M PRIBOR 1-year government bond yield Consumer credit (right-hand scale) 16 14 1 1 8 6 4 Interest rates on domestic koruna and euro loans to corporations fell slightly Interest rates on loans to households for house purchase and for consumption fell slightly again in 15 Q4 1
CNB Monetary Policy Lowering key interest rates to technical zero : November 1 Weakening of koruna to around CZK 7/EUR and announcement of (one-sided) exchange rate commitment: November 13 Application of escape clause due to positive supply shock (slump in oil prices): since late 14 13
CNB Macroprudential Policy The CNB is in charge of macroprudential policy in the Czech Republic from 13 The key objective is to prevent systemic risk from forming and spreading in the financial system The CNB issued recommendation on the management of risks associated with the provision of retail loans secured by residential property (applied in June 15) The CNB set the countercyclical capital buffer rate for local exposures at above-zero level for the first time (in December 15).5% rate will be applicable from January 17 Reasons for decision: The Czech economy has shifted within the financial cycle to a phase of stronger credit recovery accompanied by an easing of bank lending standards Accelerated speed in which private sector accumulates debt Increasing risk of a spiral between property prices and loans used to finance property purchases 14
New CNB s forecast 15
Assumptions of the Forecast External Environment GDP growth will stay around % over the entire forecast horizon Producer prices will return to annual growth at the end of this year The subdued inflation is reflected in accommodative ECB monetary policy and consequently also in the outlook for 3M EURIBOR and USD/EUR 16
Assumptions of the Forecast External Environment Price of Brent crude oil (USD/barrel; differences in % right-hand scale) 1 1-8 -4 6-6 4-8 I/11 I/1 I/13 I/14 I/15 I/16 IV -1 Differences Previous forecast New forecast Following a further sizeable fall at the start of 16, the forecast expects the price of Brent crude oil to rise gradually over the forecast horizon 17
Assumptions of the Forecast Fiscal Policy 15: drop in the deficit to 1.3% of GDP due to fast economic growth coupled with dissipation of the extraordinary factors from 14. 16: decline in the deficit to.5% of GDP due to a fall in co-financing of EU funds, increased tobacco excise duties (offsetting the impact of a one-off pension bonus), measures to improve VAT collection, and lower debt service costs. 17: balanced budget (ongoing economic growth, further decline in debt service costs, fading out of one-off measures from this year). 18
Assumptions of the Forecast Fiscal Impulse Fiscal impulse contributed significantly to the GDP growth in 15, mainly due to the accelerated drawdown of the EU funds. In 16, the impact will be significantly negative due to a drop in public investment financed by EU funds, as the new programme period has been starting only gradually. In 17, the forecast assumes a marginally positive fiscal impulse. 19
Assumptions of the Forecast Monetary Policy The forecast assumes that market interest rates will be flat at their current very low level and the exchange rate will be used as a monetary policy instrument (with the exchange rate commitment set at CZK/EUR 7) until the end of 16. Consistent with the forecast is an increase in market interest rates in 17. The exit should not result in the exchange rate appreciating sharply to the slightly overvalued level recorded before the CNB started intervening, among other things because the weaker exchange rate of the koruna is in the meantime passing through to the price level and other nominal variables. Nevertheless, a positive interest rate differential, continued QE by the ECB at least until March 17 and renewed although much slower than in the pre-crisis period real convergence of the Czech economy to the advanced EA countries will be apparent after the exit from the exchange rate commitment. The forecast does not take into account that any appreciation of the koruna following the discontinuation of the exchange rate commitment might be dampened by hedging of exchange rate risk by exporters during the existence of the commitment, by the closing of koruna positions by financial investors and by possible CNB interventions to mitigate exchange rate volatility.
The New Forecast - Summary Both headline and monetary policy-relevant inflation decreased towards zero in 15 Q4, remaining well below the CNB s target. They will increase in 16 17, hitting the % target at the monetary policy horizon and then moving slightly above it. Growing economic activity and, this year, accelerating wage growth will continue to foster higher costs and consequently also higher consumer prices over the entire forecast horizon. The current strongly anti-inflationary effect of import prices will moderate. The growth of the Czech economy will slow from 4.7% to.7% this year because of a temporary decline in gross capital formation due mainly to a drop in government investment financed from EU funds. Growth will pick up to 3.% next year. Employment growth will continue, albeit at a slower pace than last year. Wage growth in the business sector will record a further marked increase this year. The forecast assumes that market interest rates will be flat at their current very low level and the exchange rate will be used as a monetary policy instrument until the end of 16. Consistent with the forecast is an increase in market interest rates in 17. 1
The New Forecast I Headline inflation forecast (year on year in %) Headline inflation will increase, hitting the % target at the monetary policy horizon and then moving slightly above it
The New Forecast II Interest rate forecast (3M PRIBOR in %) 3 1 I/14 II III IV I/15 II III IV I/16 II III IV I/17 II III 9% 7% 5% 3% confidence interval The forecast expects market interest rates to be flat at their current very low level until the end of 16; consistent with the forecast is an increase in rates in 17 3
The New Forecast III GDP growth forecast (annual percentage changes; seasonally adjusted) 1 8 6 4 - I/14 II III IV I/15 II III IV I/16 II III IV I/17 II III 9% 7% 5% 3% confidence interval GDP will slow markedly this year due mainly to a drop in government investment financed from EU funds 4
The monetary policy decision (4 February 16) 5
The Monetary Policy Decision (4 February 16) and the Stance of the CNB At the close of the meeting the Board decided unanimously to leave interest rates unchanged. The two-week repo rate remains at.5%, the discount rate at.5% and the Lombard rate at.5%. The Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB s commitment to intervene unlimitedly on the FX market if needed to weaken the koruna so that the exchange rate of the koruna against the euro is kept close to CZK 7/EUR. The Board repeated that the exchange rate commitment is one-sided. This means the CNB will not allow the koruna to appreciate to levels it would no longer be possible to interpret as close to CZK 7/EUR. The CNB prevents such appreciation by means of automatic and potentially unlimited interventions, i.e. by selling koruna and buying foreign currency. If the exchange rate departs from CZK 7/EUR on the weaker side, the CNB allows the koruna exchange rate to move according to supply and demand on the FX market. 6
Reasons for the Decision According to the forecast, sustainable fulfilment of the target, which is a condition for a return to conventional monetary policy, will occur in the first half of 17. The risks to the forecast are assessed as being broadly balanced. A need to maintain expansionary monetary conditions at least to the current extent persists. In view of the above, discontinuation of the exchange rate commitment earlier than assumed by the forecast, i.e. at the start of 17, can now be ruled out. The Bank Board therefore states that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before 17. The Bank Board considers it likely that the commitment will be discontinued in the first half of 17. 7
Thank you for your attention www.cnb.cz Kamil Galuščák Economic Research Department kamil.galuscak@cnb.cz 8