Recent Macroeconomic Developments:
The Czech Republic and the Eurozone
Vladimir Tomsik
Vicegovernor
Czech National Bank
National Bank of Cambodia, Phnom Penh
6 January 2016
Outline
• Brief stylized facts
• Recent macroeconomic developments in the Czech Republic and
the Eurozone
• CNB’s forecast
• Exchange rate commitment – past and future
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BRIEF STYLIZED FACTS
3
Czech Republic – Stylized facts
Czech Republic
•
•
•
•
Population: 10.3 mil.
Area: 78 866 km2
Capital: Prague (1.3 mil.)
Currency: Koruna (CZK)
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Czech economy – Stylized facts
• A small open economy with per capita GDP close to 85 percent of
EU average
• Since 1998 monetary policy has been conducted under the
inflation targeting regime with managed floating currency
• Inflation target set to 2 percent with 1 pp tolerance band
• Very open economy with share of exports and imports on GDP
close to 85 percent
• Subject to structural changes and real convergence => trends in
nominal shares and real exchange rate appreciation
• Experienced significant FDI inflows in the past
• Manufacturing and industrial production, both mainly related to car
industry, are key drivers of real growth on the supply side
• Member of the EU since 2004
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RECENT MACROECONOMIC
DEVELOPMENTS
6
Brief overview
CPI Inflation, (percent YoY)
Nominal Interest Rate, (percent, p.a.)
Real GDP Growth, (percent)
Nominal Exchange Rates
7
GDP growth
Structure of annual GDP growth
(contributions in p. p. to annual p. change; s. a.)
•
Demand side:
The GDP is growing mainly thanks to
the domestic demand.
− The corporations and the
households have stopped
postponing their expenditure.
− Positive fiscal impulse.
Contributions of branches to GVA growth
(contributions in p. p. to annual p. change; s. a.)
•
Supply side:
Industry and services have been
contributing mostly to GVA growth
since 2014.
− The recovery was driven by
export-oriented manufacturing
sector initially, but has now
become broad-based.
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Labour market
Beverage Curve
Average nominal wage
(annual percentage changes)
• The economic recovery is having a visible positive impact on the labour market
− Unemployment has been decreasing noticeably
− The number of vacancies has been rising steadily and the number of
unemployed persons falling since the start of 2014
− Nominal average wage has been rising in both business and non-business sector
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Inflation
Structure of inflation
(annual percentage changes; contributions in p. p.)
2
1
0
-1
1/14
4
7
10
1/15
4
7
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)
• The headline inflation is still well below the CNB’s 2% target (0.0-0.3%
in fall)
− Adjusted inflation excluding fuels (core inflation) remains stable, just above 1%.
− Food prices have returned to a modest year-on-year decline
− The fuel prices decline is caused by the global drop in oil prices
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Eurozone
• Recent recovery of GDP growth which will fluctuate around 2 %
• Producer prices have declined on the back of world oil prices
• The subdued inflation is reflected in accommodative ECB‘s monetary policy
and consequently also in the outlook for 3M EURIBOR and USD/EUR.
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November 2015
CNB’S FORECAST
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Forecast assumptions
• The forecast assumes market interest rates to be flat at their current very low
level and the exchange rate to be used as a monetary policy instrument until the
end of 2016. Consistent with the forecast is an increase in interest rates
in 2017.
• The exchange rate of the koruna against the euro appreciated slightly in 2015 Q3
to CZK 27.1 on average. The forecast expects it to remain at similar levels
in the quarters ahead.
• After the exit from the exchange rate commitment the koruna will moderately
appreciate due to the positive interest rate differential and renewed – though
compared with the pre-crises period less pronounced – real convergence of the
Czech economy to its advanced counterparts in the euro area.
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GDP forecast
Current CNB’s forecast
GDP growth structure ((annual percentage changes; s.a.)
• The forecast expects that the GDP growth will continue this year
thanks to expanding domestic and external demand and low
commodity prices
• However, in 2016-2017 it will slowdown to just below 3% as
extraordinary factors dissipate (government investment and inventories)
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• The forecast implies no tendency for an overheating
GDP forecast
•
•
Household consumption will remain high, driven by continued real
income growth. Recently fast investment growth will slow down
Exports will continue increasing, reflecting growing foreign demand
Imports will be boosted by growing exports and domestic demand
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Inflation forecast
Current CNB’s forecast
Core inflation (annual percentage changes)
• Headline inflation will increase and hit the target at the monetary policy
horizon
• Inflation will rise markedly in the period ahead owing to an increase in
food price inflation and next year also in adjusted inflation excluding fuel
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Interest rates forecast
Current CNB’s forecast of 3M PRIBOR
•
•
•
Market interest rates are assumed to be flat at their current very low level
and the exchange rate to be used as a monetary policy instrument until the
end of 2016
Consistent with the forecast is an increase in interest rates in 2017
After the exit from the exchange rate commitment the koruna will
moderately appreciate due to the positive interest rate differential and
renewed
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EXCHANGE RATE COMMITMENT –
PAST AND FUTURE
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Exchange rate commitment
• In 2012 - 2013, the Czech economy was going through the longest
recession in its history (impact of the weakening foreign demand
and proceeding domestic fiscal consolidation):
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•
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•
decline of GDP (mainly due to falling consumption and investment)
increasing unemployment rate
decreasing real wages
weak consumer and business confidence
• Inflation decreased to the lower boundary of the tolerance band
around the CNB’s 2 % target and it was expected to fall to (or even
below) zero
• Standard monetary policy tools reached their limits:
interest rates at technical zero
forward guidance
verbal FX interventions
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Exchange rate commitment
• To avoid deflation or long-term undershooting of the inflation target
the Bank Board decided in November 2013 to start using the
exchange rate as an additional instrument for easing the monetary
conditions:
”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 commitment is one-sided:
• 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
• The CNB stands ready to intervene automatically, i.e. without the need for
an additional decision of the Bank Board, and without any time or volume
limits
• CNB is a forward-looking ”Inflation Targeter“…
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The exchange rate after the decision
• After the CNB’s policy announcement, koruna reached 27 CZK/EUR
quickly, and has been moving at somewhat weaker levels since then
• Actual interventions only within few days after the policy decision of
the CNB
• Further interventions needed in late summer 2015
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Design of the exit
• The exit will take place only once there are conditions for a
sustainable achievement of the 2% inflation target even after the
exit, i.e. without a need to go back to unconventional measures.
• The exact form of the exit will depend on the actual circumstances,
but there is preference for a clean, one-off exit.
• The exit will be transparent.
• The exit will mean going back to the managed float regime, in which
the central bank stands ready to smooth out excessive exchange
rate volatility.
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Czech vs. Swiss approach and exit
MP regime
Reason for entry
Balance sheet constraints
Safe heaven
Communication of exit
Characteristics of the exit
Regime after exit
Swiss
Czech
officially not IT
inflation targeting
export competitiveness
deflation risk, undershooting
of inflation target
quite important
none
yes, on global scale
no (or regional only)
none
from the very beginning
discretionary
explicitly linked to
sustainable achievement
of the inflation target
officially free float
managed float
• Even though the two floors are seemingly quite similar, one can find
sharp differences almost in all key aspects of the policy
• The CNB‘s approach to the exit will thus be much different from the
Swiss case, and so will be market positioning before the exit
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The exchange rate after the exit
• The subsequent return to conventional monetary policy will not imply
appreciation of the exchange rate at the forecast horizon to the slightly
overvalued level recorded before the CNB started intervening:
− The exchange rate was slightly overvalued before the CNB intervention
− The weaker exchange rate of the koruna is in the meantime passing through to
domestic prices and other nominal variables
− The absence of counterparty (real-money clients will be hedged by previous
transactions and there will be no counterparty to close the long koruna positions)
− Slower speed of the real equilibrium appreciation in subsequent years compared
to pre-crisis figures (see the next slide)
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Equilibrium trends in CNB‘s forecasts
in %
Before crisis
Post-crisis
Czech GDP growth
4.0
3.0
Effective EA GDP growth
2.1
1.8
Real exchange rate appreciation
2.4
1.5
• The GDP growth differential is likely to be smaller post-crisis than before
the crisis (1.2 p.p. now vs. 1.9 p.p before) due to:
− more mature stage of the GDP catch-up (in PPP, Czech GDP is currently close to
80% of the euro area average)
− legacy effects of the crisis
• As a result, the real exchange rate appreciation trend will also be slower
(CNB forecasts assume 1.5 % a year)
• A part of this may go via an inflation differential, if EA inflation stays
below 2 %
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Thank you for your attention
Vladimir Tomsik
Vicegovernor
Czech National Bank
vladimir.tomsik@cnb.cz
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