czech republic: monetary policy and the economic outlook · 2020-03-22 · czech republic: basic...

Czech Republic: Monetary policy and the Economic Outlook

Jiří Rusnok CNB Board member

Czech National Bank

Adam Smith Seminar Schloss Spiez, Switzerland,

July 2014

Czech Republic: basic facts

• EU Member State since 2004 • Population: 10.5 millions • Total GDP (2013): €141bn • GDP per capita: €13,440 • GDP per capita in PPS: 80% of EU28 average • GDP growth (1Q 2014): 2.5% YoY • Industrial production (Apr 2014): 7.7% YoY • Unemployment rate: 6.5% • Inflation rate: 0.8%

2

3

Outline

• Monetary policy and FX interventions

• One and half year after…

• Some thoughts on the future EXIT

4

Outline




Economic activity

5

• Since mid-2008 the Czech economy experienced W-shaped recession and the pace of its recovery was significantly lagging behind its regional peers.

• The output gap deepened to -2% to -4%, reflecting the longest recession in the independent Czech history.

(GDP, YoY, in %) (GDP, 1Q2008 = 100)

Source: Eurostat

-10-8-6-4-202468

1012

I/08 I/09 I/10 I/11 I/12 I/13

Czech Rep. Germany AustriaPoland Slovakia

90

95

100

105

110

115

120

I/08 I/09 I/10 I/11 I/12 I/13

Czech Rep. Germany AustriaPoland Slovakia

Development of consumer prices

6

• Headline inflation continued to slow down below the lower bound of CNB‘s inflation target...

• …and core inflation remaining in negative territory for 60 months in row signaled persisting disinflationary pressures in the economy.

• The risk of deflation was increasing.

(Inflation, YoY%)

Source: Czech National Bank

7

• Excluding the impact of tax changes, the Czech HICP was actually slightly negative in October 2013.

• The Czech Republic thus resembled more the periphery than the core of the EU.

Czech inflation in the EU context

Consumer prices in November 2013 (YoY %)

Main policy interest rates

• Interest rates as a standard instrument of monetary policy in the inflation targeting regime have reached zero lower bound (ZLB) in late 2012.

0

1

2

3

4

5

6

7

8

9

10

11

12

13

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

discount rate 2W repo rate lombard rate

0

1

2

3

4

5

6

7

8

9

10

22

24

26

28

30

32

34

36

38

40

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CZK/EUR2W REPO (right axes)

Monetary conditions – long-term overview

• Similarly to previous periods of economic recession, the monetary policy conditions have been eased using both their components (interest and exchange rate), yet for the first time under ZLB limitation.

Further easing of MP conditions was needed still

10

• In November 2013 the CNB forecast implied the need of at least four more monetary policy rate cuts (toward negative territory) in order to bring the inflation back to the inflation target in monetary-policy horizon.

• Given the zero lower bound on interest rates, this pointed to a significant need to ease monetary policy using other instruments.

(3M PRIBOR, %) (Headline inflation, YoY%)

Source: CNB Inflation Report, November 2013

-2

-1

0

1

2

3

4

IV/11 I/12 II III IV I/13 II III IV I/14 II III IV I/15 II

90% 70% 50% 30% confidence interval

-2

-1

0

1

2

3

4

5

6

IV/11 I/12 II III IV I/13 II III IV I/14 II III IV I/15 II


Inflation target

Monetary policy

horizon

11

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.

Monetary-policy easing through exchange rate

12

• The alternative scenario (assuming the FX interventions) respects the zero lower bound on interest rates, while monetary policy easing is delivered through a weakening of the exchange rate.

• The use of the exchange rate as a monetary policy tool was expected to accelerate the return of inflation towards the CNB's target.

(3M PRIBOR, %) (Headline inflation, YoY%)


-2

-1

0

1

2

3

4

IV/11 I/12 II III IV I/13 II III IV I/14 II III IV I/15 II90% 70%50% 30% confidence intervalBaseline Alternative scenario

-2

-1

0

1

2

3

4

5

6

IV/11 I/12 II III IV I/13 II III IV I/14 II III IV I/15 II90% 70%50% 30% confidence intervalBaseline Alternative scenario

Inflation target

Monetary policy

horizon

CNB‘s FX operations and the exchange rate

13

• Fast depreciation of exchange rate of CZK to the 27/EUR levels followed immediately after the CNB had started to intervene.

• Interventions were massive but only took place in first few days.


• The CNB‘s commitment is asymmetric: the CNB is prepared to prevent the currency appreciate below the 27/EUR floor the CNB does not intervene once the exchange rate moves above 27 CZK/EUR.

14

Exchange rate

22

23

24

25

26

27

28

1/12 7/12 1/13 7/13 1/14

CZK/EUR 27 CZK/EUR level

15

Outline




Czech economy: out of recession…?

16

• Czech economic rebounded from its longest recession in middle 2013.

(GDP, YoY, in %)

Source: Eurostat

Czech economy: broadly based recovery

17

• The recovery of the Czech economy is broadly based, driven not only by rising foreign-trade surplus, but fueled by the improving domestic demand (investment and consumption) too.

(Contributions to GDP YoY growth, in percentage points)

Source: Czech Statistical Office

External environment is gradually improving

• Business confidence in the main export markets has been edging up, which suggests the external demand should support further increase of Czech export performance within coming quarters.

18

Economic sentiment Manufacturing output vs. German economic sentiment Ifo

60

70

80

90

100

110

120

130

01.07 10.07 07.08 04.09 01.10 10.10 07.11 04.12 01.13 10.13

EU28 Czech Rep. Germany

Austria Poland Slovakia

98

100

102

104

106

108

110

112

-8

-6

-4

-2

0

2

4

6

8

10

12

01.12 07.12 01.13 07.13 01.14 07.14Czech Rep.GermanyGerman Ifo expectations (rhs, +3 months)

(YoY %) (2005 = 100)

Source: Czech Statistical Office Source: Czech Statistical Office, Eurostat, Ifo

CZ economic sentiment – broadly based improvement

• Foreign demand is not the only engine of the Czech economic rebound. Economic sentiment of domestic-demand oriented sectors (services and trade) have been picking up too…

• …followed with a gradual improvement of deeply depressed construction sector. 19

Source: Czech Statistical Office

• The gap in production capacity utilization of Czech manufacturers has been gradually narrowing...

• …which signals that further improvement of investment demand is likely to continue. 20

Czech capacity utilization vs. investment demand

• The ongoing recovery of domestic consumption, investment and export performance should fuel gradual acceleration of the Czech economic growth.

• Czech GDP should reach pre-crisis levels in 2H 2014. 21

GDP and main components

0,2

8,7

7,1

-4,5

3,8 3,6

0,10,7

1,8

-0,9

2,6 3,3

-6

-4

-2

0

2

4

6

8

10

2013 2014F 2015F

(YoY

%)

GDP Households Investment Exports840

860

880

900

920

940

960

I/08 I/09 I/10 I/11 I/12 I/13 I/14 I/15(C

ZKbn

, con

stan

t pric

es, s

.a.)

Annual growth rates GDP levels

Source: Czech Statistical Office, CNB forecast

-2%

0%

2%

4%

6%

8%

1.02

1.03

1.04

1.05

1.06

1.07

1.08

1.09

1.10

1.11

1.12

1.13

1.14

Headline inflation MP-relevant inflation

Inflation – actual vs. targets

22

• In line with CNB‘s expectations, inflation at the start of 2014 declined to very low, but positive levels.

• Without the weaker koruna, both the headline and MP-relevant inflation would have turned negative (around -1%).

(y/y, in %)

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1/09 1/10 1/11 1/12 1/13 1/14

Adjusted inflation (except fuels)Prices of non-tradables (except administered prices)Prices of other tradables (except food and fuels)

Core inflation – tradables and non-tradables

23

• Core inflation has turned positive now. • The decline of tradable prices has slowed down significantly, as a clear

reflection of the exchange rate pass-through. • Non-tradable prices are rebounding too.

(YoY%)

24

External outlook compared to Nov 2013

• The recovery of foreign demand for Czech exports is on track. • But the Czech economy „imports“ more deflationary tendencies from

the Eurozone – the outlook for PPI and CPI is significantly lower than in Nov 2013. • As a result, the outlook for EURIBOR has shifted down.

Effective euro area GDP (y/y in %) Effective euro area CPI (y/y in %)

Effective euro area PPI (y/y in %) EURIBOR 3M (in %)

-1

0

1

2

3

-1

0

1

2

3

I/12 II III IV I/13 II III IV I/14 II III IV I/15 II III IV

Infl. Rep. II/2014Infl. Rep. IV/2013 (alt.)observed data

0,5

1,0

1,5

2,0

2,5

3,0

0,5

1,0

1,5

2,0

2,5

3,0


-2

-1

0

1

2

3

4

-2

-1

0

1

2

3

4

I/12 II III IV I/13 II III IV I/14 II III IV I/15 II III IV0,0

0,5

1,0

1,5

0,0

0,5

1,0

1,5


25

Inflation outlook compared to Nov 2013

• Current inflation is slightly below expectations due to a more pronounced observed drop in administered prices.

• The outlook is lower, too, due to a lower forecast of administered prices (electricity), more depressed wages in 4.Q 2013 and disinflation in Eurozone.

IR IV/2013 IR II/2014 2014 1.3% 0.8% 2015 2.7% 2.2%

(y/y in %)

• Despite the exchange rate depreciation, this year’s inflation rate will be the second lowest in a decade.

• The average forecasted inflation for the period 2014-2015 is slightly below the CNB target.

• Identified risks to the forecast are in the downward direction. 26

Long-term inflation forecast Annual inflation rate (in %)

27

Outline




28

Outline

• Czech economic performance

• CNB‘s ultra-low interest rates and fx interventions

• Conclusions

0

1

2

3

4

II/12 III IV I/13 II III IV I/14 II III IV I/15 II III IV


29

Interest rate path

• The forecast assumes that market interest rates will be flat at their current very low level, followed by a gradual rise in market rates into 2015 by about 0.6 percentage point.

• At the same time, the forecast assumes that the exchange rate will stay close to CZK 27/EUR until the start of next year.

PRIBOR 3M, % p.a.

30

Outline




31

• Exit = return to the standard inflation targeting framework with interest rates as the main instrument, combined with managed floating (no explicit commitment regarding exchange rate level).

When?

• „The CNB Bank Board continues to view the level of the exchange rate commitment at CZK 27 to the euro as appropriate and stated that the CNB would not discontinue the use of the exchange rate as a monetary policy instrument earlier than in 2015 Q2.“ …i.e. the exit will definitely not come before April 2015, but given the inflation outlook it will most likely come later.“

• Exit will come only once monetary policy tightening is needed, and this need is sufficiently strong and durable to avoid hitting the ZLB again.

• The main trigger of the CNB Bank Board decision on FX interventions in November 2013 was the need of further interest rate cuts by almost 100bps into negative territory, implied by the updated CNB forecast. Symmetric approach to exit would suggest that similar magnitude of interest rate hikes should have been implied by the forecast in order to contemplate whether to scrap the FX commitment.

Some thoughts on the future EXIT

32

How? ENTRY was fully transparent; so might be EXIT • Among many possible variants, two options most likely:

• One-off exit, followed with interest-rate tightening • Stepwise exit – gradual and transparent reduction of the FX floor in two or more

consecutive backstops • ”The return to conventional monetary policy will not imply appreciation

of the exchange rate to the level recorded before the CNB started intervening, as the weaker exchange rate of koruna will in the meantime pass through to the price level and other nominal variables.“ ⇒ Exit without marked FX appreciation is possible (and desirable)

• ”The Bank Board stated that the probability of a later exit from the exchange rate commitment was increasing.“… i.e. the exit may come later than in February 2015, and this has become more likely.

• Key trade-off between timing of exit (sooner or later) and likelihood of departing from ZLB

• Sooner exit = MP tightening more gradual; lesser probability of inflation spiking markedly above target

• Later exit = more certainty about not returning to ZLB

Some thoughts on the future EXIT

Thank you for your attention.

Jiří Rusnok

Czech National Bank Na Příkopě 28 115 03 Praha 1

[email protected]

Tel: 224 412 000

czech republic: monetary policy and the economic outlook · 2020-03-22 · czech republic: basic...

Documents