Abstract
Growth is gaining momentum, led by strong external demand while domestic demand is also picking up. The central bank’s foreign exchange intervention policy has helped stem deflationary pressures but inflation is still well below target. Following substantial fiscal adjustment over the past three years, an easing of the fiscal stance is underway and the new government’s medium-term fiscal plans have not yet been fully elaborated. The financial system is sound and resilient to shocks, and improvements in the regulatory and supervisory architecture are ongoing. The challenge for the authorities is to create the conditions for strong and sustainable growth while maintaining macroeconomic stability.
This statement provides information that has become available since the staff report was finalized. This information does not alter the thrust of the staff appraisal.
The Board of the Czech National Bank (CNB) extended its timeline for using the exchange rate as an additional monetary policy instrument to end-2015. This decision was underpinned by a new quarterly macroeconomic forecast, which foresees achievement of the inflation target conditional on continuation of current market interest rates and the use of the exchange rate as a monetary policy instrument for inflation targeting until 2015:Q3. The CNB Board assessed the risks to the new forecast as being to the downside, mainly from very low euro area inflation, and therefore extended its guidance for using the exchange rate as a monetary policy instrument. While staff supports the view that it is appropriate to keep the exchange rate floor in place for now, the central bank should continue to focus on inflation targeting with a view to exiting the intervention policy as soon as conditions allow (as emphasized in the staff appraisal). Following the decision, the koruna entered a slight depreciation trend, and, as of August 21, was about 2 percent weaker than the level prevailing at end-July and about 4 percent weaker than the CNB’s floor of 27 koruny per euro.
The latest national accounts data confirmed the economy’s growth momentum, notwithstanding one-off effects from stocks. Preliminary estimates suggest that real GDP grew 2.6 percent year-over-year in the second quarter of 2014. Compared to the first quarter, real GDP remained unchanged mainly due to the impact of continued destocking of tobacco products following the excise tax hike.
Inflation picked up somewhat. Headline inflation increased to 0.5 percent year-on-year in July from 0 percent year-on-year in June, mainly due to a slight acceleration of food price inflation. Inflation excluding regulated prices, indirect price changes, food, and fuels remained unchanged at 0.7 percent year-on-year in July.