The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is a modest rise in domestic market interest rates initially, followed by a decline next year.
According to the external assumptions of the new forecast, economic growth in the euro area will accelerate slightly next year following a slowdown this year. Foreign producer price inflation is expected to slow further over the rest of this year and then rise towards 2%. By contrast, consumer price inflation in the euro area will not reach 2% over the next two years. Partly for this reason, the European Central Bank has declared its readiness to ease monetary policy even further. The market therefore expects significantly negative 3M EURIBOR rates over the entire forecast horizon.
With regard to oil prices, the market expects a slight decrease over the next two years. The interest rate reduction in the USA will foster a narrowing of the spread between dollar and euro interest rates. According to the assumptions of the forecast, this should cause the euro to appreciate against the dollar.
Domestic inflation will stay above the Czech National Bank's 2% target but still within the tolerance band around the target in the quarters ahead. This will continue to reflect persisting strong domestic inflation pressures and high growth in administered prices and food prices. Inflation will start to decrease at the start of next year, owing to the previous monetary policy tightening and an unwinding of the currently high growth in administered prices. It will approach the target over the monetary policy horizon, i.e. in the second half of next year. However, the decrease in inflation will be slowed throughout next year by the impacts of changes to indirect taxes.
The Czech economy will grow by 2.6% this year and accelerate slightly over the next two years. Growth in economic activity will continue to be driven by all components of domestic demand except inventories. Robust growth in household consumption will reflect continued, albeit gradually slowing, growth in household income. Growth in private investment will remain solid over the entire forecast horizon, owing to high capacity utilisation. Government investment expenditure will also grow further, supported by drawdown of EU funds. Net exports will hinder economic growth this year but will make a slightly positive contribution to economic growth next year. The unemployment rate is at a record low and will not fall any further. Owing to labour shortages and gradually weakening demand for labour, total employment growth will slow as well. However, persisting labour market tightness will cause wage growth to approach its steady-state level only gradually.
A markedly positive interest rate differential vis-a-vis the euro area and continued real convergence of the Czech economy will cause the koruna to firm gradually this year. The exchange rate appreciation will slow next year, reflecting a decrease in the interest rate differential vis-a-vis the euro area.
Consistent with the forecast is a modest rise in domestic market interest rates initially, followed by a decline next year. The modest rise in interest rates at the start of the forecast primarily reflects persisting strong domestic inflation pressures due to rapid growth in wages and household consumption. The initial rise in interest rates in the forecast is also fostered by the second-round effects of changes to indirect taxes next year. By contrast, the decline in domestic interest rates forecasted for 2020 will be due mainly to persisting deeply negative interest rates in the euro area.
By comparison with the previous forecast, the inflation outlook has been raised slightly. This is due mainly to stronger price pressures and the newly incorporated changes to indirect taxes. The economic growth forecast is little changed. Interest rates remain roughly at the same level as in the previous forecast for the rest of this year and are slightly lower in the longer term. The koruna-euro exchange rate is rather weaker than in the previous projection.
The Bank Board assessed the balance of risks to the forecast at the monetary policy horizon as being slightly anti-inflationary. The risk of a more pronounced slowdown in demand growth in the Czech Republic's main trading partner countries is the main factor acting in this direction. The impacts of protectionist measures in global trade and a disorderly Brexit remain sources of external uncertainty.