Download Economic and monetary developments 2007 was the third

Economic and monetary developments
2007 was the third consecutive year in which the economy recorded growth exceeding 6%.
Inflation was relatively low, standing below the inflation target for most of 2007. A surge in
inflation in 2007 Q4 and January 2008 was due mainly to a sharp rise in world prices of
food, changes to indirect taxes and a further pick-up in regulated prices. These components of
inflation will keep it above the target for the remainder of the year. However, given the oneoff effects of the rise in regulated prices and the changes to indirect taxes, their impacts on
annual consumer price inflation will subside at the end of 2008 and the start of 2009 and
inflation will return to low levels consistent with the CNB’s targets.
The growth of the Czech economy picked up slightly in 2007, exceeding 6% as in the past
two years. As in the previous more than five years, the Czech economy grew considerably
faster than the EU economy as a whole. As in 2006, the largest contributors to the growth
were gross fixed capital formation and household consumption. The real economy pushed
inflation upwards, as the GDP level exceeded the equilibrium output level.
Gross domestic product in the Czech Republic and the European Union
8
Czech Republic
7
EU-27
6
%
5
4
3
2
1
0
I/2002
I/2003
I/2004
I/2005
I/2006
I/2007
The continuing buoyant growth of the Czech economy was accompanied by an increase in
demand for labour in 2007 and at the start of 2008, which created the right conditions for
rising employment. Nevertheless, some sectors experienced shortages of workers in the
required occupations, and these were only partly covered by inflows of workers from abroad.
The rising employment coupled with high job creation fostered a sizeable decrease in the
unemployment rate. As in previous years, the rate was lower than in the EU, and the gap
widened further. Although both nominal and real wages rose faster in 2007 than in the
previous year, their growth slackened slightly in the first quarter of 2008.
Unemployment rate in the Czech Republic and the European Union
1
10
%
8
6
Czech Republic
EU-27
4
12/2001
12/2002
12/2003
12/2004
12/2005
12/2006
12/2007
The CNB increased monetary policy interest rates by a total of 1 percentage point in four
steps last year and by a further 0.25 percentage point in February 2008. As in the previous two
years, domestic short-term market interest rates were lower than the corresponding interest
rates in the euro area in 2007 and in the first four months of 2008. The gap between these
rates narrowed, since rates in the euro area were affected by the turbulence on world financial
markets at the end of 2007 and the start of 2008.
Money market interest rates
5
3M EURIBOR
3M PRIBOR
4
%
3
2
1
0
12/2001
12/2002
12/2003
12/2004
12/2005
12/2006
12/2007
The nominal exchange rate of the koruna against the euro initially depreciated slightly in the
first half of 2007, but appreciated increasingly in the latter half of 2007 and in the first four
months of 2008. The exchange rate against the dollar appreciated to an even greater extent.
The appreciation was due mainly to the koruna’s increasing attractiveness to investors,
reflecting in particular the rise in domestic interest rates and the favourable development of
the Czech economy. This contrasted with developments in some advanced countries
(especially the USA), which were adversely affected by the turbulence on world financial
markets in the second half of 2007. The stronger koruna-euro and koruna-dollar rates reduced
the prices of most imported goods, thereby contributing to the low inflation level. As in
previous years, the CNB made no interventions in the foreign exchange market. However, it
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agreed a specific strategy with the Government in April 2008 aimed at preventing public
sector operations from having undesirable impacts on the foreign exchange market and
subsequently on the macroeconomic stability of the Czech Republic.
Nominal exchange rate of the koruna against the euro and dollar
38
CZK/EUR
34
CZK/USD
CZK/EUR, CZK/USD
30
26
22
18
14
12/2001
12/2002
12/2003
12/2004
12/2005
12/2006
12/2007
Inflation gradually rose during 2007, thus approaching the inflation target. In the final quarter
of 2007 and in January 2008, annual consumer price inflation surged well above the upper
boundary of the CNB’s inflation-target tolerance band. After stabilising in February, inflation
started to decline slightly in March and April.
Fulfilment of the inflation target
8
7
6
5
target band
4
%
point target
3
2
1
0
-1
12/2001
12/2002
12/2003
12/2004
12/2005
12/2006
12/2007
Consumer prices were mainly affected by food prices and regulated prices in 2007 and in
early 2008. Consumer price inflation was also affected by changes to indirect taxes and, to a
lesser extent, by prices of consumer goods and market services. HICP inflation was below the
level in the EU in the first four months of 2007. However, it was higher in the period that
followed, in particular during 2007 Q4 and in the first four months of 2008.
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Inflation in the Czech Republic and the European Union
8
7
Czech Republic
EU-27
6
5
%
4
3
2
1
0
-1
12/2001
12/2002
12/2003
12/2004
12/2005
12/2006
12/2007
Slower inflation is expected for the remainder of this year, as the temporary effects of high
growth in food prices and regulated prices and changes to indirect taxes unwind. Lower
inflation will also be fostered by the koruna’s exchange rate, via import prices. The strong
exchange rate will also be one of the factors of slower economic growth in the Czech
Republic, along with budget cuts and the expected slowdown of the European economy. GDP
growth should thus slow to below 5% this year. The slowdown in economic activity will
foster a decline in inflation to the 3% inflation target at the start of 2009.
Zdeněk Tůma
Governor, Czech National Bank
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