14/11/2019

Inflation targeting as a monetary policy tool: The Czech experience

Setting flexible inflation targets turned out to be a successful monetary policy tool for the Czech Republic over the past 20 years, bringing high inflation levels down to the desired targets, the Deputy Governor of the Czech Central Bank Marek Mora said.

The Czech Republic was the first emerging economy to introduce inflation targeting in 1998. In the first decade since this tool was introduced, it helped with disinflation and inflation stabilisation, and in the second decade, it helped Czechia - by then an EU Member State - to bring inflation down to those normally seen in developed countries, although external shocks caused significant temporary deviations.

Mr Mora was speaking at a well-attended public lecture on Tuesday, as part of his visit to the Central Bank of Malta.

He also referred to the fact that the Czech Republic has one of the lowest levels of support for euro adoption in the EU: according to the Spring Eurobarometer, only 26% of the population are in favour, with 67% against. He stressed, however, that any decision on euro adoption would be a political one.

Bulgaria and Croatia are both lined up to join the monetary area, but so far the Czech Republic has shown no indication of wanting to follow in their footsteps - an obligation that comes with EU accession.

Mr Mora explained that the business sector tended to be more in favour of euro adoption than households, noting that the country had the highest share of exports to Germany of any Member State.

The Czechs have had their own currency - the koruna - for 100 years. Mr Mora pointed out light-heartedly that it was the only Republic to have a 'crown' as its currency. However, he also stressed the importance of the country's ability to use the exchange rate as a monetary policy tool.

The system was able to cope with the threat of harmful deflation during a lengthy domestic recession, thanks to the use of the exchange rate as an additional monetary policy instrument, he said.

In his closing remarks, Governor Mario Vella referred to the sizeable contingent of staff in the audience, saying the frank exchange was a great opportunity for them to appreciate the various approaches taken by central banks as this helped to broaden their horizons.

Other lectures are planned involving speakers from central banks both within and outside the euro area.

Key figures:

• GDP per capita at purchasing power parity was 90% of the EU average in 2018.
• The public debt level was 32.7% of GDP in 2018.
• Czechia has a Budget surplus.
• Its unemployment rate (2.1% in September 2019) is the lowest in the EU.

Link to Presentation

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