Statement of the Bank Board for the press conference following the monetary policy meeting

Decision

At its meeting today, the Bank Board kept interest rates unchanged. The two-week repo rate remains at 7%, the discount rate at 6% and the Lombard rate at 8%. Four members voted in favour of this decision, and three members voted for increasing rates by 0.25 percentage point.

The Czech National Bank will continue to prevent excessive fluctuations of the koruna.

The decision is underpinned by a new macroeconomic forecast. The baseline scenario now implies unchanged interest rates. In addition, the Bank Board discussed two other scenarios. The first one assumes rates being held at the current level for longer than in the baseline scenario. The second one additionally considers elevated inflation expectations.

The CNB’s interest rates are at a level that is dampening domestic demand pressures. They are slowing growth in koruna bank loans to households and firms and hence also in the quantity of money in the economy. In the first three quarters of the year, the volume of pure new mortgages declined by 70% compared with the first quarter of last year. Taking into account the inflation outlook one year ahead, real interest rates are distinctly positive for the first time in many years. Monetary conditions have been tight in recent months, due partly to the koruna appreciating against the euro. The monetary conditions in our country are thus the tightest in twenty years.

The Bank Board will wait for further data and will assess them. It will decide at its next meeting whether rates will remain unchanged or increase. The Bank Board still stands ready to raise monetary policy rates, especially if it assesses that inflation is not falling to the CNB’s target quickly enough. From this point of view, market expectations that rates have peaked may not materialise. We consider the market expectations regarding the timing of the first decrease in CNB rates to be premature.

The Bank Board states that long-term price stability is contingent on responsible fiscal policy and moderate wage growth. The road to lower inflation thus also leads via a reduction of the state budget deficit.

Headline inflation peaked in September 2022, when it reached 18%. In line with our expectations, a gradual downward trend in inflation started in February 2023. In March 2023, inflation fell to 15%. Core inflation has been coming down since October 2022. However, both headline and core inflation remain at unacceptable levels. The Bank Board thus confirms its determination to continue fighting inflation until it is fully under control, i.e. stabilised at the 2% target. Interest rates will therefore remain relatively high for some time.

Economic developments

The strong cost inflation pressures from the external environment and demand pressures from the domestic economy are receding in the Czech economy. The strength of the foreign cost pressures and the problems in supply chains are gradually easing. Electricity and gas prices on energy markets are also decreasing. However, it will take time for this decline to pass through more markedly to consumer prices.

According to the CZSO’s flash estimate, GDP rose by 0.1% quarter on quarter in Q1. This growth interrupted the mild recession observed in the second half of last year. Household consumption, which is crucial for the future course of demand-pull inflation, fell for the sixth consecutive quarter according to the CZSO’s commentary. Consumption is being dampened by high energy and food prices, negative sentiment and higher interest rates.

On the other hand, unemployment remains low. Industrial production has been resilient to the increased costs and supply chain problems.

The effect of fiscal policy is creating upside risks to inflation going forward.

Outlook

We expect inflation to continue declining. In the second half of this year, inflation will fall below 10% due to tight monetary conditions and easing cost pressures. The forecast also expects inflation to get close to the inflation target at the monetary policy horizon (in 12−18 months).

According to the forecast, the average inflation rate will be 11.2% in 2023 as a whole, falling to 2.1% in 2024 (for comparison, it was 15.1% in 2022).

As regards GDP, the economy will grow by 0.5% this year according to the forecast. Domestic economic activity will still be subdued at the start of this year. Household consumption will be hit by a deep decline in real income. External demand will rise only slightly. The economy will gradually return to growth as the cost pressures unwind − next year GDP will grow by 3% according to the forecast.

The forecast implies stability of the 3M PRIBOR market interest rate initially, followed by a gradual decline from 2023 Q3 onwards. However, the Bank Board expects interest rates to stay at the current or a higher level for longer. This will ensure that inflation returns to levels close to the inflation target next year, even in the event of elevated inflation expectations (see the other scenarios discussed).

As far as the external environment is concerned, new data have confirmed that the euro area economy avoided a recession at the start of this year. Foreign cost inflation pressures will continue to ease gradually in the course of this year. A deterioration in economic sentiment and growth in households’ living costs and firms’ expenses, coupled with monetary policy tightening by major central banks, lead to a downturn in global economic activity and a gradual decrease in global inflation pressures.

Risks and uncertainties

The Bank Board assessed the risks and uncertainties of the outlook as being significant and going in both directions. Still expansionary fiscal policy is having an inflationary effect. The threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral also remain significant risks in the same direction. By contrast, a stronger-than-forecasted downturn in domestic consumer and investment demand is a downside risk. The general uncertainties of the outlook include the future course of the war in Ukraine, the availability and prices of energy, and the future monetary policy stance abroad.

Statutory mandate

The Bank Board assures the public that the CNB’s actions will be sufficient to restore price stability in accordance with its statutory mandate. In addition, the Bank Board is ready to react appropriately to any materialisation of the risks of the forecast.