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%. Five members voted in favour of this decision, and two 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 the spring (May) macroeconomic forecast and by an assessment of information obtained since it was prepared.
The CNB’s interest rates are at a level that is dampening domestic demand pressures. It is slowing growth in koruna bank loans to households and firms and hence also in the quantity of money in the economy. 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 Bank Board will decide at its next meeting whether rates will remain unchanged or increase. It will base its decision on an assessment of the new CNB forecast and of newly available data.
Although inflation has fallen more markedly in recent months than expected in the baseline scenario of the CNB forecast, the Bank Board still 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. From this point of view, we consider the market expectations regarding the timing of the first decrease in 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 in the long term 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. Inflation fell to 11.1% in May 2023 and we expect it to drop below 10% soon. Core inflation has been coming down since October 2022. Price growth is easing across the board.
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 close to the 2% target. Interest rates will therefore remain relatively high for longer.
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 continue to ease. Electricity and gas prices are significantly below the peaks recorded last year. However, it will take time for this decline to pass through more markedly to consumer prices.
The demand pressures from the domestic economy continue to weaken. GDP stagnated in quarter-on-quarter terms in 2023 Q1. The economy was below its potential and below the pre-Covid level. Household consumption, which is crucial for the future course of demand-pull inflation, fell for the sixth consecutive quarter and is well below its pre-pandemic level in real terms. Consumption is being dampened by high energy and food prices, negative sentiment and higher interest rates. GDP and household consumption were slightly below the levels expected in our May forecast.
Firms are facing increased costs of energy and commodities, which is slowing investment growth. The supply chain problems are easing further. External demand will be dampened by the monetary policies of major central banks and the gradual fading of the government measures adopted during the energy crisis.
On the other hand, unemployment remains low. Nominal wage growth was high in Q1, reaching 8.6% year on year, but was lower than forecasted. Real wage growth remains deeply negative (-6.7%).
We are seeing a major slowdown in the property and mortgage markets, which will gradually contribute to a further easing of core inflation. The double-digit year-on-year decline in the volume of pure new mortgages continued in previous months. The volume of pure new mortgages fell by 64% year on year in January–April.
The effect of fiscal policy is creating upside risks to inflation going forward. We assess the public finance adjustment package under discussion as a step in the right direction, but it will only be possible to evaluate it after it has been approved by Parliament.
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 risks in the same direction. By contrast, a further 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.