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%. All seven board members voted in favour of this decision.

The decision is underpinned by the summer (August) macroeconomic forecast and by an assessment of information obtained since it was prepared.

The Bank Board regards the current settings of the monetary conditions as appropriate for inflation to return to the inflation target next year in all the scenarios considered.

The CNB’s interest rates are at a level that is slowing growth in koruna bank loans to households and firms and hence also in the quantity of money in the economy. However, rapidly rising lending to the government is having the opposite effect. Taking into account the inflation outlook one year ahead, real interest rates are distinctly positive for the first time in many years. From the start of next year, real interest rates will also be positive in ex post terms.

The koruna has weakened against the euro over the last month due mainly to a change in regional sentiment. However, it is still stronger than a year ago.

Inflation has continued to decline. It reached 8.5% in August this year, compared with 17.2% in August 2022. However, it remains at unacceptable levels. The Bank Board confirms its determination to continue fighting inflation until it is fully under control, i.e. stabilised close to the 2% target.

At its meetings ahead, the Bank Board will base its decisions on the new forecast and an assessment of newly available data. An evaluation of the persistence of the disinflationary trend, an analysis of the labour market situation, and the evolution of domestic and external demand will be crucial for the future course of monetary policy. The Bank Board expects the interest rate path to be higher than in the baseline scenario of the current forecast in the coming quarters.

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.

Economic developments

The strong cost inflation pressures from the external environment and demand pressures from the domestic economy are receding in the Czech economy. According to our analyses, the economy is below its potential. GDP rose by 0.1% quarter on quarter in Q2. In the previous quarter, the economy had stagnated. On a year-on-year basis, GDP fell by 0.4% in Q2. Household consumption rose slightly following six quarters of decline, but was 9% below the pre-Covid level. It continues to be dampened by tight monetary policy, high energy and food prices and negative sentiment. Overall, the performance of the economy was broadly in line with the forecast assumptions.

The labour market remains tight and unemployment low. However, wage growth, which reached 7.7% in Q2, was almost 1 percentage point lower than assumed in the forecast. In the coming quarters, we expect real wage growth to turn positive and thus support household consumption.

The available economic indicators are signalling a broad stagnation of real GDP in Q3, whereas the summer forecast expected growth of 0.7%. Industrial production fell in both month-on-month and year-on-year terms in July (by 2.3%). New orders in industry and other leading indicators suggest that the downturn in industry will continue. External demand is slowing, partly because of the tight monetary policies of major central banks and the gradual fading of the government measures adopted during the energy crisis.

Inflation has fallen in accordance with the summer forecast over the past two months. In September, we expect another significant decline. This will be counteracted by a rise in fuel prices following the growth in oil prices and the increase in excise duty on diesel fuel back to its original level in recent weeks. In October, we expect annual inflation to rise temporarily due to the base effect caused by the introduction of the energy savings tariff last year; the rise in annual inflation at the end of the year will thus be technical and does not threaten the decline in inflation towards the target. In the first half of 2024, we expect inflation to be close to the 2% target.

Risks and uncertainties

The Bank Board assessed the risks of the forecast and the uncertainties of the outlook as being significant and going in both directions. The threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral, which would lead to renewed demand-pull pressures and persistent inflation, are the main upside risks to inflation. A rapid decline of the saving rate to its usual long-term level and its potential upward effect on household consumption are also an inflationary risk. A longer effect of expansionary fiscal policy and a further increase in oil prices are additional risks. A stronger-than-expected downturn in economic activity in Germany is an uncertainty in the direction of lower economic activity. The general uncertainties of the outlook include the course of the war in Ukraine, energy prices, 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.