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 lowering rates by 0.25 percentage point.
The Bank Board discussed the new macroeconomic forecast. Its baseline scenario implies a gradual decline in interest rates from 2023 Q4 onwards.
The high inflation is receding, in line with the preceding macroeconomic forecasts. Nonetheless, the risk of unanchored inflation expectations persists. This risk could manifest itself in the results of the ongoing wage bargaining process and in stronger-than-expected repricing of goods and services at the start of next year. In addition, the core inflation outlook for 2024 is still elevated at 3%. The Bank Board therefore decided to keep monetary policy very tight for the time being.
The Bank Board discussed other scenarios showing that the potential macroeconomic costs of leaving rates unchanged for longer than in the baseline scenario would be low if the upside risks to inflation did not materialise.
The monetary conditions in the Czech economy are still highly restrictive. 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, high lending to the government is having the opposite effect, remaining an upside risk to inflation. Taking into account the inflation outlook one year ahead, ex ante real interest rates are distinctly positive for the first time in many years. From January 2024, real interest rates will also be significantly positive in ex post terms.
On the other hand, the depreciation of the koruna against the euro to roughly the levels observed last autumn has already delivered a slight easing of overall monetary conditions.
Inflation has declined markedly since autumn 2022: headline inflation has fallen from 18% to 6.9% and core inflation from 14.7% to 5%. 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 mainly on an assessment of newly available data and of the fulfilment of the forecast. Analysis of the sustainability of the disinflationary trend, 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 is already discussing a strategy for a future reduction in rates. It assumes that any decrease in rates will initially be moderate and gradual. The interest rate path will therefore most probably be higher than in the baseline scenario of the 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. Before wage bargaining starts, the CNB calls for wage restraint across the economy.
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 the CZSO’s flash estimate, GDP fell by 0.6% year on year in Q3, the same as in the previous quarter. The economy is being held back by household consumption, which is being dampened by high energy and food prices, negative sentiment and higher interest rates. According to our analyses, the economy is below its potential.
On the other hand, unemployment remains low and the labour market tight. However, wage growth was below expectations in 2023 Q2 (wages grew by 7.7% year on year). Industrial production is declining year on year, due mainly to subdued external demand, which is being affected by the tight monetary policy of foreign central banks.
Outlook
We expect the downward trend in annual inflation to halt temporarily in October 2023 as a result of the statistical effect of last year’s energy savings tariff, which lowered the comparison base. This is therefore a technical factor that will not interrupt the fundamental disinflationary process. According to the new forecast, inflation will fall significantly at the start of 2024. The average inflation rate will be 2.6% in 2024 and is expected to decrease further to 2.1% in 2025. However, core inflation is expected to be elevated next year, averaging 3%. As regards GDP, the economy will contract by 0.4% this year according to the forecast. GDP will return to growth of around 1.2% next year.
Risks and uncertainties
The Bank Board assessed the risks of the forecast and the uncertainties of the outlook as being significant and tilted to the upside. The threat of inflation expectations becoming unanchored is the main upside risk to inflation. This could lead to increased wage bargaining demands and stronger repricing at the start of next year, which would result in inflation being more markedly above the target throughout 2024. A longer effect of expansionary fiscal policy is also an inflationary risk. By contrast, a stronger-than-expected downturn in economic activity in Germany and the potential impacts of globally tightened monetary and financial conditions are downside risks to inflation. The uncertainties of the outlook include the future course of the war in Ukraine and the Middle East, the 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.