Minutes of the Bank Board meeting on 21 December 2023

Present at the meeting: Aleš Michl, Eva Zamrazilová, Jan Frait, Tomáš Holub, Karina Kubelková, Jan Kubíček, Jan Procházka

The meeting opened with a presentation of the eighth situation report based on an assessment of the information obtained since the autumn forecast was drawn up. Consistent with the forecast was a gradual decline in interest rates from the third quarter of 2023 onwards. In light of the new information, the Board said the autumn forecast was materialising comparatively well.

The Board expected inflation to fall significantly in 2024. The time had therefore come to take a careful step towards gradually reducing the key interest rates. However, the Board still saw inflationary risks in the outlook. The materialisation of these risks would mean that inflation would fall significantly in 2024, but not very close to the 2% target. Therefore, the Bank Board considered it necessary to persist with tight monetary policy and approach potential further rate cuts with caution.

At the start of the meeting, Aleš Michl said monetary policy had significantly reined in the growth in the quantity of money in the economy over the past 15 months by reducing the growth in lending to the private sector. In his opinion, the monetary policy pursued to date had therefore worked well. It was now necessary to persist with tight monetary policy to ensure that inflation reached the long-term target of 2% in all its components, especially its core component, as volatile items such as food and energy prices could not be relied on in the disinflation process.

There was a consensus that the likelihood of stronger-than-expected repricing in January was fairly low. This was because of weak domestic demand, depressed by restrictive monetary policy. Eva Zamrazilová said she saw no fundamental reason for significant growth in consumer prices of food. She regarded the argument that the prices of retail chains’ suppliers were rising as debatable. Jan Kubíček stated that, given the state of domestic demand, even if significant repricing occurred in January it would probably imply lower growth in prices over the rest of 2024, so it would not have a major effect on inflation at the monetary policy horizon, which currently lay in the first half of 2025.

According to a majority of the board members, the weak economic performance internationally was an anti-inflationary factor. Jan Procházka added that the tensions in the Middle East had yet to be reflected in a substantial rise in the price of crude oil. Karina Kubelková said that although the conflict in Israel and the Red Sea had not impinged on the Czech economy so far, it still constituted a geopolitical risk for international trade and hence also for the still negative sentiment of Czech firms and consumers.

Jan Frait identified the monetary policy of other central banks as a downside risk to inflation. In his view, Europe was on the road to recession and very weak demand pressures. He felt there was a risk of ECB monetary policy being too restrictive for longer, which would depress economic activity in the Czech Republic’s main trading partner countries. The impacts of the high interest rates in Europe were most apparent in the commercial property sector. This might have a negative effect on non-bank institutions in the financial sector. Jan Procházka argued that the tight monetary conditions of the major central banks would foster subdued global growth next year, so it could not be expected that inflation pressures would be imported into the Czech economy from abroad. In the event of a recovery in demand, spare production capacity would be available, so any such recovery would not have a significant inflationary effect, at least not to begin with.

Part of the Board’s discussion also concerned fiscal policy. Aleš Michl said the growth in the quantity of money in the economy via government borrowing had not been reined in. Eva Zamrazilová also felt that Czech public finances represented a long-term inflationary risk that was relevant to the future interest rate path and to the final interest rate level 12 to 18 months ahead and beyond. Karina Kubelková said the government’s consolidation push was slowly waning and fiscal policy would probably be less anti-inflationary in 2024 than previously expected. By contrast, Tomáš Holub labelled the inflationary risks of the forecast connected with fiscal policy and its effect on money growth as minor.

Eva Zamrazilová and Tomáš Holub said the risk of a wage-price spiral occurring in the near future had probably decreased further. Jan Procházka and Karina Kubelková agreed that the risk of escalating wage growth had not materialised. According to Karina Kubelková, however, the risk of faster-than-expected wage growth persisted. This risk was being exacerbated in the public sector by the deal to increase doctors’ pay and in the private sector by the still positive gap in firms’ mark-ups and the generally tight labour market.

Jan Procházka said the December meeting represented a suitable point for starting the interest rate reduction cycle. Tomáš Holub disagreed, saying that the optimal moment had probably been in the recent past. Jan Frait and Jan Kubíček said that, thanks to the Board’s communications and changes in yields abroad, the monetary conditions had already eased in the meantime through a decline in interest rates at the longer end of the yield curve. 

The Board also discussed the future path of monetary policy rates. According to Aleš Michl, interest rates were safely high above their steady-state level. This would allow the reduction in rates to be halted or interrupted at any time at subsequent meetings if upside risks to inflation were to materialise. Jan Frait said interest rates would probably be reduced more slowly than implied by their paths in recent forecasts. Tomáš Holub said that, on the contrary, there would also be room at the December meeting to lower interest rates by more than the usual 25 basis points, which was preferred primarily for reasons of communication. However, if the baseline scenario of the autumn forecast were to materialise, it would be necessary in his view to cut interest rates more forcefully at future meetings, or else domestic monetary policy would get significantly behind the curve.

At its meeting, the Bank Board lowered the two-week repo rate by 0.25 percentage point to 6.75%. At the same time, it lowered the discount rate by the same amount to 5.75% and the Lombard rate to 7.75%. All seven members voted in favour of this decision.

Author of the minutes: Jan Brůha, Monetary Department