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

Decision

At its meeting today, 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.

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

The Bank Board expects inflation to fall significantly next year. The time has therefore come to take a careful step towards gradually reducing the key interest rates. However, the Bank Board still sees inflationary risks in the outlook for the years ahead. The materialisation of these risks would mean that inflation would fall significantly compared to 2023, but not very close to the 2% target. Therefore, the Bank Board considers it necessary to persist with tight monetary policy and approach potential further rate cuts with caution.

The CNB’s tight monetary policy has slowed growth in the quantity of money in the economy created by lending to the private sector. Lending on the property market and, in turn, activity on the property market, has declined in particular. At the same time, the strong koruna has made imports cheaper, especially in the first half of 2023. Since August 2022, the Bank Board has also been emphasising after all its meetings that long-term price stability is contingent on responsible fiscal policy and moderate wage growth. However, our estimates so far indicate that the ratio of the general government deficit to GDP (under ESA methodology) has increased in 2023 compared with 2022. According to the Bank Board, this has been an inflationary factor this year.

At its meetings ahead, the Bank Board will base its decisions on the new forecast and on an assessment of newly available data and their implications for the unwinding of the risks to the outlook. The pace of any further reduction in rates will depend mainly on an evaluation of the persistence of the disinflationary trend, the effect of fiscal policy on the economy, an analysis of the labour market situation, and the evolution of domestic and external demand. The Bank Board expects the interest rate path to be higher than in the baseline scenario of the current forecast in the coming quarters. At the same time, it states that the interest rate reduction process can be paused or terminated at any time at levels that are still restrictive if inflation does not decrease in line with the forecast.

Inflation has declined markedly since autumn 2022: headline inflation has fallen from 18% to 7.3% and core inflation from 14.7% to 3.9%. Taking into account the inflation outlook one year ahead, 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. However, inflation 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.

Economic developments

The cost inflation pressures from the external environment and demand pressures from the domestic economy are still receding in the Czech economy. According to our analyses, the economy is below its potential. It is being held back by household consumption, which is being dampened by the still tight monetary policy, high energy and food prices and negative sentiment. GDP fell by 0.5% quarter on quarter in Q3, i.e. by 0.3 percentage point more than forecasted.

On the other hand, unemployment remains low and the labour market tight. Wage growth was broadly in line with the forecast in Q3 (wages rose by 7.1% year on year). The risk of a wage-price spiral is therefore not materialising so far. In the coming quarters, we expect real wage growth to turn positive and thus support household consumption.

The available indicators from the real economy are indicating that the Czech economy will be broadly stagnant in 2023 Q4. 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.

Annual inflation rose temporarily to 8.5% in October and then fell to 7.3% in November. The one-off rise in October was due to the statistical effect of last year’s energy savings tariff, which lowered the comparison base for prices. Adjusted for this technical factor, annual inflation would have been 4.7% in November. Inflation was slightly above the forecast, but the deviations were caused by growth in administered prices, which was higher than we had expected. As regards core inflation, the disinflation continued in accordance with our assumptions. We expect inflation to fall to the upper boundary of the tolerance band around the inflation target at the start of next year.

Risks and uncertainties

The Bank Board assessed the risks of the forecast and the uncertainties of the outlook as being modestly inflationary. The threat of inflation expectations becoming unanchored and the impact of changes to indirect taxes on prices are the main upside risks to inflation. Higher-than-expected inflation in January could shift the path of inflation for the whole of 2024 above the levels we expect. By contrast, a stronger-than-expected downturn in global economic activity and in German economic output is a downside risk to inflation. The future monetary policy stance abroad remains an uncertainty of the outlook.

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.