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 0.5 percentage point to 4.75%. At the same time, it lowered the discount rate by the same amount to 3.75% and the Lombard rate to 5.75%. Five members voted in favour of this decision, and two members voted for lowering rates by 0.25 percentage point.

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

Inflation in the Czech Republic fell from 18% in September 2022 to the 2% inflation target in February and March 2024. Price stability was thus restored in the Czech Republic. Inflation was in the upper half of the tolerance band around the CNB’s inflation target in the subsequent months, standing at 2.6% in May. However, monetary policy must remain tight to keep inflation close to the target in the long term.

The CNB started lowering interest rates cautiously in December 2023, but its fight against inflation is not over. Even after today’s decision, interest rates remain significantly positive in real terms and are dampening inflation. As rates gradually approach their neutral levels, the Bank Board is likely to slow the pace of moderation of monetary policy restriction at the meetings ahead or keep rates unchanged for some time.

The reason why no further major rate cuts should be expected is that the Bank Board sees inflationary risks in the outlook. Their materialisation would mean that inflation would diverge for longer from the target towards the upper boundary of the tolerance band in the quarters ahead. Therefore, the Bank Board considers it necessary to persist with tight monetary policy and carefully consider any further rate cuts, approaching them with great caution.

The Bank Board states that the interest rate reduction process can be paused or terminated at any time at levels that are still restrictive if inflation – especially its core component – does not develop in line with the forecast.

At its meetings ahead, the Bank Board will base its decisions on an assessment of newly available data and their implications for the inflation outlook. Its considerations about the interest rate settings will depend mainly on an evaluation of the persistence of the low-inflation environment, exchange rate developments, the effect of fiscal policy on the economy, an analysis of the tightness in the labour market, the evolution of domestic and external demand, and the actions of key foreign central banks. The Bank Board will also assess the transmission of interest rate cuts to lending activity, asset prices and subsequently real economic activity.

The Bank Board confirms its determination to continue its tight monetary policy in order to stabilise inflation near the 2% target in the long term.

Economic developments

GDP rose by 0.3% quarter on quarter and 0.2% year on year in 2024 Q1. Household consumption in particular contributed to the growth, but was 7% below the level observed before Covid. By contrast, investment activity fell significantly, by 7.9% quarter on quarter, the largest decline in history. According to our analyses, the economy is still below its potential. It will probably not reach pre-Covid levels until the second half of this year.

The available indicators from the real economy are indicating a continued recovery in 2024 Q2. With inflation falling, real household income growth is recovering. This is reflected in improved household sentiment. The gradual recovery in domestic demand is confirmed by the retail and services sales figures.

The labour market tightness is easing slowly, but unemployment remains low. Average wage growth reached 7% in 2024 Q1. It remains slightly elevated from a historical perspective, but real wages are 6% below pre-Covid levels. The risk of a wage-price spiral does not seem to be materialising.

Inflation has been inside the tolerance band around the CNB’s target since the beginning of this year. Core inflation is following roughly the same path as forecasted, but growth in services prices remains elevated.

External demand remains subdued, due in part to the tight monetary policies of major central banks and the fading of government measures taken during the energy crisis. Real activity is declining, particularly in manufacturing in Germany.

Risks and uncertainties

The Bank Board assessed the risks and uncertainties of the outlook as being modestly inflationary. Increased wage demands in the private and public sector are an inflationary risk. Excessive wage growth in the public sector would also lead to a risk of the state budget having an inflationary effect. Higher-than-expected inertia in services inflation and a halt in tradables disinflation, which has so far been due mainly to fading supply-side problems, are additional upside risks. An inflationary risk in the longer term is a potential acceleration of money creation in the economy stemming from a significant recovery in lending activity, especially on the property market. By contrast, a stronger-than-expected downturn in global economic activity and weaker German economic output are 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 maintain 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.